Happy Anniversary Lehman Brothers, And What We Haven't Learned about Wall Street Over the Past Five Years
While attention is focused on Syria, the gambling addiction of Wall Street’s biggest banks is more dangerous than ever.
Five years ago this September, Lehman Brothers went bankrupt, and the Street hurtled toward the worst financial crisis in eighty years. Yet the biggest Wall Street banks are far larger now than they were then. And the Dodd-Frank rules designed to stop them from betting with the insured deposits of ordinary savers are still on the drawing boards – courtesy of the banks’ lobbying prowess. The so-called Volcker Rule has yet to see the light of day.
To be sure, the banks’ balance sheets are better than they were five years ago. The banks have raised lots of capital and written off many bad loans. (Their risk-weighted capital ratio is now about 60 percent higher than before the crisis.)
But they’re back to too many of their old habits.
Consider JPMorgan Chase, the largest of the bunch. Last year it lost $6.2 billion by betting on credit default swaps tied to corporate debt – and then lied about it. Evidence shows the bank paid bribes to get certain counties to buy the swaps. The Justice Department is investigating the bank over improper energy trading. That follows the news that the anti-bribery unit of the Security and Exchange Commission is looking into whether JPMorgan hired the children of Chinese officials to help win business. The bank has also allegedly committed fraud in collecting credit card debt, used false and misleading means of foreclosing on mortgages, and misled credit-card customers in seeking to sell them identity-theft products. The list goes on.
JPMorgan’s most recent quarterly report lists its current legal imbroglios in nine pages of small print, and estimates resolving them all may cost as much as $6.8 billion. That’s not much more than a pittance for a company with total assets of $2.4 trillion and shareholder equity of $209 billion.
Which is precisely the point. No company, least of all a giant Wall Street bank, will eschew a chance to make a tidy profit unless the probability of getting caught and prosecuted, multiplied times the amount of any potential penalty, is greater than the expected profits.
Have we learned nothing since September, 2008? Five years ago this month Wall Street almost went under. We bailed it out. Millions of Americans are still suffering the consequences of the Street’s excesses. Yet the Street’s top guns and fat cats are still treating the economy as their own private casino, and raking in even more than before.
The fact is, the giant Wall Street banks are ungovernable – too big to fail, too big to jail, too big to curtail. They should be split up, and their size capped. There’s no need to wait for Congress to do it; the nation’s antitrust laws are adequate to the job. There is ample precedent. In 1911 we split up Standard Oil. In 1982 we split up Ma Bell. The Federal Reserve has authority to do it on its own in any event. (Would Larry Summers take such an initiative?)
Legislation is needed, however, to resurrect the Glass-Steagall Act that once separated commercial banking from casino capitalism. But don’t hold your breath.
Ohio Gov. John Kasich loves talking about his record in office, his knack for balancing the budget and his controversial decision to back Medicaid expansion.
But there’s one part of his resume he’s less inclined to discuss: the years he spent as a senior executive at Lehman Brothers.
Kasich joined Lehman’s investment banking division as managing director in 2001, working there until the firm’s collapse in September 2008 unleashed global panic and served as the catalyst for the financial crisis.
Lehman Brothers was arguably the most deeply vilified Wall Street firm during the 2008 meltdown and Kasich was a senior executive.
“Kasich’s close ties to Wall Street should raise concerns for everyone who suffered due to the collapse of our financial system caused by those very same banks,” said Craig Holman of the advocacy group Public Citizen. “This is not a responsible businessman, and strongly suggests he would not be a responsible president.”
Last weekend we watched the Oscars and, like most people, were pleased that “Twelve Years a Slave” won Best Picture. No previous film has so accurately captured the reality of enslaved people’s lives. Yet though Twelve Years shows us the labor of slavery, it omits the financial system — asset securitization — that made slavery possible.
Every year or two, somebody discovers that a famous bank on Wall Street profited from slavery. This discovery is always treated as if the relationship between slavery and the American financial system were some kind of odd accident, disconnected from the present. But it was not an accident. The cotton and slave trades were the biggest businesses in antebellum America, and then as now, American finance developed its most innovative products to finance the biggest businesses.
