September 15th, 2008. If you were anywhere near
the world of finance, you remember that day.
You remember the feeling in the air. Oh, absolutely.
It was electric in the worst possible way. The
day the world seemed to just stop. And if you
were a homeowner, you probably remember that
sudden knot in your stomach. Even if you didn't
know what Lehman Brothers was, you felt it. You
felt the shockwave. And if you were just watching
the news, you saw the ticker on the screen just
falling. A waterfall of red. We are, of course,
talking about the bankruptcy of Lehman Brothers,
the largest bankruptcy filing in United States
history. And I think we need to start with the
sheer scale of it, because the numbers, over
time, they just become abstract statistics. They
do, but they are just staggering. When they filed
for Chapter 11 that Monday morning, they cited
bank debt of $613 billion. $613 billion? And
another $155 billion in bond debt. The asset
side of the ledger was nominally $639 billion.
To put that in perspective for you, that balance
sheet, Lehman's balance sheet, was larger than
the entire gross domestic product of a country
like Switzerland. Right. This wasn't a regional
bank going under. This was a financial institution
that was, for all intents and purposes, a sovereign
state of capital. And it collapsed. It collapsed
in a single weekend. The immediate impact was
like a global cardiac arrest. The Dow Jones dropped
over 500 points that day. Which at the time was
the largest single day drop since the aftermath
of 9 -11. Exactly. The commercial paper market,
which is the lifeblood of corporate short term
funding, it just froze solid. Money market funds
broke the buck. It was the trigger. It was the
trigger for the Great Recession. Yeah. No question.
And that's really the mission for this deep dive.
We're not just here to do a post -mortem on numbers.
Right. We have a mountain of sources here. I
mean, we've got the monster, the 2 ,200 -page
report by the court -appointed bankruptcy examiner
Anton Volukin. Which is basically the autopsy
report of the century for a financial firm. It
really is. We also have biographical histories
of the Lehman family, internal emails that were
released during all the litigation that followed.
And what we're trying to figure out is the arc.
It's the story. How does a company that starts
before the American Civil War. A firm that survives
the Great Depression. Two world wars, the hostile
takeovers of the 80s, even having their headquarters
basically destroyed on 9 -11. How does that firm
with that history of survival just evaporate
in 48 hours? It's the ultimate story of evolution.
And I think, you know, the ultimate story of
hubris, it's like a Greek tragedy, but with spreadsheets
and derivatives. A Greek tragedy with spreadsheets.
I like that. You have this company that had this
incredible DNA for pivoting, for moving to where
the money was until finally they pivoted into
a corner they just couldn't get out of. So let's
unpack that. Let's start at the beginning, because
I think most people, when they hear Lehman Brothers,
they just picture Dick Fold, you know, the guys
in suits carrying the cardboard boxes out of
the skyscraper in 2008. Right. The end of the
story. But the DNA of this company was forged
way, way back. We're talking 1844. Yeah, it's
a classic American business saga. It starts with
an immigrant story. A man named Huyum Lehman,
who is the son of a cattle merchant in Bavaria.
He comes to the United States in 1844. And he
changes his name, right? He does. He becomes
Henry Lehman. Yeah. And he settles in Montgomery,
Alabama. Which is such an interesting detail
in itself. The roots of this quintessential Wall
Street giant are actually in the Deep South,
in the Cotton Belt. Exactly. And he opens a simple
dry goods store, a general store called H. Lehman.
A few years later, his brothers, Emanuel and
Mayer, they arrive from Germany. In 1850, they
rename the business. Lehman Brothers. And what
are they selling at this point? Just shovels,
seeds, fabric? Basic necessities. General merchandise.
But this is where we see the first major pivot,
the first flash of that Lehman DNA we were talking
about. You have to picture the mid -19th century
South. The economy is a monoculture. It's all
about one thing. Cotton is king. And the brothers,
they realize that the local farmers, they don't
always have cash on hand to pay for their goods.
But what they do have is cotton. So they start
bartering. They take cotton in exchange for tools.
