WEBVTT 00:00:00.000 --> 00:00:04.120 September 15th, 2008. If you were anywhere near 00:00:04.120 --> 00:00:06.820 the world of finance, you remember that day. 00:00:07.000 --> 00:00:09.380 You remember the feeling in the air. Oh, absolutely. 00:00:09.640 --> 00:00:12.640 It was electric in the worst possible way. The 00:00:12.640 --> 00:00:15.919 day the world seemed to just stop. And if you 00:00:15.919 --> 00:00:18.219 were a homeowner, you probably remember that 00:00:18.219 --> 00:00:20.719 sudden knot in your stomach. Even if you didn't 00:00:20.719 --> 00:00:22.579 know what Lehman Brothers was, you felt it. You 00:00:22.579 --> 00:00:24.719 felt the shockwave. And if you were just watching 00:00:24.719 --> 00:00:27.600 the news, you saw the ticker on the screen just 00:00:27.600 --> 00:00:32.049 falling. A waterfall of red. We are, of course, 00:00:32.070 --> 00:00:34.229 talking about the bankruptcy of Lehman Brothers, 00:00:34.350 --> 00:00:36.649 the largest bankruptcy filing in United States 00:00:36.649 --> 00:00:39.270 history. And I think we need to start with the 00:00:39.270 --> 00:00:41.869 sheer scale of it, because the numbers, over 00:00:41.869 --> 00:00:44.450 time, they just become abstract statistics. They 00:00:44.450 --> 00:00:47.030 do, but they are just staggering. When they filed 00:00:47.030 --> 00:00:48.969 for Chapter 11 that Monday morning, they cited 00:00:48.969 --> 00:00:54.189 bank debt of $613 billion. $613 billion? And 00:00:54.189 --> 00:00:58.009 another $155 billion in bond debt. The asset 00:00:58.009 --> 00:01:01.250 side of the ledger was nominally $639 billion. 00:01:01.530 --> 00:01:03.609 To put that in perspective for you, that balance 00:01:03.609 --> 00:01:06.730 sheet, Lehman's balance sheet, was larger than 00:01:06.730 --> 00:01:09.409 the entire gross domestic product of a country 00:01:09.409 --> 00:01:11.849 like Switzerland. Right. This wasn't a regional 00:01:11.849 --> 00:01:14.390 bank going under. This was a financial institution 00:01:14.390 --> 00:01:18.489 that was, for all intents and purposes, a sovereign 00:01:18.489 --> 00:01:22.329 state of capital. And it collapsed. It collapsed 00:01:22.329 --> 00:01:25.030 in a single weekend. The immediate impact was 00:01:25.030 --> 00:01:28.730 like a global cardiac arrest. The Dow Jones dropped 00:01:28.730 --> 00:01:31.689 over 500 points that day. Which at the time was 00:01:31.689 --> 00:01:33.909 the largest single day drop since the aftermath 00:01:33.909 --> 00:01:37.450 of 9 -11. Exactly. The commercial paper market, 00:01:37.590 --> 00:01:39.890 which is the lifeblood of corporate short term 00:01:39.890 --> 00:01:43.209 funding, it just froze solid. Money market funds 00:01:43.209 --> 00:01:45.859 broke the buck. It was the trigger. It was the 00:01:45.859 --> 00:01:47.939 trigger for the Great Recession. Yeah. No question. 00:01:48.120 --> 00:01:50.040 And that's really the mission for this deep dive. 00:01:50.140 --> 00:01:52.500 We're not just here to do a post -mortem on numbers. 00:01:52.680 --> 00:01:54.799 Right. We have a mountain of sources here. I 00:01:54.799 --> 00:01:56.980 mean, we've got the monster, the 2 ,200 -page 00:01:56.980 --> 00:01:59.659 report by the court -appointed bankruptcy examiner 00:01:59.659 --> 00:02:02.180 Anton Volukin. Which is basically the autopsy 00:02:02.180 --> 00:02:04.599 report of the century for a financial firm. It 00:02:04.599 --> 00:02:06.739 really is. We also have biographical histories 00:02:06.739 --> 00:02:09.639 of the Lehman family, internal emails that were 00:02:09.639 --> 00:02:11.620 released during all the litigation that followed. 00:02:11.960 --> 00:02:13.680 And what we're trying to figure out is the arc. 00:02:14.080 --> 00:02:17.740 It's the story. How does a company that starts 00:02:17.740 --> 00:02:20.759 before the American Civil War. A firm that survives 00:02:20.759 --> 00:02:24.060 the Great Depression. Two world wars, the hostile 00:02:24.060 --> 00:02:27.219 takeovers of the 80s, even having their headquarters 00:02:27.219 --> 00:02:31.759 basically destroyed on 9 -11. How does that firm 00:02:31.759 --> 00:02:34.659 with that history of survival just evaporate 00:02:34.659 --> 00:02:36.939 in 48 hours? It's the ultimate story of evolution. 00:02:37.599 --> 00:02:39.479 And I think, you know, the ultimate story of 00:02:39.479 --> 00:02:42.580 hubris, it's like a Greek tragedy, but with spreadsheets 00:02:42.580 --> 00:02:45.240 and derivatives. A Greek tragedy with spreadsheets. 00:02:45.240 --> 00:02:47.020 I like that. You have this company that had this 00:02:47.020 --> 00:02:50.340 incredible DNA for pivoting, for moving to where 00:02:50.340 --> 00:02:53.400 the money was until finally they pivoted into 00:02:53.400 --> 00:02:55.500 a corner they just couldn't get out of. So let's 00:02:55.500 --> 00:02:57.000 unpack that. Let's start at the beginning, because 00:02:57.000 --> 00:02:59.259 I think most people, when they hear Lehman Brothers, 00:02:59.500 --> 00:03:01.979 they just picture Dick Fold, you know, the guys 00:03:01.979 --> 00:03:04.000 in suits carrying the cardboard boxes out of 00:03:04.000 --> 00:03:05.979 the skyscraper in 2008. Right. The end of the 00:03:05.979 --> 00:03:08.750 story. But the DNA of this company was forged 00:03:08.750 --> 00:03:12.210 way, way back. We're talking 1844. Yeah, it's 00:03:12.210 --> 00:03:14.289 a classic American business saga. It starts with 00:03:14.289 --> 00:03:17.050 an immigrant story. A man named Huyum Lehman, 00:03:17.150 --> 00:03:19.289 who is the son of a cattle merchant in Bavaria. 00:03:19.389 --> 00:03:22.129 He comes to the United States in 1844. And he 00:03:22.129 --> 00:03:24.270 changes his name, right? He does. He becomes 00:03:24.270 --> 00:03:26.710 Henry Lehman. Yeah. And he settles in Montgomery, 00:03:26.930 --> 00:03:29.349 Alabama. Which is such an interesting detail 00:03:29.349 --> 00:03:32.389 in itself. The roots of this quintessential Wall 00:03:32.389 --> 00:03:34.990 Street giant are actually in the Deep South, 00:03:35.129 --> 00:03:38.189 in the Cotton Belt. Exactly. And he opens a simple 00:03:38.189 --> 00:03:40.949 dry goods store, a general store called H. Lehman. 00:03:41.569 --> 00:03:44.430 A few years later, his brothers, Emanuel and 00:03:44.430 --> 00:03:47.330 Mayer, they arrive from Germany. In 1850, they 00:03:47.330 --> 00:03:49.930 rename the business. Lehman Brothers. And what 00:03:49.930 --> 00:03:52.050 are they selling at this point? Just shovels, 00:03:52.050 --> 00:03:55.830 seeds, fabric? Basic necessities. General merchandise. 00:03:56.129 --> 00:03:58.729 But this is where we see the first major pivot, 00:03:58.789 --> 00:04:01.629 the first flash of that Lehman DNA we were talking 00:04:01.629 --> 00:04:04.270 about. You have to picture the mid -19th century 00:04:04.270 --> 00:04:07.409 South. The economy is a monoculture. It's all 00:04:07.409 --> 00:04:10.490 about one thing. Cotton is king. And the brothers, 00:04:10.650 --> 00:04:12.689 they realize that the local farmers, they don't 00:04:12.689 --> 00:04:14.330 always have cash on hand to pay for their goods. 00:04:14.509 --> 00:04:17.529 But what they do have is cotton. So they start 00:04:17.529 --> 00:04:20.750 bartering. They take cotton in exchange for tools. 