First, American planters organized new banks, usually in new states like Mississippi and Louisiana. Drawing up lists of slaves for collateral, the planters then mortgaged them to the banks they had created, enabling themselves to buy additional slaves to expand cotton production. To provide capital for those loans, the banks sold bonds to investors from around the globe — London, New York, Amsterdam, Paris. The bond buyers, many of whom lived in countries where slavery was illegal, didn’t own individual slaves — just bonds backed by their value. Planters’ mortgage payments paid the interest and the principle on these bond payments. Enslaved human beings had been, in modern financial lingo, “securitized.”
As slave-backed mortgages became paper bonds, everybody profited — except, obviously, enslaved African Americans whose forced labor repaid owners’ mortgages. But investors owed a piece of slave-earned income. Older slave states such as Maryland and Virginia sold slaves to the new cotton states, at securitization-inflated prices, resulting in slave asset bubble. Cotton factor firms like the now-defunct Lehman Brothers — founded in Alabama — became wildly successful. Lehman moved to Wall Street, and for all these firms, every transaction in slave-earned money flowing in and out of the U.S. earned Wall Street firms a fee.
Swiss bank UBS has admitted that its investment banking arm has lost around $2bn (£1.27bn) through "unauthorised trading".
Shares in UBS fell by almost 10% in early trading after it reported the loss, which could push the bank into the red for the current financial quarter.
In a brief statement, issued on the third anniversary of Lehman Brothers, UBS said that the issue was still being investigated.
“UBS has discovered a loss due to unauthorized trading by a trader in its Investment Bank. The matter is still being investigated, but UBS’s current estimate of the loss on the trades is in the range of $2bn. It is possible that this could lead UBS to report a loss for the third quarter of 2011.
UBS added that "no client positions were affected.”
Simon Ballard, senior credit strategist at RBS capital markets, said the trading loss would add to public concern over the banking sector.
“At a time of greater regulation, it will raise questions about regulatory capital and whether ringfences are in place to stop this happening,” Ballard told Bloomberg TV.
“Stocks are plummeting. The economy is slowing. Politicians are scrambling to find solutions but are mired in disagreement.” Any of that sound familiar? Aside from being the opening of an article in the New York Times this morning, the picture it paints should remind us of the financial crisis back in 2008. Remember how that started because consumers were taking out more debt than they can afford to pay off? Pretty much the same deal now, but here’s the kicker: the debt now is government debt. Back then, it was consumer debt.
[Markets] do seize up. Here’s the thing, though. A UBS trader is now in jail for losing a few billion dollars. That’s probably reasonable. In Lehman’s case, no one went to jail, and Dick Fuld is a multi-millionaire, even though the losses run into the trillions. Moral of the story: Make sure your losses are authorized.
On Sept. 15, 2008, Lehman Brothers – the fourth-largest investment bank in the U.S. at the time – filed for bankruptcy, accelerating the worst financial crisis since the Great Depression.
Five years later, has the American economy recovered? Not unless you consider the Dow Jones Industrial Average to be the one true marker of health. Unemployment remains high, construction moribund, growth sluggish, foreclosures rife. Meanwhile the wider so-called “advanced” (the better word would be “decaying”) world divides between large countries that have at best stabilized, and the other ones – Cyprus, Greece, Portugal, Ireland, and perhaps Spain – that verge on collapse.
Krugman isn’t trying to get the Democrats to push hard for additional stimulus, although the logical extension of his ‘back of the envelope calculation’ would lead to that position. Krugman seems totally resigned to a continued stalemate in Washington: where the GOP tells outright lies and the Democrats respond with half truths.
Set aside the politics for a moment, and ask what the past five years would have looked like if the U.S. government had actually been able and willing to do what textbook macroeconomics says it should have done — namely, make a big enough push for job creation to offset the effects of the financial crunch and the housing bust, postponing fiscal austerity and tax increases until the private sector was ready to take up the slack.I’ve done a back-of-the-envelope calculation of what such a program would have entailed: It would have been about three times as big as the stimulus we actually got, and would have been much more focused on spending rather than tax cuts.