Essentially, yes. They start accepting raw cotton
as payment. And it doesn't take them long to
have a fundamental realization, one that just
changes the family's destiny forever. What's
that? Trading the cotton itself is way more profitable
than selling the dry goods. Ah. So the real money
wasn't in the shovel. It was in the commodity
the shovel was being used to produce. Precisely.
So they pivot. They become cotton brokers, cotton
traders. But. And we have to be really clear
about this because the historical record is unambiguous.
You can't talk about the cotton trade in Alabama
in the 1850s without talking about the system
that produced it. Right. And that system was
built entirely on slavery. Explicitly. The pre
-Civil War economy in Alabama depended almost
entirely on the forced labor of enslaved people.
I mean, the sources note that in the 1860 census,
enslaved individuals made up nearly 45 percent
of Alabama's total population. And the firm wasn't
just, you know, adjacent to the system. They
were participants. Direct participants. The 1860
census specifically lists Mayor Lehman as the
owner of seven enslaved people. Three males and
four females. So the initial capital, the seed
money that eventually grows into this Wall Street
behemoth, it was directly derived from a trade
that was the product of enslaved labor. That
is the historical fact. It's a very dark part
of the foundation of the firm, but it's the reality
of how a lot of capital was accumulated in America
in that era. Then, of course, the Civil War comes.
That system is destroyed. The economy of the
South is just... And for a lot of businesses
based in the South, that was it. Game over. But
Lehman, they pivot again. They saw it coming.
It seems so. It shows their foresight. Even before
the war started back in 1858, they realized that
the center of gravity for cotton trading, for
the financing side of it, was shifting north.
To New York City. Right. So they opened an office
at 119 Liberty Street in Manhattan. Emanuel,
one of the brothers, moved up there to run it.
They were becoming a New York firm before the
war even began. Which is what saved them. After
the war, with the South in ruins, they doubled
down on New York and they really leaned into
institution building. What do you mean by that?
They helped found the New York Cotton Exchange
in 1870. This was a massive deal. It was an innovation
that standardized the crop. It turned cotton
from just a physical pile of fluff into a tradable,
liquid financial instrument. This feels like
the moment they stop being merchants and start
becoming... for lack of a better word, finance
guys. That's it. Exactly. They joined the New
York Stock Exchange in 1887. And then at the
turn of the century, around 1906, under the leadership
of Philip Lehman, they make the next huge pivot.
Away from commodities. Away from just commodities
and into what we now think of as investment banking,
underwriting stock issuances for companies that
want to go public. And when you look at the list
of companies they took public. It's basically
a history of 20th century American consumerism.
It really is. They partnered up with Goldman
Sachs on a lot of these deals. Which is so ironic
considering how Goldman became their mortal enemy
and, you know, ultimately survived them. Deeply
ironic. Together, they brought huge names to
the market. General Cigar Company, Sears, Roebuck
& Company. They underwrote the offerings for
F .W. Woolworth, for Macy's, Gimber Brothers.
They were financing the birth of the American
department store. Okay, but then comes the big
test. 1929, the Great Depression. This is the
graveyard of banks. How does a firm like Lehman
that's so tied to the stock market survive when
the market literally ceases to function? This
is where Robert Bobby Lehman comes into the story.
He's the grandson of one of the founders, and
he takes over in 1925 just before the crash.
So he's a young man when this tidal wave hits.
He is. And when the crash happens, the equity
market is dead. Stone debt. Nobody is issuing
new stock. Nobody's buying bonds for retail companies.
So Bobby does what Lehman's do. He pivots. He
pivots again. To what? He shifts the firm's focus
to what we would now call venture capital. Venture
capital in the 1930s. I didn't even think that
term existed yet. The term didn't, but the practice
did. Yeah. He realized they need to invest in
the next thing. So they started backing these
high risk, high reward emerging industries. Like
what? They backed a company called Dumont Laboratories,
which was the first commercial television manufacturer.
