September 15, 2023. On this day 15 years ago on September 15, 2008, the Lehman Brothers collapse happened. The organisation had filed for bankruptcy. It had a balance sheet showing assets worth $639 billion and liabilities worth $619 billion. Too big to fail , and also too big to save. The market was gripped by panic.
The main cause for the fall of this 164-year old Wall Street organisation was what is called sub-prime crisis. It caused recession in the market and a decline in the global GDP.
In 2007, the organisation had shown profit of $4.2 billion. In April-June quarter of 2008, it declared a loss of $2.8 billion, and in July-September quarter of 2008, there was an estimated loss of $3.9 billion. This is the point at which it filed for bankruptcy.
It was a liquidity crisis, and there was no white knight to take care of it. The stock price dropped to an abysmally low level of $0.03 by September 2008.
It is necessary to understand the US mortgage market. It is similar to our home loan market. Loan is advanced keeping the real estate as collateral. The real estate prices keep rising and therefore the loan’s risk is fully covered. During the pendency of the loan, if there is default on the part of the borrower, the bank acquires the possession of the mortgaged property, auctions it and recovers its loan. However, if the borrowers are not credit-worthy or sub-prime, there is a combined default, which brings down the real estate prices. As a result, there are no takers for repossessed properties.
Therefore, what is of utmost importance is to evaluate credit worthiness of the borrowers. Some mortgages in the US were offered to borrowers with no income, no job and no assets. There was utter lack of risk management.
A bank who is a mortgage holder too sells the loan and uses the proceeds to fund another mortgage. The same process gets extended to fund a third loan. Customers too sold their loans similarly. They used that cash to buy another set of mortgages. The whole thing sucks up many borrowers and institutions. This had resulted in overpriced bubble of real estate. On account of defaults this bubble collapsed.
The liquidation process continued till September 2022 — almost 14 years after bankruptcy.
Nomura purchased Lehman operations in Asia Pacific, and investment banking and equities trading in West Asia and Europe. Barclays bought the north American investment banking and trading operations. There was quantitative easing (QE) in the US. It pumped liquidity in the market.
Satoshi Nakamoto, a computer programmer or a group of programmers, wrote a paper on cryptocurrency called Bitcoin. In 2009, Bitcoin blockchain was launched.
In 2023, another international institute Credit Suisse has been bought by UBS. Both are Swiss institutions. Credit Suisse was acquired for $3.25 billion to prevent its collapse. Big parts of Credit Suisse still make losses, and the whole restructuring will take a couple of years.
Of late, Silicon Valley Bank crashed (2023). It was financing startups.
Bank balance sheets have become much healthier due to reforms and right credit-evaluation. Credit rating agencies have tightened their norms. Global banking norms (Basel III) have been tightened. Central banks have become more proactive.