'By any objective standard, U.S. economic policy since Lehman has been an astonishing, horrifying failure.’
Would such a policy have worked? All the evidence of the past five years says yes. The Obama stimulus, inadequate as it was, stopped the economy’s plunge in 2009. Europe’s experiment in anti-stimulus — the harsh spending cuts imposed on debtor nations — didn’t produce the promised surge in private-sector confidence. Instead, it produced severe economic contraction, just as textbook economics predicted. Government spending on job creation would, indeed, have created jobs.
But wouldn’t the kind of spending program I’m suggesting have meant more debt? Yes — according to my rough calculation, at this point federal debt held by the public would have been about $1 trillion more than it actually is. But alarmist warnings about the dangers of modestly higher debt have proved false. Meanwhile, the economy would also have been stronger, so that the ratio of debt to G.D.P. — the usual measure of a country’s fiscal position — would have been only a few points higher. Does anyone seriously think that this difference would have provoked a fiscal crisis?
And, on the other side of the ledger, we would be a richer nation, with a brighter future — not a nation where millions of discouraged Americans have probably dropped permanently out of the labor force, where millions of young Americans have probably seen their lifetime career prospects permanently damaged, where cuts in public investment have inflicted long-term damage on our infrastructure and our educational system.
Look, I know that as a political matter an adequate job-creation program was never a real possibility. And it’s not just the politicians who fell short: Many economists, instead of pointing the way toward a solution of the jobs crisis, became part of the problem, fueling exaggerated fears of inflation and debt.
Still, I think it’s important to realize how badly policy failed and continues to fail. Right now, Washington seems divided between Republicans who denounce any kind of government action — who insist that all the policies and programs that mitigated the crisis actually made it worse — and Obama loyalists who insist that they did a great job because the world didn’t totally melt down.
Obviously, the Obama people are less wrong than the Republicans. But, by any objective standard, U.S. economic policy since Lehman has been an astonishing, horrifying failure.
And appointing the anti-regulatory Summers as chair of the Federal Reserve would be a perfect capstone for this litany of stupid missteps.
Report #1: Why and How the Lehman Brothers’ Business Model Collapsed in October 2008?
Since we have considered the fundamentals of what caused the financial crisis of 2007-2010, we shall now take a look at one of the banking failures, which could be described as the epitome of the ‘business model gone bad’. Lehman Brothers, a worldwide investment bank filed for Chapter 11 bankruptcy on the 15th September 2008, with debts estimated to stand at around $613 billion, making it the largest corporate bankruptcy in U.S history.
The bank’s past was one of mass and often rapid change. The organisation was established in 1847 in the dry goods business, however it began to diversify taking on a number of other products and resources as time progressed. Upon the last remaining family member’s death in 1969, Lehman acquired a number of organisations to make it the fourth largest investment bank in the U.S. By 1984, Lehman Brothers was bought out by American Express for $360 million and continued its rapid growth – mainly through highly leveraged buyouts. However, following a near capital failure, American Express decided to shed its banking venture by offering an IPO for ‘Lehman Brothers Holding Inc.’ in 1994 – effectively marking the start of Lehman as we know it.
This section of the report will look at what happened to Lehman post-1994 right up until its bankruptcy in September 2008. It will explore the business model that Lehman Brothers followed in its quest to become the number one investment bank in the world and how its senior members helped to contribute towards its demise.
The Business Model
“Lehman’s business model was not unique”, quotes Anton Valukas (2010). We know this to be true as many other banks also followed a high-risk, high-leverage strategy. However, Lehman is slightly unique in the magnitude and scale of how it went about undertaking this policy. It held a plethora of long-term assets, backed by short-term liabilities (funded by the short-term Repo market). The mismatch of the balance sheet doesn’t need much explanation as tow why it became fatal for Lehman Brothers. Before explaining why and how this was so, we shall take a further look at what exactly the business model entailed.