They funded RCA. They moved heavily into the
oil and gas industry, financing companies like
Halliburton and Kerr -McGee. So while everyone
else is stuffing cash under their mattress, Lehman
is betting on the future of television and oil?
They bet on the future because the present looks
so bleak. And it worked. They not only survived
the depression, they came out of it stronger.
As we get into the post -war era, into the 60s,
the family part of the story starts to fade.
Right. Bobby Lehman, he ran the firm for 44 years.
He was an absolute titan. But when he died in
1969, there was no other Lehman family member
left to take over. And that's always the most
dangerous moment for family dynasty, isn't it?
The end of the bloodline at the top. It created
a massive... power vacuum. And it happened to
coincide with the 1970s, which, if you look at
economic history, was just a brutal decade for
finance. Oh, it was awful. Stagflation, oil shocks,
volatile markets. By 1973, Lehman Brothers was
actually on the brink of failure again. And this
is when the outsider comes in, Pete Peterson.
Right. Pete Peterson is brought in from a company
called Bell & Howell. He was not a Lehman guy.
He wasn't a Wall Street lifer. He was a manager,
a fix -it man. And he did it. He fixed it. To
his credit, he absolutely did. He slashed costs.
He acquired another firm called Abraham & Company.
And he engineered a huge merger with Kuhn Lobenkamp,
another prestigious firm. Under Peterson's leadership,
Lehman had five straight years of record profits.
But profits don't always create a happy family.
And this leads us to what some people call the
Civil War era at Lehman. And I find this part
fascinating because it really sets the cultural
stage for the firm that Dick Fold would later
inherit. It absolutely does. To understand what
happened, you have to understand the two warring
tribes inside any investment bank. OK. On one
side, you've got the investment bankers. These
are the dealmakers, the relationship guys. They
wear the nice suits. They have the long lunches.
They shake hands with CEOs. Pete Peterson was
the king of the bankers. And on the other side?
You have the traders, the guys on the trading
floor. They live and die by the second to second
ticks of the market. They're lighter. They're
rougher. And they tend to see the bankers as,
you know, empty suits who just talk a lot. And
at Lehman in the late 70s and early 80s, the
traders were starting to make all the money.
That's the key. The market volatility meant that
trading profits were exploding. And the head
of the traders was a man named Louis Glucksmann.
He was a rough edged, chain smoking, incredibly
intense guy. And he's looking at Peterson. He's
looking at Peterson, the smooth banker running
the show. And he's basically saying, my guys
are generating the profits. Why are you in charge?
So we get a coup. A literal boardroom coup. In
1983, Glucksmann skillfully maneuvers to oust
Peterson. Peterson is pushed out. Glucksmann
takes sole control of the firm. It was a complete
victory for the traders. But a short -lived one.
A Pyrrhic victory. It turns out that winning
the war destroyed the country. The internal environment
just became toxic. I read that Stephen Schwartzman,
who was there at the time, before he went off
to found Blackstone, he described it as dysfunctional
and extremely competitive. That's putting it
mildly. the partners started warring with each
other instead of competing with other firms.
The place just fell apart. Within a year of the
coup, in 1984, the firm was in so much turmoil,
they were forced to sell themselves just to stabilize
the ship. And they sold to American Express,
which to me always seems like such a bizarre
cultural fit. You have this very staid, corporate,
do -you -know -me credit card company. Trying
to manage a pack of, you know, Wall Street wolves
like the Lehman traders. It was a disaster, a
total culture clash. It lasted for 10 years,
but by all accounts is a miserable marriage for
the entire decade. So in 1994, Amex finally throws
in the towel. They had had enough. They decide
to spin off the investment banking division.
And so Lehman Brothers Holdings Inc. goes public.
It's an independent company once again. And this
is the moment. This is when the final major character
in our tragedy steps onto the stage. The man
who would become completely synonymous with Lehman
Brothers. Richard Fold. Dick Fold. The Gorilla.