00:04:20.910 --> 00:04:23.649 Essentially, yes. They start accepting raw cotton 00:04:23.649 --> 00:04:26.029 as payment. And it doesn't take them long to 00:04:26.029 --> 00:04:27.970 have a fundamental realization, one that just 00:04:27.970 --> 00:04:30.449 changes the family's destiny forever. What's 00:04:30.449 --> 00:04:32.930 that? Trading the cotton itself is way more profitable 00:04:32.930 --> 00:04:36.750 than selling the dry goods. Ah. So the real money 00:04:36.750 --> 00:04:39.250 wasn't in the shovel. It was in the commodity 00:04:39.250 --> 00:04:41.149 the shovel was being used to produce. Precisely. 00:04:41.209 --> 00:04:43.970 So they pivot. They become cotton brokers, cotton 00:04:43.970 --> 00:04:47.100 traders. But. And we have to be really clear 00:04:47.100 --> 00:04:50.019 about this because the historical record is unambiguous. 00:04:51.019 --> 00:04:53.399 You can't talk about the cotton trade in Alabama 00:04:53.399 --> 00:04:56.379 in the 1850s without talking about the system 00:04:56.379 --> 00:04:58.240 that produced it. Right. And that system was 00:04:58.240 --> 00:05:01.100 built entirely on slavery. Explicitly. The pre 00:05:01.100 --> 00:05:03.759 -Civil War economy in Alabama depended almost 00:05:03.759 --> 00:05:06.139 entirely on the forced labor of enslaved people. 00:05:06.399 --> 00:05:09.000 I mean, the sources note that in the 1860 census, 00:05:09.339 --> 00:05:11.920 enslaved individuals made up nearly 45 percent 00:05:11.920 --> 00:05:14.730 of Alabama's total population. And the firm wasn't 00:05:14.730 --> 00:05:16.790 just, you know, adjacent to the system. They 00:05:16.790 --> 00:05:20.329 were participants. Direct participants. The 1860 00:05:20.329 --> 00:05:23.889 census specifically lists Mayor Lehman as the 00:05:23.889 --> 00:05:27.050 owner of seven enslaved people. Three males and 00:05:27.050 --> 00:05:29.970 four females. So the initial capital, the seed 00:05:29.970 --> 00:05:32.329 money that eventually grows into this Wall Street 00:05:32.329 --> 00:05:35.670 behemoth, it was directly derived from a trade 00:05:35.670 --> 00:05:37.910 that was the product of enslaved labor. That 00:05:37.910 --> 00:05:40.189 is the historical fact. It's a very dark part 00:05:40.189 --> 00:05:42.810 of the foundation of the firm, but it's the reality 00:05:42.810 --> 00:05:45.329 of how a lot of capital was accumulated in America 00:05:45.329 --> 00:05:48.350 in that era. Then, of course, the Civil War comes. 00:05:48.509 --> 00:05:51.110 That system is destroyed. The economy of the 00:05:51.110 --> 00:05:54.129 South is just... And for a lot of businesses 00:05:54.129 --> 00:05:57.110 based in the South, that was it. Game over. But 00:05:57.110 --> 00:05:59.209 Lehman, they pivot again. They saw it coming. 00:05:59.430 --> 00:06:01.889 It seems so. It shows their foresight. Even before 00:06:01.889 --> 00:06:05.089 the war started back in 1858, they realized that 00:06:05.089 --> 00:06:07.290 the center of gravity for cotton trading, for 00:06:07.290 --> 00:06:09.370 the financing side of it, was shifting north. 00:06:09.589 --> 00:06:11.769 To New York City. Right. So they opened an office 00:06:11.769 --> 00:06:14.189 at 119 Liberty Street in Manhattan. Emanuel, 00:06:14.290 --> 00:06:16.250 one of the brothers, moved up there to run it. 00:06:16.480 --> 00:06:18.399 They were becoming a New York firm before the 00:06:18.399 --> 00:06:21.319 war even began. Which is what saved them. After 00:06:21.319 --> 00:06:23.759 the war, with the South in ruins, they doubled 00:06:23.759 --> 00:06:25.800 down on New York and they really leaned into 00:06:25.800 --> 00:06:27.680 institution building. What do you mean by that? 00:06:27.879 --> 00:06:29.439 They helped found the New York Cotton Exchange 00:06:29.439 --> 00:06:33.100 in 1870. This was a massive deal. It was an innovation 00:06:33.100 --> 00:06:35.800 that standardized the crop. It turned cotton 00:06:35.800 --> 00:06:39.920 from just a physical pile of fluff into a tradable, 00:06:40.019 --> 00:06:42.639 liquid financial instrument. This feels like 00:06:42.639 --> 00:06:45.120 the moment they stop being merchants and start 00:06:45.120 --> 00:06:48.110 becoming... for lack of a better word, finance 00:06:48.110 --> 00:06:50.790 guys. That's it. Exactly. They joined the New 00:06:50.790 --> 00:06:54.189 York Stock Exchange in 1887. And then at the 00:06:54.189 --> 00:06:56.910 turn of the century, around 1906, under the leadership 00:06:56.910 --> 00:06:59.709 of Philip Lehman, they make the next huge pivot. 00:06:59.889 --> 00:07:02.129 Away from commodities. Away from just commodities 00:07:02.129 --> 00:07:05.050 and into what we now think of as investment banking, 00:07:05.290 --> 00:07:07.610 underwriting stock issuances for companies that 00:07:07.610 --> 00:07:09.269 want to go public. And when you look at the list 00:07:09.269 --> 00:07:11.420 of companies they took public. It's basically 00:07:11.420 --> 00:07:14.680 a history of 20th century American consumerism. 00:07:14.720 --> 00:07:16.639 It really is. They partnered up with Goldman 00:07:16.639 --> 00:07:18.899 Sachs on a lot of these deals. Which is so ironic 00:07:18.899 --> 00:07:21.240 considering how Goldman became their mortal enemy 00:07:21.240 --> 00:07:24.639 and, you know, ultimately survived them. Deeply 00:07:24.639 --> 00:07:27.540 ironic. Together, they brought huge names to 00:07:27.540 --> 00:07:30.920 the market. General Cigar Company, Sears, Roebuck 00:07:30.920 --> 00:07:32.720 & Company. They underwrote the offerings for 00:07:32.720 --> 00:07:34.939 F .W. Woolworth, for Macy's, Gimber Brothers. 00:07:35.279 --> 00:07:37.160 They were financing the birth of the American 00:07:37.160 --> 00:07:39.540 department store. Okay, but then comes the big 00:07:39.540 --> 00:07:44.769 test. 1929, the Great Depression. This is the 00:07:44.769 --> 00:07:48.310 graveyard of banks. How does a firm like Lehman 00:07:48.310 --> 00:07:51.089 that's so tied to the stock market survive when 00:07:51.089 --> 00:07:53.910 the market literally ceases to function? This 00:07:53.910 --> 00:07:55.910 is where Robert Bobby Lehman comes into the story. 00:07:56.089 --> 00:07:58.350 He's the grandson of one of the founders, and 00:07:58.350 --> 00:08:00.709 he takes over in 1925 just before the crash. 00:08:00.949 --> 00:08:03.029 So he's a young man when this tidal wave hits. 00:08:03.209 --> 00:08:05.350 He is. And when the crash happens, the equity 00:08:05.350 --> 00:08:08.269 market is dead. Stone debt. Nobody is issuing 00:08:08.269 --> 00:08:11.009 new stock. Nobody's buying bonds for retail companies. 00:08:11.230 --> 00:08:14.149 So Bobby does what Lehman's do. He pivots. He 00:08:14.149 --> 00:08:16.910 pivots again. To what? He shifts the firm's focus 00:08:16.910 --> 00:08:19.629 to what we would now call venture capital. Venture 00:08:19.629 --> 00:08:21.569 capital in the 1930s. I didn't even think that 00:08:21.569 --> 00:08:23.910 term existed yet. The term didn't, but the practice 00:08:23.910 --> 00:08:25.990 did. Yeah. He realized they need to invest in 00:08:25.990 --> 00:08:28.129 the next thing. So they started backing these 00:08:28.129 --> 00:08:31.449 high risk, high reward emerging industries. Like 00:08:31.449 --> 00:08:34.240 what? They backed a company called Dumont Laboratories, 00:08:34.360 --> 00:08:36.659 which was the first commercial television manufacturer. 