Lehman Brothers Bankruptcy, September 15, 2008

Lehman Brothers filed for bankruptcy early Monday, September 15, 2008, after a frantic weekend failed to produce a buyer or government-supported transaction. The 158-year-old investment bank reported more than $600 billion in assets, making it the largest US bankruptcy filing at the time. Its failure did not start the financial crisis, but it shattered confidence and accelerated runs across short-term credit markets.

Mortgage Exposure and Leverage

Lehman expanded aggressively into residential and commercial real estate during the credit boom. It originated, bought and packaged mortgages while holding significant related assets. Borrowed money amplified returns when prices rose and losses when they fell.

As housing weakened, investors questioned how Lehman valued hard-to-sell assets. The firm reported losses, sought new capital and tried to separate troubled holdings. Each step failed to restore confidence.

Like Bear Stearns, Lehman depended on short-term wholesale funding. Lenders could decline to renew transactions daily or demand more collateral. A firm can own long-term assets worth something eventually yet fail immediately when it cannot turn them into cash.

The Final Weekend

Officials gathered major financial executives at the Federal Reserve Bank of New York on September 12. They sought a private solution and explored possible sales to Bank of America or Barclays.

Bank of America instead agreed to buy Merrill Lynch. Barclays considered Lehman but could not obtain the guarantees and UK approval needed before markets reopened. Without a buyer, Lehman’s parent filed under Chapter 11 before dawn Monday.

The government had assisted JPMorgan’s purchase of Bear Stearns in March. Officials argued that Lehman lacked sufficient collateral for a similar Federal Reserve loan. Critics later disputed whether the failure was unavoidable or a disastrous policy choice. The documentary record supports a mix of legal, financial and judgment constraints rather than one simple explanation.

Why the Failure Spread

Lehman sat inside a network of derivatives, repurchase agreements, prime brokerage accounts and securities holdings. Its bankruptcy forced customers and counterparties to determine which contracts would be honored and where collateral was held.

The Reserve Primary Fund held Lehman commercial paper. Losses pushed its share value below one dollar—“breaking the buck”—and investors rushed to withdraw money from money-market funds. Those funds were major buyers of short-term corporate debt, so the run threatened ordinary business financing.

Banks became reluctant to lend to one another. Risk premiums rose and markets froze. The damage reached beyond shareholders to payroll credit, municipal finance, retirement accounts and employment.

AIG, Merrill and an Extraordinary Week

The weekend also produced Bank of America’s agreement to acquire Merrill Lynch, preventing another immediate failure. On September 16, the Federal Reserve authorized support for insurance giant AIG, whose credit-default-swap obligations threatened counterparties around the world.

These different outcomes fueled anger about who was saved. The answer depended on timing, collateral, buyers, legal structure and officials’ assessment of systemic danger, but to the public it appeared inconsistent.

The Dow Jones Industrial Average fell more than 500 points on September 15. Larger swings followed as investors tried to understand whether any institution was safe.

From Lehman to TARP

Treasury Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke asked Congress for broad authority to stabilize the system. The House rejected an initial rescue bill on September 29, and the Dow fell 777.68 points, then its largest point decline.

Congress passed a revised Emergency Economic Stabilization Act on October 3, creating the Troubled Asset Relief Program. Treasury soon used TARP mainly to inject capital into banks rather than buy the troubled mortgage assets emphasized in the initial proposal.

The Federal Reserve expanded lending programs and later cut its policy target near zero. Those actions limited collapse but could not prevent the Great Recession’s job and wealth losses.

Bankruptcy and Accountability

Lehman’s bankruptcy became a long process involving affiliates and creditors across countries. Courts and administrators unwound trades, sold businesses and distributed recoveries for years.

Government investigations examined accounting practices including “Repo 105” transactions used to temporarily reduce reported balance-sheet size. Debate over criminal accountability continued, but no top Lehman executive was convicted for causing the failure.

Customers and creditors did not all experience the case in the same way. Their recoveries depended on which legal entity owed them money, what collateral protected a claim and which country’s insolvency rules applied.

The Dodd-Frank Act of 2010 later created new oversight and a resolution framework intended to handle failing large financial companies without ordinary bankruptcy or open-ended rescue.

September 15 in Context

The 2008 calendar places Lehman’s Monday filing just seven weeks before Barack Obama’s election. The crisis transformed the campaign, crowded out other issues and confronted the next administration with recession from its first day.

Lehman remains shorthand for the crisis, but shorthand can mislead. Housing losses, securitization, leverage, weak underwriting, ratings failures and fragile funding developed over years. September 15 was the moment those connected weaknesses became impossible for the wider public to ignore.