That's what they called him. He was the traitor
by background. He came up on the commercial paper
desk. He was intense, famously intimidating,
and just pathologically competitive. He takes
over as CEO of the newly independent firm in
94. And his whole mission, his driving force
was validation, wasn't it? He wanted to prove
that Lehman wasn't just some reject, some cast
off from American Express. Oh, he had a massive
chip on his shoulder. He wanted Lehman to be
a bulge bracket firm, tier one, right up there
with Goldman Sachs and Morgan Stanley. He was
obsessed with it. And for a long time, he was.
wildly successful. Incredibly successful. He
guided the firm through the Asian financial crisis
in 1997. He steered them through the collapse
of the hedge fund long -term capital management
in 1998, which took down a lot of others. He
seemed to have the golden touch. And then came
September 11th, 2001. And I think we really need
to spend a moment here because the psychological
impact of 9 -11 on the firm and on Fold was just
profound. It was. You have to remember, Lehman
Brothers had offices in the World Trade Center.
They occupied three floors of the North Tower,
one WTC. And they lost an employee in the attacks.
Tragically, yes. One employee was killed. But
their global headquarters was right across the
street at Three World Financial Center. It wasn't
hit by a plane, but it was so severely damaged
by the collapse of the towers that it was rendered
completely unusable. So in an instant, you have
a global investment bank, a firm managing hundreds
of billions of dollars, and they have no office.
They are effectively homeless. 6 ,500 employees
were displaced in a moment. But the story of
their recovery is it's the stuff of Wall Street
legend. And this is where that Lehman culture
of toughness really hardened into something else.
They just scattered, right? They did. They moved
their entire trading operation to backup facilities
in Jersey City. But the investment banking division,
the dealmakers, they literally took over the
Sheraton Manhattan Hotel in Midtown. I love this
detail. They were running a multi -billion dollar
banking operation out of a hotel. Out of a hotel.
They converted the lounges, the ballrooms, and
all 665 guest rooms into offices. They were ripping
out beds and putting in desks and trading turrets.
They were running fiber optic cables down the
laundry chutes. That's just incredible. Imagine
trying to close a billion -dollar M &A deal while
sitting on a hotel chair in a room that still
smells faintly of room service. It is the definition
of resilience. And here's the thing. Within 48
hours of the stock market's reopening, they were
fully operational. And Fold didn't even wait
for their... old headquarters to be repaired.
No. He made a statement. He immediately went
out and bought a brand new 32 -story skyscraper
at 745 7th Avenue from their rival, Morgan Stanley.
Paid $700 million for it and had the entire firm
moved in by January 2002. But there's a real
double -edged sword to that kind of experience,
isn't there? Surviving something so traumatic,
being literally bombed out of your building and
being back in business within a week. That has
to change your mindset. It does. Many people,
including Veloukis in that examiner's report,
point directly to this moment. It created this
powerful... Almost dangerous sense of invincibility.
A feeling that if we can survive this, we can
survive anything. Exactly. It forged this intense
us against the world mentality. It bound the
employees to fold and do each other. But it also
very likely blinded them to future risks. They
felt bulletproof. And that feeling of being bulletproof,
that confidence combined with what was happening
in the broader economy that led them straight
into the arms of the housing market. Right into
the heart of the storm. You have to connect the
dots. After 9 -11, the Federal Reserve. Reserve
under Alan Greenspan slashed interest rates to
historic lows to keep the economy from grinding
to a halt. Money became cheap, very cheap. And
when money is cheap, big investors, pension funds,
they go hunting for yield. They need to find
better returns than they can get from safe government
bonds. And the best returns, the highest yields,
were in real estate. Bingo. Which brings us to
part four, the house of cards, the mortgage obsession.
Starting around 2003 and then just accelerating
wildly through 2006, Lehman made a conscious
strategic decision. They didn't just want to
trade mortgage bonds anymore. They wanted to
own the entire supply chain. Vertical integration.