00:08:37.000 --> 00:08:39.840 They funded RCA. They moved heavily into the 00:08:39.840 --> 00:08:42.019 oil and gas industry, financing companies like 00:08:42.019 --> 00:08:44.419 Halliburton and Kerr -McGee. So while everyone 00:08:44.419 --> 00:08:46.620 else is stuffing cash under their mattress, Lehman 00:08:46.620 --> 00:08:48.600 is betting on the future of television and oil? 00:08:48.779 --> 00:08:51.080 They bet on the future because the present looks 00:08:51.080 --> 00:08:54.879 so bleak. And it worked. They not only survived 00:08:54.879 --> 00:08:56.480 the depression, they came out of it stronger. 00:08:57.710 --> 00:09:00.370 As we get into the post -war era, into the 60s, 00:09:00.370 --> 00:09:02.850 the family part of the story starts to fade. 00:09:03.029 --> 00:09:05.370 Right. Bobby Lehman, he ran the firm for 44 years. 00:09:05.429 --> 00:09:08.029 He was an absolute titan. But when he died in 00:09:08.029 --> 00:09:10.590 1969, there was no other Lehman family member 00:09:10.590 --> 00:09:12.809 left to take over. And that's always the most 00:09:12.809 --> 00:09:14.769 dangerous moment for family dynasty, isn't it? 00:09:14.789 --> 00:09:16.850 The end of the bloodline at the top. It created 00:09:16.850 --> 00:09:19.929 a massive... power vacuum. And it happened to 00:09:19.929 --> 00:09:22.570 coincide with the 1970s, which, if you look at 00:09:22.570 --> 00:09:25.029 economic history, was just a brutal decade for 00:09:25.029 --> 00:09:27.950 finance. Oh, it was awful. Stagflation, oil shocks, 00:09:28.289 --> 00:09:32.149 volatile markets. By 1973, Lehman Brothers was 00:09:32.149 --> 00:09:34.830 actually on the brink of failure again. And this 00:09:34.830 --> 00:09:37.230 is when the outsider comes in, Pete Peterson. 00:09:37.549 --> 00:09:40.090 Right. Pete Peterson is brought in from a company 00:09:40.090 --> 00:09:42.629 called Bell & Howell. He was not a Lehman guy. 00:09:42.889 --> 00:09:46.049 He wasn't a Wall Street lifer. He was a manager, 00:09:46.210 --> 00:09:49.210 a fix -it man. And he did it. He fixed it. To 00:09:49.210 --> 00:09:52.250 his credit, he absolutely did. He slashed costs. 00:09:52.509 --> 00:09:55.330 He acquired another firm called Abraham & Company. 00:09:55.549 --> 00:09:59.230 And he engineered a huge merger with Kuhn Lobenkamp, 00:09:59.330 --> 00:10:02.090 another prestigious firm. Under Peterson's leadership, 00:10:02.470 --> 00:10:04.850 Lehman had five straight years of record profits. 00:10:05.389 --> 00:10:07.590 But profits don't always create a happy family. 00:10:07.850 --> 00:10:10.009 And this leads us to what some people call the 00:10:10.009 --> 00:10:13.070 Civil War era at Lehman. And I find this part 00:10:13.070 --> 00:10:15.190 fascinating because it really sets the cultural 00:10:15.190 --> 00:10:17.809 stage for the firm that Dick Fold would later 00:10:17.809 --> 00:10:20.299 inherit. It absolutely does. To understand what 00:10:20.299 --> 00:10:22.220 happened, you have to understand the two warring 00:10:22.220 --> 00:10:25.200 tribes inside any investment bank. OK. On one 00:10:25.200 --> 00:10:26.919 side, you've got the investment bankers. These 00:10:26.919 --> 00:10:29.200 are the dealmakers, the relationship guys. They 00:10:29.200 --> 00:10:31.000 wear the nice suits. They have the long lunches. 00:10:31.000 --> 00:10:34.019 They shake hands with CEOs. Pete Peterson was 00:10:34.019 --> 00:10:35.779 the king of the bankers. And on the other side? 00:10:35.919 --> 00:10:38.259 You have the traders, the guys on the trading 00:10:38.259 --> 00:10:41.080 floor. They live and die by the second to second 00:10:41.080 --> 00:10:42.980 ticks of the market. They're lighter. They're 00:10:42.980 --> 00:10:45.799 rougher. And they tend to see the bankers as, 00:10:45.860 --> 00:10:48.570 you know, empty suits who just talk a lot. And 00:10:48.570 --> 00:10:51.309 at Lehman in the late 70s and early 80s, the 00:10:51.309 --> 00:10:52.830 traders were starting to make all the money. 00:10:52.990 --> 00:10:55.529 That's the key. The market volatility meant that 00:10:55.529 --> 00:10:58.190 trading profits were exploding. And the head 00:10:58.190 --> 00:11:00.470 of the traders was a man named Louis Glucksmann. 00:11:00.549 --> 00:11:03.970 He was a rough edged, chain smoking, incredibly 00:11:03.970 --> 00:11:06.850 intense guy. And he's looking at Peterson. He's 00:11:06.850 --> 00:11:08.769 looking at Peterson, the smooth banker running 00:11:08.769 --> 00:11:11.470 the show. And he's basically saying, my guys 00:11:11.470 --> 00:11:14.090 are generating the profits. Why are you in charge? 00:11:14.330 --> 00:11:17.860 So we get a coup. A literal boardroom coup. In 00:11:17.860 --> 00:11:21.279 1983, Glucksmann skillfully maneuvers to oust 00:11:21.279 --> 00:11:23.600 Peterson. Peterson is pushed out. Glucksmann 00:11:23.600 --> 00:11:25.779 takes sole control of the firm. It was a complete 00:11:25.779 --> 00:11:27.899 victory for the traders. But a short -lived one. 00:11:28.019 --> 00:11:30.799 A Pyrrhic victory. It turns out that winning 00:11:30.799 --> 00:11:33.779 the war destroyed the country. The internal environment 00:11:33.779 --> 00:11:36.860 just became toxic. I read that Stephen Schwartzman, 00:11:36.899 --> 00:11:38.620 who was there at the time, before he went off 00:11:38.620 --> 00:11:41.080 to found Blackstone, he described it as dysfunctional 00:11:41.080 --> 00:11:43.679 and extremely competitive. That's putting it 00:11:43.679 --> 00:11:46.350 mildly. the partners started warring with each 00:11:46.350 --> 00:11:48.269 other instead of competing with other firms. 00:11:48.629 --> 00:11:51.809 The place just fell apart. Within a year of the 00:11:51.809 --> 00:11:55.450 coup, in 1984, the firm was in so much turmoil, 00:11:55.570 --> 00:11:58.230 they were forced to sell themselves just to stabilize 00:11:58.230 --> 00:12:00.389 the ship. And they sold to American Express, 00:12:00.529 --> 00:12:03.210 which to me always seems like such a bizarre 00:12:03.210 --> 00:12:06.210 cultural fit. You have this very staid, corporate, 00:12:06.429 --> 00:12:09.929 do -you -know -me credit card company. Trying 00:12:09.929 --> 00:12:12.750 to manage a pack of, you know, Wall Street wolves 00:12:12.750 --> 00:12:15.549 like the Lehman traders. It was a disaster, a 00:12:15.549 --> 00:12:17.789 total culture clash. It lasted for 10 years, 00:12:17.830 --> 00:12:20.009 but by all accounts is a miserable marriage for 00:12:20.009 --> 00:12:23.490 the entire decade. So in 1994, Amex finally throws 00:12:23.490 --> 00:12:25.929 in the towel. They had had enough. They decide 00:12:25.929 --> 00:12:27.629 to spin off the investment banking division. 00:12:28.149 --> 00:12:32.409 And so Lehman Brothers Holdings Inc. goes public. 00:12:32.730 --> 00:12:35.450 It's an independent company once again. And this 00:12:35.450 --> 00:12:38.860 is the moment. This is when the final major character 00:12:38.860 --> 00:12:41.899 in our tragedy steps onto the stage. The man 00:12:41.899 --> 00:12:44.320 who would become completely synonymous with Lehman 00:12:44.320 --> 00:12:48.080 Brothers. Richard Fold. Dick Fold. The Gorilla. 