After failing to find buyers for the troubled financial giant, that was weighed down by risky debt holdings made up of at subprime mortgages, US authorities declined to offer a bailout and allowed the institution to fail.
Monday, September 15, 2008, at 1:45am, Lehman Brothers filed for bankruptcy, taking the world by surprise leaving well over $600bn in debt, as well as 25,000 employees in shock.
It was the biggest bankruptcy in American history.
On Wall Street, the Dow Jones plunged 500 points, the largest drop since the attacks of September 11, 2001.
Stunned traders streaming out of the building carrying boxes of their belongings became a symbol of the crisis.
Some were caught by surprise.
But others, like Lawrence McDonald, a former trader and co-author of a 2009 book on the collapse — A Colossal Failure of Common Sense: The Incredible Inside Story of the Collapse of Lehman Brothers — said management had long been alerted to the excessive risks they took to increase short term profits.
The top Lehman leadership, housed on the bank’s 31st floor, “drove us 162 miles an hour...right into the biggest subprime iceberg ever seen,” he said in 2009.
“It was 24,992 people making money and eight guys losing it,” he said, lamenting that the management “bet the ranch” on toxic assets.
From 2005 to 2007, at the height of the real estate bubble, when mortgages were given to many homebuyers who could not afford them, and then packaged into securities and sold off, Lehman Brothers bought several mortgage brokerages and posted record profits.
But in mid-2007, the losses began to build.
The knockout punch came nine months later, March 16, 2008, with the near bankruptcy of another investment bank, Bear Stearns.
Bear Stearns was on the verge of bankruptcy also because of its massive bets on subprime mortgage securities, and was bought for a pittance by JPMorgan, in a sale brokered by the Federal Reserve.
The deal shakes markets, which are now betting on Lehman’s demise.
The Fed and Treasury tried to find a buyer, negotiating in vain with a South Korean bank, then with Bank of America and Barclays.
But while the government just a week earlier took over mortgage giants Fannie Mae and Freddie Mac — government-sponsored private enterprises that guarantee more than $5tn in home loans — in the end officials choose to abandon Lehman.
A few days later, Uncle Sam would rescue insurance giant AIG for $180bn, before providing another $700bn dollars in a controversial recapitalisation plan to prop up banks: the Troubled Asset Relief Programme (TARP) to try to shore up the teetering financial system.
Authorities found themselves between a rock and a hard place and have been widely criticised for sacrificing Lehman Brothers but saving other banks, such as Goldman Sachs.
Some people argue that federal regulators could have found a way to keep Lehman alive. But even if they had, the problems caused by toxic housing-finance investments - subprime loans that were packaged and repackaged into securities of increasingly dubious and obscure value, along with derivative securities and vital short-term financing arrangements pegged to those packages - were large and metastasising. The credit markets were bound to crumble eventually.