They wanted to be the ones making the loans,
packaging the loans into securities, and then
selling those securities. And to do that, they
went on a buying spree. They acquired a company
called Aurora Loan Services, which was what's
known as an Alt -A lender. OK, let's break that
down. Alt -A. What does that actually mean? It's
a kind of mortgage that sits between prime and
subprime. It basically means the borrower has
a decent credit score, but maybe they can't or
won't provide full documentation of their income.
They were sometimes called liar loans. Not a
great sign. And they also bought BNC Mortgage.
Which was pure, unadulterated subprime. These
were loans to borrowers with poor credit histories,
high risk. And by 2006, these two subsidiaries,
Aurora and BNC, were originating almost 50 billion
dollars in mortgages per month. 50 billion a
month. Lehman became the number one underwriter
of mortgage -backed securities on Wall Street.
They were the king. But there was a fatal shift
in their strategy. It wasn't just move the product
anymore. Correct. The old, safer model was called
originate to distribute. You make the loan, you
package it into a bond, and you sell that bond
to a pension fund in Norway or a bank in Germany.
You get a fee, but you don't keep the risk. But
Lehman started doing what? Originate to hold.
Exactly. They started keeping huge chunks of
these risky mortgage bonds and other real estate
assets on their own books. The returns were so
juicy they couldn't resist. They were eating
their own cooking. And they were doing this with
a terrifying amount of leverage. We hear that
word leverage thrown around all the time. Can
we just break down exactly what Lehman's position
looked like? We have to. By 2007, early 2008,
Lehman had total assets of roughly $680 billion.
But their actual capital, their tangible common
equity, the cushion they had against losses,
was only about $22 .5 billion. So that's a leverage
ratio of about 30 to 1. 30 to 1. Let's use an
analogy for that. That's like me buying a $300
,000 house, but I only put down $10 ,000 of my
own money. That is the perfect analogy. And if
the value of that house drops by just over 3%,
your $10 ,000 down payment is completely wiped
out. You're insolvent. And in Lehman's case,
a mere 3 % to 5 % decline in the value of their
massive real estate portfolio would erase 100
% of their capital. The entire firm. They had
no margin for error. None. And they knew the
market was getting shaky. Which brings us to
one of the most infamous parts of this whole
saga. Repo 105. Repo 105. This is where the Lucas
report really just drops the hammer. It sounds
like a secret weapon from a spy movie. What was
it actually? OK, so a normal repo or repurchase
agreement is a standard. boring transaction on
Wall Street. It's like a pawn shop for bonds.
I give you a bond as collateral, you give me
cash overnight. The next day, I buy my bond back
for a tiny bit more money. It's a short -term
loan. Okay, that's normal. That's totally normal.
It's just a financing transaction. But Lehman
found a loophole, a legal opinion from a law
firm in the United Kingdom. They used a UK -based
subsidiary because... English law, unlike U .S.
law, allowed them to classify some of these repo
transactions as a true sale rather than a financing.
And why does that distinction, sale versus financing,
matter so much? Because if it's a sale, the assets,
the bonds, temporarily come off your balance
sheet. If it's just a financing, the assets stay
on your balance sheet and you just show more
cash and more debt. At the end of every quarter,
right before they had to take the public snapshot
for their earnings report. They would use repo
105 to temporarily move $50 billion of assets
off their books. So for a few days, they looked
$50 billion smaller and therefore much less leveraged.
Their leverage ratio looked healthier to investors
and rating agencies. Precisely. And then as soon
as the new quarter began, they'd reverse the
transaction and the assets would pop right back
onto the balance sheet. It was accounting gimmickry.
It was cosmetic surgery for the balance sheet.
And the examiner's report called it materially
misleading. It did. And it noted that the top
executives, including Fold and the CFOs, they
all signed off on the financial statements that
were based on this gimmick. So we get to 2008.
The slow motion crash starts to unfold. Well,
the first big warning shot had already been fired.
Bear Stearns collapses in March of 2008. Now,
this is a crucial point. The Federal Reserve
and the Treasury Department stepped in. They
brokered a sale of Bear Stearns to J .P. Morgan.