In 2006 when the housing bubble was at its peak, Lehman Brothers took the decision to embark upon an aggressive growth strategy, signifying more risk and increased leverage on its capital. This was despite the fact that by July 2006, U.S house prices “rose at their slowest pace in more than 11 years”. The model’s objectives would be met by Lehman following a 13% annual growth plan; which was evidently risky in a highly leveraged, small equity based model. They opted to achieve this by buying a number of un-hedged assets, even when the onset of the sub-prime crisis came to fruition in late 2006, which ultimately caused Lehman catastrophic losses in the September 2008.
Why The Business Model Failed
As we have seen, Lehman’s key objective in their business model was to rapidly increase annual growth through a policy of high-leverage and high-risk, in order to capitalise upon the practically worldwide desire for high homeownership. In this section of the report, I shall explore some of the ways in why this model came to an end when Lehman Brothers declared bankruptcy in September 2008. It will focus mainly upon which of Lehman’s own actions caused their business model to fail, in preparation for the final section of, ‘How the business model failed?’ which will primarily look at the external forces which resulted in Lehman Brothers going bust.
As has been the rhetoric throughout much of this report, the sub-prime housing bubble was at the core of the troubles in the global economy and the same rationale can be applied to, why Lehman’s business model failed. Lehman continued an aggressive growth strategy in the face of the sub-prime crisis, believing that the crisis would not spread to other areas of the market and that it would be able to pick up competitive positions as other banks began to retrench and shed risk. Valukas (2010) highlights the aggressive risk-taking culture at Lehman in the lead up to their bankruptcy, “After Lehman did include Archstone risk [who was a real estate investment trust, acquired by Lehman – and whose risk had previously been omitted in calculations], Lehman continued to exceed their risk taking limit for several months”. This can be attributed to a large growth in Net Assets (48% between Q4 2006 and Q1 2008), which can be accredited to the accumulation of illiquid assets, which doubled during the same time period from $86.9bn at the end of Q4 2006 to $174.6bn in Q1 2008, this also ran in autonomy with an increase in sub-prime mortgage delinquencies. Thus suggesting that despite defaults on mortgages increasing, Lehman was still acquiring subprime, despite delinquency rates on variable mortgages in the final quarter of 2007 hitting around 15% (which was mainly due to ARMs mortgages seeing a change in interest). It wasn’t until early 2008 when Lehman began to shed Net Assets, by which time it was probably too late, considering the concern which surrounded many banks following Bear Stearns’ bail-out.
Why did Lehman arrive at this predicament? One explanation as to the constant acquirement of the assets mentioned above, would be the poor risk management facilities in place at the bank. Lehman Brothers used stress testing to measure their risk; however it was not designed to include risks given by investments in real estate and private equity – which was the base of much of Lehman’s assets. Valukas (2010) declares that Lehman’s risk limit at the end of 2006 rose from $2.3bn to $3.3bn, an alleged compromised amount than the original mass-hike, but a large increase nonetheless. In addition to this, Lehman also agreed with credit rating agencies to enforce a single transaction limit, whereby specific transactions would not be allowed to be made if it endangered leverage and risk. However, “Lehman informed its external constituents that this prerogative would be exercised only in rare circumstances”. A decision which they decided to not enforce, due to a severely smaller equity base than its banking competitors, thus making a mockery of the credit rating agencies.
Poor liquidity is a running theme as to why Lehman’s business model was a failure. Much of the liquidity pool Lehman claimed to hold was encumbered or otherwise illiquid. “September 12th 2008, two days after it reported a liquidity pool of $41bn, the pool contained less than $2bn of readily monetizable assets”. The poor liquidity that Lehman had under this business model meant that it was bound to failure, as it left the bank unable to accomplish three important goals in the midst of a financial crisis; hedge risk, raise cash and sell assets in order to reduce leverage on the balance sheet.