00:12:48.120 --> 00:12:49.960 That's what they called him. He was the traitor 00:12:49.960 --> 00:12:51.980 by background. He came up on the commercial paper 00:12:51.980 --> 00:12:55.100 desk. He was intense, famously intimidating, 00:12:55.220 --> 00:12:58.960 and just pathologically competitive. He takes 00:12:58.960 --> 00:13:01.580 over as CEO of the newly independent firm in 00:13:01.580 --> 00:13:04.090 94. And his whole mission, his driving force 00:13:04.090 --> 00:13:06.409 was validation, wasn't it? He wanted to prove 00:13:06.409 --> 00:13:09.470 that Lehman wasn't just some reject, some cast 00:13:09.470 --> 00:13:12.289 off from American Express. Oh, he had a massive 00:13:12.289 --> 00:13:14.269 chip on his shoulder. He wanted Lehman to be 00:13:14.269 --> 00:13:16.769 a bulge bracket firm, tier one, right up there 00:13:16.769 --> 00:13:18.710 with Goldman Sachs and Morgan Stanley. He was 00:13:18.710 --> 00:13:20.649 obsessed with it. And for a long time, he was. 00:13:21.120 --> 00:13:23.340 wildly successful. Incredibly successful. He 00:13:23.340 --> 00:13:25.559 guided the firm through the Asian financial crisis 00:13:25.559 --> 00:13:28.159 in 1997. He steered them through the collapse 00:13:28.159 --> 00:13:29.960 of the hedge fund long -term capital management 00:13:29.960 --> 00:13:32.940 in 1998, which took down a lot of others. He 00:13:32.940 --> 00:13:35.000 seemed to have the golden touch. And then came 00:13:35.000 --> 00:13:37.899 September 11th, 2001. And I think we really need 00:13:37.899 --> 00:13:40.019 to spend a moment here because the psychological 00:13:40.019 --> 00:13:43.639 impact of 9 -11 on the firm and on Fold was just 00:13:43.639 --> 00:13:47.059 profound. It was. You have to remember, Lehman 00:13:47.059 --> 00:13:49.100 Brothers had offices in the World Trade Center. 00:13:49.200 --> 00:13:51.299 They occupied three floors of the North Tower, 00:13:51.460 --> 00:13:54.820 one WTC. And they lost an employee in the attacks. 00:13:55.159 --> 00:13:58.340 Tragically, yes. One employee was killed. But 00:13:58.340 --> 00:14:00.259 their global headquarters was right across the 00:14:00.259 --> 00:14:03.279 street at Three World Financial Center. It wasn't 00:14:03.279 --> 00:14:06.159 hit by a plane, but it was so severely damaged 00:14:06.159 --> 00:14:08.620 by the collapse of the towers that it was rendered 00:14:08.620 --> 00:14:11.080 completely unusable. So in an instant, you have 00:14:11.080 --> 00:14:13.259 a global investment bank, a firm managing hundreds 00:14:13.259 --> 00:14:15.879 of billions of dollars, and they have no office. 00:14:16.000 --> 00:14:19.179 They are effectively homeless. 6 ,500 employees 00:14:19.179 --> 00:14:21.370 were displaced in a moment. But the story of 00:14:21.370 --> 00:14:23.250 their recovery is it's the stuff of Wall Street 00:14:23.250 --> 00:14:25.570 legend. And this is where that Lehman culture 00:14:25.570 --> 00:14:28.330 of toughness really hardened into something else. 00:14:28.389 --> 00:14:30.889 They just scattered, right? They did. They moved 00:14:30.889 --> 00:14:32.909 their entire trading operation to backup facilities 00:14:32.909 --> 00:14:35.909 in Jersey City. But the investment banking division, 00:14:36.129 --> 00:14:39.070 the dealmakers, they literally took over the 00:14:39.070 --> 00:14:41.429 Sheraton Manhattan Hotel in Midtown. I love this 00:14:41.429 --> 00:14:43.789 detail. They were running a multi -billion dollar 00:14:43.789 --> 00:14:46.889 banking operation out of a hotel. Out of a hotel. 00:14:47.679 --> 00:14:49.600 They converted the lounges, the ballrooms, and 00:14:49.600 --> 00:14:53.799 all 665 guest rooms into offices. They were ripping 00:14:53.799 --> 00:14:56.399 out beds and putting in desks and trading turrets. 00:14:56.539 --> 00:14:58.600 They were running fiber optic cables down the 00:14:58.600 --> 00:15:00.720 laundry chutes. That's just incredible. Imagine 00:15:00.720 --> 00:15:03.679 trying to close a billion -dollar M &A deal while 00:15:03.679 --> 00:15:05.879 sitting on a hotel chair in a room that still 00:15:05.879 --> 00:15:08.740 smells faintly of room service. It is the definition 00:15:08.740 --> 00:15:11.860 of resilience. And here's the thing. Within 48 00:15:11.860 --> 00:15:14.100 hours of the stock market's reopening, they were 00:15:14.100 --> 00:15:16.620 fully operational. And Fold didn't even wait 00:15:16.620 --> 00:15:18.330 for their... old headquarters to be repaired. 00:15:18.570 --> 00:15:21.529 No. He made a statement. He immediately went 00:15:21.529 --> 00:15:24.649 out and bought a brand new 32 -story skyscraper 00:15:24.649 --> 00:15:28.669 at 745 7th Avenue from their rival, Morgan Stanley. 00:15:29.049 --> 00:15:32.350 Paid $700 million for it and had the entire firm 00:15:32.350 --> 00:15:35.590 moved in by January 2002. But there's a real 00:15:35.590 --> 00:15:37.529 double -edged sword to that kind of experience, 00:15:37.690 --> 00:15:41.210 isn't there? Surviving something so traumatic, 00:15:41.389 --> 00:15:43.490 being literally bombed out of your building and 00:15:43.490 --> 00:15:46.470 being back in business within a week. That has 00:15:46.470 --> 00:15:49.129 to change your mindset. It does. Many people, 00:15:49.190 --> 00:15:51.110 including Veloukis in that examiner's report, 00:15:51.289 --> 00:15:54.049 point directly to this moment. It created this 00:15:54.049 --> 00:15:56.879 powerful... Almost dangerous sense of invincibility. 00:15:57.059 --> 00:15:59.480 A feeling that if we can survive this, we can 00:15:59.480 --> 00:16:02.700 survive anything. Exactly. It forged this intense 00:16:02.700 --> 00:16:05.500 us against the world mentality. It bound the 00:16:05.500 --> 00:16:08.000 employees to fold and do each other. But it also 00:16:08.000 --> 00:16:11.039 very likely blinded them to future risks. They 00:16:11.039 --> 00:16:13.500 felt bulletproof. And that feeling of being bulletproof, 00:16:13.580 --> 00:16:15.980 that confidence combined with what was happening 00:16:15.980 --> 00:16:18.659 in the broader economy that led them straight 00:16:18.659 --> 00:16:20.419 into the arms of the housing market. Right into 00:16:20.419 --> 00:16:22.019 the heart of the storm. You have to connect the 00:16:22.019 --> 00:16:24.399 dots. After 9 -11, the Federal Reserve. Reserve 00:16:24.399 --> 00:16:27.179 under Alan Greenspan slashed interest rates to 00:16:27.179 --> 00:16:29.840 historic lows to keep the economy from grinding 00:16:29.840 --> 00:16:32.960 to a halt. Money became cheap, very cheap. And 00:16:32.960 --> 00:16:36.080 when money is cheap, big investors, pension funds, 00:16:36.240 --> 00:16:38.820 they go hunting for yield. They need to find 00:16:38.820 --> 00:16:41.059 better returns than they can get from safe government 00:16:41.059 --> 00:16:43.639 bonds. And the best returns, the highest yields, 00:16:43.659 --> 00:16:46.980 were in real estate. Bingo. Which brings us to 00:16:46.980 --> 00:16:50.840 part four, the house of cards, the mortgage obsession. 00:16:51.389 --> 00:16:53.809 Starting around 2003 and then just accelerating 00:16:53.809 --> 00:16:57.049 wildly through 2006, Lehman made a conscious 00:16:57.049 --> 00:16:59.950 strategic decision. They didn't just want to 00:16:59.950 --> 00:17:02.389 trade mortgage bonds anymore. They wanted to 00:17:02.389 --> 00:17:05.190 own the entire supply chain. Vertical integration. 