And importantly, they guaranteed $30 billion
of Bear's toxic assets. So the lesson the market
learned was the government has our back. The
too -big -to -fail doctrine was born, or at least
confirmed. The market assumed that if another
big firm like Lehman got into similar trouble,
the government would do the same thing. It created
a huge moral hazard. But Hank Paulson, the Treasury
Secretary, he had a lot of political heat for
that. Bear Stearns bailout. A ton of it. He was
being accused of bailing out his Wall Street
buddies. And he did not want to do it again.
So Lehman posts this surprise profit in the first
quarter of 2008, which was a total head fake.
But by June, reality bites. They announced their
first quarterly loss since being spun off from
Amex. A loss of $2 .8 billion. The stock, which
had been in the 60s and 70s, just starts to crater.
And Fold starts cleaning house. He does. He fires
his longtime COO, Joe Gregory. He pushes out
CFO Aaron Callen. But he refuses to sell the
company at a low price. He's still holding out.
He thinks he can find a partner, an investor,
not a buyer. He didn't want to sell the firm.
He just wanted a capital injection. Right. He
talked to everybody. Famously, he talked to Warren
Buffett. Buffett took one look at their books,
saw how complex and opaque their derivative positions
were, and just walked away. But the big hope,
the real white knight, was the Korea Development
Bank. I remember this. All through August of
2008, the rumor on Wall Street was the Koreans
are coming to save Lehman. It was the last lifeline.
But in early September, the talks completely
fell apart. The KDB got cold feet. Some reports
say the price was too high. Others say the Korean
regulators just looked at Lehman's toxic real
estate portfolio and got terrified. And when
that news broke. When the news broke on September
9th that the KDB deal was dead, Lehman stock
plunged 45 percent in one day. And this leads
us to an anecdote that I think just perfectly
painfully encapsulates the culture of denial
inside the firm's leadership at that moment.
The Neuberger -Berman email. Yes. Oh, this is
just. It's breathtaking. So Neuberger Berman
was the asset management division of Lehman.
It was the stable, profitable, safe part of the
business. They managed money for wealthy clients.
Right. It was separate from the high -risk trading
floor. As the stock is in free fall, a group
of senior executives at Neuberger sends an email
to Lehman's executive committee. And what did
they suggest? A very sensible thing. They suggested
that the top management at Lehman Fold and his
lieutenants should publicly announce that they
were foregoing their multi -million dollar bonuses
for the year. A gesture of accountability. A
way to signal to the market, we get it, we're
sharing the pain. A simple, powerful PR move.
But one of Lehman's directors, George Herbert
Walker V, a cousin of President Bush. He got
wind of this email and he was horrified. Horrified
by the suggestion? He dismissed it completely.
He actually sent an apology to the executive
committee for the email even being sent. He wrote,
and this is a direct quote, Sorry, team. I am
not sure what's in the water at Neuberger Berman.
I'm embarrassed and I apologize. Wow. The house
is on fire. The stock has been vaporized. And
the leadership is embarrassed by the suggestion
that they shouldn't take their bonuses. It just
shows the complete disconnect from reality, the
sense of entitlement. They truly believed they
had earned those rewards, regardless of the outcome
for the firm or its shareholders. But the market
didn't care. And so we arrive at the final weekend,
September 12th, 13th and 14th, 2008, the death
watch. Timothy Geithner, who was the president
of the New York Fed at the time, he summons the
CEOs of all the major Wall Street banks to the
Fed's fortress -like building in lower Manhattan.
He basically locks them in a room for the weekend.
He does. Jamie Dimon from J .P. Morgan, John
Thain from Merrill Lynch, Lloyd Blankfein from
Goldman Sachs. They're all there. And the message
from Geithner and from Hank Paulson is crystal
clear. There's no government money this time.
Paulson was adamant. He said, I cannot be Mr.
Bailout again. He told the assembled CEOs. You
guys, the private sector, need to come up with
a solution. You need to fund a rescue or the
whole system is coming down on Monday morning.
So who are the potential buyers for Lehman at
this point? It really came down to just two,
Bank of America and the British bank, Barclays.
