The Lehman Collapse

SEP 15 2008 · 12:00

The Lehman Brothers logo at the firm's Times Square headquarters shortly before bankruptcy, New York, September 2008. Place: 745 Seventh Avenue, New York Figures: Richard Fuld, Lehman CEO · Henry Paulson, US Treasury Secretary · Timothy Geithner, New York Fed President · Ben Bernanke, Federal Reserve Chair · the unnamed counterparties of $639 billion in assets The Weekend at the New York Fed The weekend of 12 to 14 September 2008 is spent in the Liberty Street conference rooms of the Federal Reserve Bank of New York. Paulson, Geithner, and the chief executives of the surviving Wall Street firms try to assemble a private-sector rescue. Barclays declines under pressure from UK regulators. Bank of America peels off to take Merrill Lynch instead. By Sunday evening it is clear: there will be no buyer. Lehman files Chapter 11 at 1:45 a.m. Monday morning with $639 billion in assets and $619 billion in debt. The largest bankruptcy in United States history. Within 36 hours the consequences arrive in series. AIG, the largest insurer in the world and the counterparty on roughly half a trillion dollars of credit-default swaps, requires an $85 billion Federal Reserve loan to avoid liquidation. The Reserve Primary Fund breaks the buck, triggering a global money-market run. Commercial paper markets freeze. The interbank dollar lending rate spikes. Within a week the Fed has opened or expanded swap lines with fourteen foreign central banks; the dollar shortage is planetary. Who Can Actually Backstop the System The Westphalian state turns out to be the only entity that can backstop a global financial system. TARP authorizes $700 billion in the United States on 3 October. The United Kingdom recapitalizes RBS, HBOS, and Lloyds. Ireland guarantees the entire deposit base of its six largest banks. Iceland's three largest banks collapse and the country negotiates an IMF program. Germany guarantees Hypo Real Estate. The transnational financial system is sustained only by sovereign balance sheets that will strain for a decade afterwards under the resulting public debt. The lesson, drawn by everyone in different directions: globalized finance had outgrown the national container, yet only the national container could save it. Six weeks after Lehman, on 31 October, a nine-page paper proposing a financial system that requires no national container at all is posted to a cryptography mailing list. (See [[bitcoin-whitepaper-2008]].) The era's two main responses to the crisis appear within forty-six days of each other. Video: Al Jazeera English report on the morning of 15 September 2008, the day Lehman Brothers filed the largest bankruptcy in United States history.