00:17:05.369 --> 00:17:07.509 They wanted to be the ones making the loans, 00:17:07.630 --> 00:17:09.750 packaging the loans into securities, and then 00:17:09.750 --> 00:17:11.809 selling those securities. And to do that, they 00:17:11.809 --> 00:17:14.130 went on a buying spree. They acquired a company 00:17:14.130 --> 00:17:16.750 called Aurora Loan Services, which was what's 00:17:16.750 --> 00:17:18.950 known as an Alt -A lender. OK, let's break that 00:17:18.950 --> 00:17:21.329 down. Alt -A. What does that actually mean? It's 00:17:21.329 --> 00:17:23.309 a kind of mortgage that sits between prime and 00:17:23.309 --> 00:17:25.609 subprime. It basically means the borrower has 00:17:25.609 --> 00:17:28.190 a decent credit score, but maybe they can't or 00:17:28.190 --> 00:17:30.670 won't provide full documentation of their income. 00:17:30.890 --> 00:17:33.690 They were sometimes called liar loans. Not a 00:17:33.690 --> 00:17:35.910 great sign. And they also bought BNC Mortgage. 00:17:36.029 --> 00:17:39.690 Which was pure, unadulterated subprime. These 00:17:39.690 --> 00:17:42.369 were loans to borrowers with poor credit histories, 00:17:42.549 --> 00:17:46.750 high risk. And by 2006, these two subsidiaries, 00:17:46.809 --> 00:17:50.890 Aurora and BNC, were originating almost 50 billion 00:17:50.890 --> 00:17:53.490 dollars in mortgages per month. 50 billion a 00:17:53.490 --> 00:17:56.049 month. Lehman became the number one underwriter 00:17:56.049 --> 00:17:58.130 of mortgage -backed securities on Wall Street. 00:17:58.269 --> 00:18:01.490 They were the king. But there was a fatal shift 00:18:01.490 --> 00:18:03.960 in their strategy. It wasn't just move the product 00:18:03.960 --> 00:18:06.880 anymore. Correct. The old, safer model was called 00:18:06.880 --> 00:18:09.420 originate to distribute. You make the loan, you 00:18:09.420 --> 00:18:11.720 package it into a bond, and you sell that bond 00:18:11.720 --> 00:18:14.839 to a pension fund in Norway or a bank in Germany. 00:18:15.019 --> 00:18:17.799 You get a fee, but you don't keep the risk. But 00:18:17.799 --> 00:18:20.160 Lehman started doing what? Originate to hold. 00:18:20.500 --> 00:18:23.420 Exactly. They started keeping huge chunks of 00:18:23.420 --> 00:18:25.700 these risky mortgage bonds and other real estate 00:18:25.700 --> 00:18:28.829 assets on their own books. The returns were so 00:18:28.829 --> 00:18:31.109 juicy they couldn't resist. They were eating 00:18:31.109 --> 00:18:33.009 their own cooking. And they were doing this with 00:18:33.009 --> 00:18:35.250 a terrifying amount of leverage. We hear that 00:18:35.250 --> 00:18:37.549 word leverage thrown around all the time. Can 00:18:37.549 --> 00:18:39.509 we just break down exactly what Lehman's position 00:18:39.509 --> 00:18:43.369 looked like? We have to. By 2007, early 2008, 00:18:43.789 --> 00:18:47.109 Lehman had total assets of roughly $680 billion. 00:18:48.049 --> 00:18:51.390 But their actual capital, their tangible common 00:18:51.390 --> 00:18:53.809 equity, the cushion they had against losses, 00:18:54.009 --> 00:18:57.069 was only about $22 .5 billion. So that's a leverage 00:18:57.069 --> 00:18:59.849 ratio of about 30 to 1. 30 to 1. Let's use an 00:18:59.849 --> 00:19:01.789 analogy for that. That's like me buying a $300 00:19:01.789 --> 00:19:04.269 ,000 house, but I only put down $10 ,000 of my 00:19:04.269 --> 00:19:06.529 own money. That is the perfect analogy. And if 00:19:06.529 --> 00:19:09.430 the value of that house drops by just over 3%, 00:19:09.430 --> 00:19:12.769 your $10 ,000 down payment is completely wiped 00:19:12.769 --> 00:19:15.069 out. You're insolvent. And in Lehman's case, 00:19:15.250 --> 00:19:18.029 a mere 3 % to 5 % decline in the value of their 00:19:18.029 --> 00:19:20.950 massive real estate portfolio would erase 100 00:19:20.950 --> 00:19:24.369 % of their capital. The entire firm. They had 00:19:24.369 --> 00:19:27.210 no margin for error. None. And they knew the 00:19:27.210 --> 00:19:29.970 market was getting shaky. Which brings us to 00:19:29.970 --> 00:19:31.990 one of the most infamous parts of this whole 00:19:31.990 --> 00:19:35.410 saga. Repo 105. Repo 105. This is where the Lucas 00:19:35.410 --> 00:19:37.890 report really just drops the hammer. It sounds 00:19:37.890 --> 00:19:40.430 like a secret weapon from a spy movie. What was 00:19:40.430 --> 00:19:43.690 it actually? OK, so a normal repo or repurchase 00:19:43.690 --> 00:19:47.519 agreement is a standard. boring transaction on 00:19:47.519 --> 00:19:49.380 Wall Street. It's like a pawn shop for bonds. 00:19:49.599 --> 00:19:51.539 I give you a bond as collateral, you give me 00:19:51.539 --> 00:19:54.200 cash overnight. The next day, I buy my bond back 00:19:54.200 --> 00:19:56.900 for a tiny bit more money. It's a short -term 00:19:56.900 --> 00:19:59.500 loan. Okay, that's normal. That's totally normal. 00:19:59.559 --> 00:20:02.119 It's just a financing transaction. But Lehman 00:20:02.119 --> 00:20:04.940 found a loophole, a legal opinion from a law 00:20:04.940 --> 00:20:07.799 firm in the United Kingdom. They used a UK -based 00:20:07.799 --> 00:20:11.299 subsidiary because... English law, unlike U .S. 00:20:11.339 --> 00:20:14.119 law, allowed them to classify some of these repo 00:20:14.119 --> 00:20:17.700 transactions as a true sale rather than a financing. 00:20:17.920 --> 00:20:20.359 And why does that distinction, sale versus financing, 00:20:20.579 --> 00:20:24.160 matter so much? Because if it's a sale, the assets, 00:20:24.240 --> 00:20:26.200 the bonds, temporarily come off your balance 00:20:26.200 --> 00:20:29.220 sheet. If it's just a financing, the assets stay 00:20:29.220 --> 00:20:31.119 on your balance sheet and you just show more 00:20:31.119 --> 00:20:33.769 cash and more debt. At the end of every quarter, 00:20:33.869 --> 00:20:35.650 right before they had to take the public snapshot 00:20:35.650 --> 00:20:37.650 for their earnings report. They would use repo 00:20:37.650 --> 00:20:40.630 105 to temporarily move $50 billion of assets 00:20:40.630 --> 00:20:43.430 off their books. So for a few days, they looked 00:20:43.430 --> 00:20:47.630 $50 billion smaller and therefore much less leveraged. 00:20:47.730 --> 00:20:50.490 Their leverage ratio looked healthier to investors 00:20:50.490 --> 00:20:53.329 and rating agencies. Precisely. And then as soon 00:20:53.329 --> 00:20:54.990 as the new quarter began, they'd reverse the 00:20:54.990 --> 00:20:57.470 transaction and the assets would pop right back 00:20:57.470 --> 00:21:00.150 onto the balance sheet. It was accounting gimmickry. 00:21:00.269 --> 00:21:02.549 It was cosmetic surgery for the balance sheet. 00:21:02.750 --> 00:21:05.509 And the examiner's report called it materially 00:21:05.509 --> 00:21:08.549 misleading. It did. And it noted that the top 00:21:08.549 --> 00:21:12.490 executives, including Fold and the CFOs, they 00:21:12.490 --> 00:21:14.730 all signed off on the financial statements that 00:21:14.730 --> 00:21:17.529 were based on this gimmick. So we get to 2008. 00:21:17.710 --> 00:21:20.549 The slow motion crash starts to unfold. Well, 00:21:20.609 --> 00:21:22.690 the first big warning shot had already been fired. 00:21:23.509 --> 00:21:26.970 Bear Stearns collapses in March of 2008. Now, 00:21:26.970 --> 00:21:28.960 this is a crucial point. The Federal Reserve 00:21:28.960 --> 00:21:30.900 and the Treasury Department stepped in. They 00:21:30.900 --> 00:21:33.059 brokered a sale of Bear Stearns to J .P. Morgan. 