And Bank of America, they took a look under the
hood and ran screaming. Pretty much. Ken Lewis,
the CEO of Bank of America, realized that another
firm, Merrill Lynch, was also on the ropes. And
Merrill had a much better, cleaner business with
its massive brokerage army. So in a stunning
twist that weekend, Bank of America just pivots
and buys Merrill Lynch instead. Which left only
one potential savior. Barclays. And Barclays
wanted to do the deal. Bob Diamond, the head
of Barclays Capital, saw it as a once -in -a
-lifetime opportunity to buy a premier U .S.
investment bank on the cheap. They had their
teams working all weekend. They had a structure
ready to go. They were ready. The lawyers were
literally drafting the press releases, announcing
the deal on Sunday morning. But they overlooked
one crucial hurdle. The British regulator. The
British regulators, the Financial Services Authority,
the FSA. And they were not on board. Not at all.
The head of the FSA, Hector Saints, basically
said, we're not going to waive our rules that
require a shareholder approval for a deal this
large. And then famously, the British chancellor,
the exchequer. Alistair Darling, got on the phone
with the Americans and delivered the fatal line.
What did he say? He said, I am not going to import
your cancer. Brutal. I am not going to import
your cancer. That was it. That was the death
knell. When that message was relayed to the room
at the New York Fed on Sunday afternoon, everyone
knew it was over. There was no buyer. There was
no government bailout. Lehman was a dead man
walking. What happened in those final hours?
The regulators, the Fed and the SEC, they told
Lehman's lawyers, you have to file for bankruptcy
before the Asian markets open on Monday. They
were trying to contain the explosion. That Sunday
must have just been absolute chaos. There was
a moment of pure pandemonium. The International
Swaps and Derivatives Association, ISDA, they
held an emergency unprecedented trading session
on a Sunday afternoon. On a Sunday? Yes. to allow
banks to try and net out their derivatives exposures
to Lehman. They were frantically trying to untangle
as many wires as they could before the bomb went
off. And then, shortly before 1 in the morning
on Monday, September 15th, Lehman Brothers Holdings,
Inc. filed for Chapter 11 bankruptcy protection.
I still remember the images from that next morning.
It wasn't just the stock chart going to zero.
It was the people. The employees just streaming
out of that big glass building in Times Square,
holding those little cardboard boxes with their
desk plants and their family photos. The end
of an era. 158 years of history. From the cotton
fields of Alabama to the pinnacle of global finance.
All of it gone with a stroke of a pen on a legal
document. But the firm didn't just vanish into
thin air. The corpse had to be carved up. And
this is the part of the story, the liquidation,
which sounds dry, but the details are actually
wild. It was a fire sale of historic proportions.
Everything must go. Barclays, the bank that was
blocked from buying the whole firm on Sunday.
They came back on Tuesday. They came back on
Tuesday. And because Lehman was now in bankruptcy
protection, Barclays could do what's called a
cherry picking deal. They could buy just. The
good part. The clean part. The North American
investment banking and trading divisions, they
didn't have to take on any of the toxic real
estate or the legacy debts. They picked the raisins
out of the cake. And what did they pay? They
paid $1 .75 billion. And get this. That price
included the brand new headquarters building
at 745 7th Avenue, the one fold bought for almost
a billion by itself, and two state -of -the -art
data centers in New Jersey. That is an unbelievable
bargain. It was the steal of the century. The
bankruptcy judge, James Peck, he basically had
to approve it. He said, I have to approve this
transaction because it is the only available
transaction. Lehman Brothers became a victim,
in effect, of a tsunami. And what about the international
pieces, the operations in Europe and Asia? The
Japanese bank, Nomura, swooped in. They bought
the Asian franchise for about $225 million. But
the European deal? The European deal is the one
that just blows my mind every time I read about
it. What happened there? Numera acquired Lehman's
European Investment Banking and Equities Divisions.
They took on 2 ,500 employees. Do you any guess
what they paid for the business itself? I'm afraid
to ask. Two dollars. You're kidding me. Two dollars?
Two U .S. dollars. A nominal fee. because the
value of the business with all its potential
liabilities was arguably negative, but Nomura
wanted the people and the footprint in Europe.
They got a massive European investment bank for
the price of a cup of coffee. That is the ultimate
humiliation. It is. But the pan wasn't just for
the highly paid bankers. We have to talk about
the human cost for regular people, the mini bonds.
Right. This wasn't just about rich people losing
money on the stock market. This had real world
consequences. In places like Hong Kong and Singapore,
Lehman had aggressively marketed these complex,
structured products called mini bonds to retail
investors. We're talking retirees. grandmothers,
people who thought they were buying something
safe. They were sold as being like a savings
account, but with a better interest rate. Exactly.
But they were linked to the credit of Lehman
and other banks. When Lehman collapsed, these
bonds became completely worthless overnight.
And there were massive protests in the streets
of Hong Kong. Tens of thousands of people lost
their entire life savings. It was a brutal lesson
in how interconnected the global financial system
had become. A bad mortgage written in Nevada,
packaged by a banker in New York, ended up destroying
the retirement of a shopkeeper in Kowloon. And
the legal mess, the liquidation, it dragged on
for more than a decade. Lehman brokerage unit
didn't officially conclude until September of
2022. It took 14 years to unwind the whole thing.
And here's the most ironic part of the entire
story. After all that, how much money did the
Lehman estate eventually pay back to its creditors?
This is the kicker. They eventually paid out
over $115 billion. Wait a second. If they were
able to pay out $115 billion, that means they
had the assets. They weren't broke. Exactly.
And that is the core lesson of this entire deep
dive. Lehman Brothers was not an empty shell
like Enron was. Enron was a fraud from top to
bottom. There was nothing there. Lehman had real
assets. They owned buildings. They had loans.
They owned stakes and companies. In the long
run, they were probably solvent. But they weren't
liquid. They died of a liquidity crisis. They
couldn't turn those long -term assets into cash
fast enough to pay the bills that were due on
that Monday morning. And even more than that,
they died of a trust crisis. Yes. That's the
perfect way to put it. The entire modern financial
system operates on confidence. It's a magic trick.
We all agree that the digital number in our bank
account is real money. So it is. But the moment
the market decides, it doesn't trust you anymore.
The math stops mattering. The math becomes irrelevant.
It becomes a self -fulfilling prophecy, a run
on the bank, but at a global institutional scale.
And culturally, Lehman's legacy is just. It's
the ultimate bogeyman. Oh, absolutely. They're
the shorthand for Wall Street greed and collapse.
They're the villains in the big short margin
call, too big to fail. There's a great gag in
the movie Despicable Me where the villain goes
to the bank of evil and on the sign it says,
formerly Lehman Brothers. You know you've made
it into the Hall of Infamy when you're a visual
gag in a kid's movie. It's the new gold standard
for financial collapse. So as we wrap up this
deep dive, I want to leave our listeners with
one final provocative thought. It's easy to look
back at 2008 and say, oh, those bankers were
so reckless with their 30 to 1 leverage. And
they were. But the fundamental problem hasn't
really gone away. The risk has just moved. The
leverage isn't quite as high inside the big banks
themselves, maybe. But it's migrated to other
parts of the system, to private credit funds,
to the shadow banking world, to government balance
sheets. The question Lehman's collapse forces
us to ask is this. In a system that runs almost
entirely on faith, on the collective belief that
the person on the other side of your trade is
good for the money, what happens when that faith
evaporates? Because when it happened to Lehman,
158 years of history and hundreds of billions
of dollars just vanished in a weekend. And there's
no reason it couldn't happen again. And that
is the thought that should keep all of us up
at night. The incredible fragility of confidence.
Well, on that slightly terrifying note, we're
going to wrap it up. We have linked the Volucas
report and our other source materials in the
show notes if you want to go even deeper into
the abyss. Thank you for joining us on the Deep
Dive. Thank you.