00:21:33.240 --> 00:21:35.940 And importantly, they guaranteed $30 billion 00:21:35.940 --> 00:21:39.380 of Bear's toxic assets. So the lesson the market 00:21:39.380 --> 00:21:41.299 learned was the government has our back. The 00:21:41.299 --> 00:21:44.059 too -big -to -fail doctrine was born, or at least 00:21:44.059 --> 00:21:46.460 confirmed. The market assumed that if another 00:21:46.460 --> 00:21:48.779 big firm like Lehman got into similar trouble, 00:21:49.000 --> 00:21:51.339 the government would do the same thing. It created 00:21:51.339 --> 00:21:53.859 a huge moral hazard. But Hank Paulson, the Treasury 00:21:53.859 --> 00:21:56.279 Secretary, he had a lot of political heat for 00:21:56.279 --> 00:21:59.130 that. Bear Stearns bailout. A ton of it. He was 00:21:59.130 --> 00:22:00.750 being accused of bailing out his Wall Street 00:22:00.750 --> 00:22:03.529 buddies. And he did not want to do it again. 00:22:03.730 --> 00:22:07.170 So Lehman posts this surprise profit in the first 00:22:07.170 --> 00:22:09.609 quarter of 2008, which was a total head fake. 00:22:09.849 --> 00:22:13.549 But by June, reality bites. They announced their 00:22:13.549 --> 00:22:15.890 first quarterly loss since being spun off from 00:22:15.890 --> 00:22:21.069 Amex. A loss of $2 .8 billion. The stock, which 00:22:21.069 --> 00:22:23.829 had been in the 60s and 70s, just starts to crater. 00:22:23.990 --> 00:22:26.609 And Fold starts cleaning house. He does. He fires 00:22:26.609 --> 00:22:29.289 his longtime COO, Joe Gregory. He pushes out 00:22:29.289 --> 00:22:32.609 CFO Aaron Callen. But he refuses to sell the 00:22:32.609 --> 00:22:34.710 company at a low price. He's still holding out. 00:22:34.990 --> 00:22:37.150 He thinks he can find a partner, an investor, 00:22:37.309 --> 00:22:39.470 not a buyer. He didn't want to sell the firm. 00:22:39.509 --> 00:22:41.690 He just wanted a capital injection. Right. He 00:22:41.690 --> 00:22:44.450 talked to everybody. Famously, he talked to Warren 00:22:44.450 --> 00:22:46.759 Buffett. Buffett took one look at their books, 00:22:46.900 --> 00:22:49.940 saw how complex and opaque their derivative positions 00:22:49.940 --> 00:22:53.579 were, and just walked away. But the big hope, 00:22:53.680 --> 00:22:56.119 the real white knight, was the Korea Development 00:22:56.119 --> 00:22:58.940 Bank. I remember this. All through August of 00:22:58.940 --> 00:23:01.359 2008, the rumor on Wall Street was the Koreans 00:23:01.359 --> 00:23:04.180 are coming to save Lehman. It was the last lifeline. 00:23:04.519 --> 00:23:06.779 But in early September, the talks completely 00:23:06.779 --> 00:23:10.019 fell apart. The KDB got cold feet. Some reports 00:23:10.019 --> 00:23:12.319 say the price was too high. Others say the Korean 00:23:12.319 --> 00:23:14.660 regulators just looked at Lehman's toxic real 00:23:14.660 --> 00:23:17.240 estate portfolio and got terrified. And when 00:23:17.240 --> 00:23:19.279 that news broke. When the news broke on September 00:23:19.279 --> 00:23:22.079 9th that the KDB deal was dead, Lehman stock 00:23:22.079 --> 00:23:25.819 plunged 45 percent in one day. And this leads 00:23:25.819 --> 00:23:28.019 us to an anecdote that I think just perfectly 00:23:28.019 --> 00:23:30.420 painfully encapsulates the culture of denial 00:23:30.420 --> 00:23:32.599 inside the firm's leadership at that moment. 00:23:32.759 --> 00:23:36.519 The Neuberger -Berman email. Yes. Oh, this is 00:23:36.519 --> 00:23:39.170 just. It's breathtaking. So Neuberger Berman 00:23:39.170 --> 00:23:40.990 was the asset management division of Lehman. 00:23:41.029 --> 00:23:43.490 It was the stable, profitable, safe part of the 00:23:43.490 --> 00:23:46.009 business. They managed money for wealthy clients. 00:23:46.349 --> 00:23:48.150 Right. It was separate from the high -risk trading 00:23:48.150 --> 00:23:51.509 floor. As the stock is in free fall, a group 00:23:51.509 --> 00:23:54.049 of senior executives at Neuberger sends an email 00:23:54.049 --> 00:23:56.230 to Lehman's executive committee. And what did 00:23:56.230 --> 00:23:58.750 they suggest? A very sensible thing. They suggested 00:23:58.750 --> 00:24:00.869 that the top management at Lehman Fold and his 00:24:00.869 --> 00:24:03.250 lieutenants should publicly announce that they 00:24:03.250 --> 00:24:05.849 were foregoing their multi -million dollar bonuses 00:24:05.849 --> 00:24:08.589 for the year. A gesture of accountability. A 00:24:08.589 --> 00:24:11.269 way to signal to the market, we get it, we're 00:24:11.269 --> 00:24:14.289 sharing the pain. A simple, powerful PR move. 00:24:14.750 --> 00:24:17.089 But one of Lehman's directors, George Herbert 00:24:17.089 --> 00:24:20.500 Walker V, a cousin of President Bush. He got 00:24:20.500 --> 00:24:23.440 wind of this email and he was horrified. Horrified 00:24:23.440 --> 00:24:25.420 by the suggestion? He dismissed it completely. 00:24:25.619 --> 00:24:27.680 He actually sent an apology to the executive 00:24:27.680 --> 00:24:30.700 committee for the email even being sent. He wrote, 00:24:30.839 --> 00:24:33.880 and this is a direct quote, Sorry, team. I am 00:24:33.880 --> 00:24:36.140 not sure what's in the water at Neuberger Berman. 00:24:36.299 --> 00:24:39.799 I'm embarrassed and I apologize. Wow. The house 00:24:39.799 --> 00:24:43.079 is on fire. The stock has been vaporized. And 00:24:43.079 --> 00:24:44.880 the leadership is embarrassed by the suggestion 00:24:44.880 --> 00:24:47.029 that they shouldn't take their bonuses. It just 00:24:47.029 --> 00:24:49.750 shows the complete disconnect from reality, the 00:24:49.750 --> 00:24:52.549 sense of entitlement. They truly believed they 00:24:52.549 --> 00:24:55.049 had earned those rewards, regardless of the outcome 00:24:55.049 --> 00:24:57.710 for the firm or its shareholders. But the market 00:24:57.710 --> 00:25:00.390 didn't care. And so we arrive at the final weekend, 00:25:00.670 --> 00:25:04.809 September 12th, 13th and 14th, 2008, the death 00:25:04.809 --> 00:25:07.549 watch. Timothy Geithner, who was the president 00:25:07.549 --> 00:25:10.150 of the New York Fed at the time, he summons the 00:25:10.150 --> 00:25:13.349 CEOs of all the major Wall Street banks to the 00:25:13.349 --> 00:25:16.069 Fed's fortress -like building in lower Manhattan. 00:25:16.519 --> 00:25:18.240 He basically locks them in a room for the weekend. 00:25:18.400 --> 00:25:21.259 He does. Jamie Dimon from J .P. Morgan, John 00:25:21.259 --> 00:25:23.680 Thain from Merrill Lynch, Lloyd Blankfein from 00:25:23.680 --> 00:25:25.900 Goldman Sachs. They're all there. And the message 00:25:25.900 --> 00:25:28.420 from Geithner and from Hank Paulson is crystal 00:25:28.420 --> 00:25:30.400 clear. There's no government money this time. 00:25:30.579 --> 00:25:33.539 Paulson was adamant. He said, I cannot be Mr. 00:25:33.680 --> 00:25:36.980 Bailout again. He told the assembled CEOs. You 00:25:36.980 --> 00:25:39.059 guys, the private sector, need to come up with 00:25:39.059 --> 00:25:41.339 a solution. You need to fund a rescue or the 00:25:41.339 --> 00:25:43.220 whole system is coming down on Monday morning. 00:25:43.400 --> 00:25:45.920 So who are the potential buyers for Lehman at 00:25:45.920 --> 00:25:47.920 this point? It really came down to just two, 00:25:48.099 --> 00:25:51.019 Bank of America and the British bank, Barclays. 00:25:51.200 --> 00:25:53.599 And Bank of America, they took a look under the 00:25:53.599 --> 00:25:57.079 hood and ran screaming. Pretty much. Ken Lewis, 00:25:57.259 --> 00:26:00.119 the CEO of Bank of America, realized that another 00:26:00.119 --> 00:26:04.029 firm, Merrill Lynch, was also on the ropes. And 00:26:04.029 --> 00:26:06.309 Merrill had a much better, cleaner business with 00:26:06.309 --> 00:26:09.750 its massive brokerage army. So in a stunning 00:26:09.750 --> 00:26:12.210 twist that weekend, Bank of America just pivots 00:26:12.210 --> 00:26:14.950 and buys Merrill Lynch instead. Which left only 00:26:14.950 --> 00:26:18.430 one potential savior. Barclays. And Barclays 00:26:18.430 --> 00:26:20.710 wanted to do the deal. Bob Diamond, the head 00:26:20.710 --> 00:26:23.430 of Barclays Capital, saw it as a once -in -a 00:26:23.430 --> 00:26:25.869 -lifetime opportunity to buy a premier U .S. 00:26:25.890 --> 00:26:28.039 investment bank on the cheap. They had their 00:26:28.039 --> 00:26:29.960 teams working all weekend. They had a structure 00:26:29.960 --> 00:26:32.359 ready to go. They were ready. The lawyers were 00:26:32.359 --> 00:26:34.619 literally drafting the press releases, announcing 00:26:34.619 --> 00:26:37.380 the deal on Sunday morning. But they overlooked 00:26:37.380 --> 00:26:40.119 one crucial hurdle. The British regulator. The 00:26:40.119 --> 00:26:42.000 British regulators, the Financial Services Authority, 00:26:42.259 --> 00:26:45.180 the FSA. And they were not on board. Not at all. 00:26:45.559 --> 00:26:47.920 The head of the FSA, Hector Saints, basically 00:26:47.920 --> 00:26:50.359 said, we're not going to waive our rules that 00:26:50.359 --> 00:26:52.660 require a shareholder approval for a deal this 00:26:52.660 --> 00:26:55.880 large. And then famously, the British chancellor, 00:26:55.960 --> 00:26:58.740 the exchequer. Alistair Darling, got on the phone 00:26:58.740 --> 00:27:00.779 with the Americans and delivered the fatal line. 00:27:01.000 --> 00:27:04.180 What did he say? He said, I am not going to import 00:27:04.180 --> 00:27:07.279 your cancer. Brutal. I am not going to import 00:27:07.279 --> 00:27:09.339 your cancer. That was it. That was the death 00:27:09.339 --> 00:27:12.140 knell. When that message was relayed to the room 00:27:12.140 --> 00:27:15.059 at the New York Fed on Sunday afternoon, everyone 00:27:15.059 --> 00:27:18.440 knew it was over. There was no buyer. There was 00:27:18.440 --> 00:27:21.220 no government bailout. Lehman was a dead man 00:27:21.220 --> 00:27:23.680 walking. What happened in those final hours? 00:27:23.819 --> 00:27:26.319 The regulators, the Fed and the SEC, they told 00:27:26.319 --> 00:27:28.759 Lehman's lawyers, you have to file for bankruptcy 00:27:28.759 --> 00:27:31.319 before the Asian markets open on Monday. They 00:27:31.319 --> 00:27:33.339 were trying to contain the explosion. That Sunday 00:27:33.339 --> 00:27:35.579 must have just been absolute chaos. There was 00:27:35.579 --> 00:27:37.480 a moment of pure pandemonium. The International 00:27:37.480 --> 00:27:40.759 Swaps and Derivatives Association, ISDA, they 00:27:40.759 --> 00:27:43.640 held an emergency unprecedented trading session 00:27:43.640 --> 00:27:47.609 on a Sunday afternoon. On a Sunday? Yes. to allow 00:27:47.609 --> 00:27:51.089 banks to try and net out their derivatives exposures 00:27:51.089 --> 00:27:54.309 to Lehman. They were frantically trying to untangle 00:27:54.309 --> 00:27:56.809 as many wires as they could before the bomb went 00:27:56.809 --> 00:27:59.069 off. And then, shortly before 1 in the morning 00:27:59.069 --> 00:28:01.769 on Monday, September 15th, Lehman Brothers Holdings, 00:28:01.789 --> 00:28:05.049 Inc. filed for Chapter 11 bankruptcy protection. 00:28:05.410 --> 00:28:07.710 I still remember the images from that next morning. 00:28:07.809 --> 00:28:09.869 It wasn't just the stock chart going to zero. 00:28:09.950 --> 00:28:13.400 It was the people. The employees just streaming 00:28:13.400 --> 00:28:15.980 out of that big glass building in Times Square, 00:28:16.119 --> 00:28:18.460 holding those little cardboard boxes with their 00:28:18.460 --> 00:28:20.980 desk plants and their family photos. The end 00:28:20.980 --> 00:28:24.779 of an era. 158 years of history. From the cotton 00:28:24.779 --> 00:28:27.599 fields of Alabama to the pinnacle of global finance. 00:28:27.759 --> 00:28:30.799 All of it gone with a stroke of a pen on a legal 00:28:30.799 --> 00:28:32.980 document. But the firm didn't just vanish into 00:28:32.980 --> 00:28:36.079 thin air. The corpse had to be carved up. And 00:28:36.079 --> 00:28:38.000 this is the part of the story, the liquidation, 00:28:38.059 --> 00:28:40.559 which sounds dry, but the details are actually 00:28:40.559 --> 00:28:43.259 wild. It was a fire sale of historic proportions. 00:28:43.700 --> 00:28:46.500 Everything must go. Barclays, the bank that was 00:28:46.500 --> 00:28:48.319 blocked from buying the whole firm on Sunday. 00:28:48.460 --> 00:28:50.559 They came back on Tuesday. They came back on 00:28:50.559 --> 00:28:53.240 Tuesday. And because Lehman was now in bankruptcy 00:28:53.240 --> 00:28:55.579 protection, Barclays could do what's called a 00:28:55.579 --> 00:28:57.920 cherry picking deal. They could buy just. The 00:28:57.920 --> 00:29:00.140 good part. The clean part. The North American 00:29:00.140 --> 00:29:02.680 investment banking and trading divisions, they 00:29:02.680 --> 00:29:04.559 didn't have to take on any of the toxic real 00:29:04.559 --> 00:29:07.279 estate or the legacy debts. They picked the raisins 00:29:07.279 --> 00:29:09.400 out of the cake. And what did they pay? They 00:29:09.400 --> 00:29:15.579 paid $1 .75 billion. And get this. That price 00:29:15.579 --> 00:29:18.059 included the brand new headquarters building 00:29:18.059 --> 00:29:22.200 at 745 7th Avenue, the one fold bought for almost 00:29:22.200 --> 00:29:25.059 a billion by itself, and two state -of -the -art 00:29:25.059 --> 00:29:27.390 data centers in New Jersey. That is an unbelievable 00:29:27.390 --> 00:29:30.250 bargain. It was the steal of the century. The 00:29:30.250 --> 00:29:33.289 bankruptcy judge, James Peck, he basically had 00:29:33.289 --> 00:29:35.170 to approve it. He said, I have to approve this 00:29:35.170 --> 00:29:37.329 transaction because it is the only available 00:29:37.329 --> 00:29:39.730 transaction. Lehman Brothers became a victim, 00:29:39.750 --> 00:29:42.049 in effect, of a tsunami. And what about the international 00:29:42.049 --> 00:29:44.690 pieces, the operations in Europe and Asia? The 00:29:44.690 --> 00:29:47.869 Japanese bank, Nomura, swooped in. They bought 00:29:47.869 --> 00:29:51.369 the Asian franchise for about $225 million. But 00:29:51.369 --> 00:29:54.460 the European deal? The European deal is the one 00:29:54.460 --> 00:29:56.079 that just blows my mind every time I read about 00:29:56.079 --> 00:29:59.160 it. What happened there? Numera acquired Lehman's 00:29:59.160 --> 00:30:01.599 European Investment Banking and Equities Divisions. 00:30:02.279 --> 00:30:06.420 They took on 2 ,500 employees. Do you any guess 00:30:06.420 --> 00:30:09.240 what they paid for the business itself? I'm afraid 00:30:09.240 --> 00:30:12.460 to ask. Two dollars. You're kidding me. Two dollars? 00:30:12.640 --> 00:30:15.400 Two U .S. dollars. A nominal fee. because the 00:30:15.400 --> 00:30:17.500 value of the business with all its potential 00:30:17.500 --> 00:30:20.980 liabilities was arguably negative, but Nomura 00:30:20.980 --> 00:30:23.819 wanted the people and the footprint in Europe. 00:30:24.589 --> 00:30:26.950 They got a massive European investment bank for 00:30:26.950 --> 00:30:29.089 the price of a cup of coffee. That is the ultimate 00:30:29.089 --> 00:30:31.890 humiliation. It is. But the pan wasn't just for 00:30:31.890 --> 00:30:34.089 the highly paid bankers. We have to talk about 00:30:34.089 --> 00:30:37.210 the human cost for regular people, the mini bonds. 00:30:37.470 --> 00:30:39.369 Right. This wasn't just about rich people losing 00:30:39.369 --> 00:30:41.509 money on the stock market. This had real world 00:30:41.509 --> 00:30:44.750 consequences. In places like Hong Kong and Singapore, 00:30:45.130 --> 00:30:48.150 Lehman had aggressively marketed these complex, 00:30:48.210 --> 00:30:51.549 structured products called mini bonds to retail 00:30:51.549 --> 00:30:54.869 investors. We're talking retirees. grandmothers, 00:30:54.930 --> 00:30:56.589 people who thought they were buying something 00:30:56.589 --> 00:30:59.130 safe. They were sold as being like a savings 00:30:59.130 --> 00:31:01.450 account, but with a better interest rate. Exactly. 00:31:01.769 --> 00:31:03.730 But they were linked to the credit of Lehman 00:31:03.730 --> 00:31:06.589 and other banks. When Lehman collapsed, these 00:31:06.589 --> 00:31:09.250 bonds became completely worthless overnight. 00:31:09.529 --> 00:31:11.470 And there were massive protests in the streets 00:31:11.470 --> 00:31:13.789 of Hong Kong. Tens of thousands of people lost 00:31:13.789 --> 00:31:16.690 their entire life savings. It was a brutal lesson 00:31:16.690 --> 00:31:19.170 in how interconnected the global financial system 00:31:19.170 --> 00:31:21.970 had become. A bad mortgage written in Nevada, 00:31:22.250 --> 00:31:25.170 packaged by a banker in New York, ended up destroying 00:31:25.170 --> 00:31:27.930 the retirement of a shopkeeper in Kowloon. And 00:31:27.930 --> 00:31:30.930 the legal mess, the liquidation, it dragged on 00:31:30.930 --> 00:31:35.289 for more than a decade. Lehman brokerage unit 00:31:35.289 --> 00:31:38.029 didn't officially conclude until September of 00:31:38.029 --> 00:31:41.589 2022. It took 14 years to unwind the whole thing. 00:31:41.730 --> 00:31:43.529 And here's the most ironic part of the entire 00:31:43.529 --> 00:31:46.509 story. After all that, how much money did the 00:31:46.509 --> 00:31:48.910 Lehman estate eventually pay back to its creditors? 00:31:49.069 --> 00:31:51.670 This is the kicker. They eventually paid out 00:31:51.670 --> 00:31:56.309 over $115 billion. Wait a second. If they were 00:31:56.309 --> 00:31:58.789 able to pay out $115 billion, that means they 00:31:58.789 --> 00:32:01.849 had the assets. They weren't broke. Exactly. 00:32:02.210 --> 00:32:05.589 And that is the core lesson of this entire deep 00:32:05.589 --> 00:32:08.250 dive. Lehman Brothers was not an empty shell 00:32:08.250 --> 00:32:11.450 like Enron was. Enron was a fraud from top to 00:32:11.450 --> 00:32:14.190 bottom. There was nothing there. Lehman had real 00:32:14.190 --> 00:32:16.329 assets. They owned buildings. They had loans. 00:32:16.470 --> 00:32:18.049 They owned stakes and companies. In the long 00:32:18.049 --> 00:32:20.630 run, they were probably solvent. But they weren't 00:32:20.630 --> 00:32:23.230 liquid. They died of a liquidity crisis. They 00:32:23.230 --> 00:32:25.430 couldn't turn those long -term assets into cash 00:32:25.430 --> 00:32:27.130 fast enough to pay the bills that were due on 00:32:27.130 --> 00:32:28.930 that Monday morning. And even more than that, 00:32:28.990 --> 00:32:31.890 they died of a trust crisis. Yes. That's the 00:32:31.890 --> 00:32:34.349 perfect way to put it. The entire modern financial 00:32:34.349 --> 00:32:37.809 system operates on confidence. It's a magic trick. 00:32:38.029 --> 00:32:40.089 We all agree that the digital number in our bank 00:32:40.089 --> 00:32:42.829 account is real money. So it is. But the moment 00:32:42.829 --> 00:32:45.789 the market decides, it doesn't trust you anymore. 00:32:45.970 --> 00:32:48.670 The math stops mattering. The math becomes irrelevant. 00:32:49.130 --> 00:32:51.849 It becomes a self -fulfilling prophecy, a run 00:32:51.849 --> 00:32:54.190 on the bank, but at a global institutional scale. 00:32:54.430 --> 00:32:58.559 And culturally, Lehman's legacy is just. It's 00:32:58.559 --> 00:33:00.980 the ultimate bogeyman. Oh, absolutely. They're 00:33:00.980 --> 00:33:02.920 the shorthand for Wall Street greed and collapse. 00:33:03.180 --> 00:33:05.380 They're the villains in the big short margin 00:33:05.380 --> 00:33:08.599 call, too big to fail. There's a great gag in 00:33:08.599 --> 00:33:10.240 the movie Despicable Me where the villain goes 00:33:10.240 --> 00:33:12.539 to the bank of evil and on the sign it says, 00:33:12.720 --> 00:33:16.220 formerly Lehman Brothers. You know you've made 00:33:16.220 --> 00:33:18.200 it into the Hall of Infamy when you're a visual 00:33:18.200 --> 00:33:20.579 gag in a kid's movie. It's the new gold standard 00:33:20.579 --> 00:33:24.109 for financial collapse. So as we wrap up this 00:33:24.109 --> 00:33:26.329 deep dive, I want to leave our listeners with 00:33:26.329 --> 00:33:29.390 one final provocative thought. It's easy to look 00:33:29.390 --> 00:33:32.170 back at 2008 and say, oh, those bankers were 00:33:32.170 --> 00:33:35.170 so reckless with their 30 to 1 leverage. And 00:33:35.170 --> 00:33:38.109 they were. But the fundamental problem hasn't 00:33:38.109 --> 00:33:40.450 really gone away. The risk has just moved. The 00:33:40.450 --> 00:33:42.450 leverage isn't quite as high inside the big banks 00:33:42.450 --> 00:33:44.869 themselves, maybe. But it's migrated to other 00:33:44.869 --> 00:33:47.069 parts of the system, to private credit funds, 00:33:47.349 --> 00:33:50.089 to the shadow banking world, to government balance 00:33:50.089 --> 00:33:52.809 sheets. The question Lehman's collapse forces 00:33:52.809 --> 00:33:56.450 us to ask is this. In a system that runs almost 00:33:56.450 --> 00:33:59.549 entirely on faith, on the collective belief that 00:33:59.549 --> 00:34:01.210 the person on the other side of your trade is 00:34:01.210 --> 00:34:04.470 good for the money, what happens when that faith 00:34:04.470 --> 00:34:06.910 evaporates? Because when it happened to Lehman, 00:34:07.009 --> 00:34:09.510 158 years of history and hundreds of billions 00:34:09.510 --> 00:34:12.469 of dollars just vanished in a weekend. And there's 00:34:12.469 --> 00:34:14.429 no reason it couldn't happen again. And that 00:34:14.429 --> 00:34:16.130 is the thought that should keep all of us up 00:34:16.130 --> 00:34:19.269 at night. The incredible fragility of confidence. 00:34:19.710 --> 00:34:21.809 Well, on that slightly terrifying note, we're 00:34:21.809 --> 00:34:23.869 going to wrap it up. We have linked the Volucas 00:34:23.869 --> 00:34:25.829 report and our other source materials in the 00:34:25.829 --> 00:34:28.070 show notes if you want to go even deeper into 00:34:28.070 --> 00:34:30.730 the abyss. Thank you for joining us on the Deep 00:34:30.730 --> 00:34:31.650 Dive. Thank you.