Still, one must surely pose the question as to why the senior management at Lehman allowed this seemingly irrational style of banking to reside. However, upon further evidence it would seem that it was senior members of Lehman Brothers which were pushing this volatile business model forwards. There is suggestion by Valukas (2010), that the risky strategy Lehman undertook to achieve its goals, was down to senior management disregarding risk managers, policies and limits, which was highlighted by the removal of the Chief Risk Officer and Head of Fixed Income in 2007 - at a time when Lehman’s Net Assets increased, along with a sharp upturn in the number of mortgage delinquencies in the U.S. The business model of Lehman could therefore have been doomed to failure, if senior management were unable to listen to employees and their apparent concerns as to the level of risk the company was undertaking.
To add to this, Lehman’s plighting business model was exacerbated by the actions of senior Lehman executives further, who were involved in; balance sheet manipulation, largely through Repo 105 transactions. These were used to, “temporarily remove securities inventory from its balance sheet, usually for a period of seven to ten days, and to create a materially misleading picture of the firm’s financial condition in late 2007 and 2008”. They were therefore, a tool used to hide leverage; as Repo 105 showed up as sales, as opposed to a standard repo (which would be financing). Creative accounting meant that Lehman was able to appear to shed around 2% of its leverage by using this kind of transactions and thus being seen as less of a risk to credit rating agencies.
How the Business Model Failed
Following the buyout of Bear Stearns by JP Morgan Chase in March 2008 and the bailout of Fannie Mae and Freddie Mac by the U.S Government in early September, it was only inevitable that confidence would erode towards Lehman, as its business model looked increasingly vulnerable. This final section of the report will focus upon how Lehman’s poor business model received its ‘final nail in the coffin’.
On the 10th September 2008, Lehman Brothers posted a los of $3.9bn for the 3 months to August. After the ‘cutting-off’ of credit lines to the bank, it eagerly sought out a buyer; meeting with Barclays and the Bank of America over the following weekend, however talks faltered when it became apparent that the U.S Treasury was unwilling to provide government money for a deal. By the Sunday evening, 15th September, Lehman Brothers had filed for Chapter 11 bankruptcy.
The build up to this fatal day had been coming since the summer of 2008. Appendix 2 (NOT AVAILABLE HERE) highlights that by June of 2008, house prices in the U.K had reached 0% growth, and to coincide with this Lehman’s share price had fallen by around 80% in value from its January levels. This again reinstates the correlation between Lehman’s large pools of mortgage-backed securities, which was reflected when house prices started to tumble. This is a good documentation therefore as to how investors lost confidence in Lehman’s business model, which subsequently spelt the end and bankruptcy for the bank, making it a shining example of all that went wrong in what caused the financial crisis of 2007-2010.
 Valukas; Anton R.; United States Bankruptcy Court Southern District of New York, Lehman Brothers; 2010; p.3
 The Economist, Saturday 26th August 2006, p.61, Issue 8492
 Valukas; Anton R.; Lehman Brothers Bankruptcy Report; 2010; p.62
 Valukas; Anton R.; Lehman Brothers Bankruptcy Report; 2010; p.51
 Valukas; Anton R.; Lehman Brothers Bankruptcy Report; 2010; p.72
 Valukas; Anton R.; Lehman Brothers Bankruptcy Report; 2010; p.74
 Valukas; Anton R.; Lehman Brothers Bankruptcy Report; 2010; p.10
 Valukas; Anton R.; Lehman Brothers Bankruptcy Report; 2010; p.46
<Be First, Be Smarter or Be Cheat> 누군가에겐 이런 것들이 삶의 좌우명일지도 모르겠다. 어쨌거나 성공해서 대기업 CEO가 되는 것이 꿈인 사람도 있을 것이다. 하지만 돈이 아무리 많아도 우리는 돈이 더 필요하다. 연봉 10억을 받건 연봉 5천을 받건 부족한건 매한가지다. 로또를 맞으면 죽을 때까지 일 안하고 행복하게 살 수 있을 것 같지만, 아이러니하게도 수많은 벼락부자들은 오히려 불행한 삶을 살았다. 돈이라는 종이쪼가리 앞에서 인간은 참으로 추악하고 잔인한 존재가 된다. 자본주의라는 거대한 울타리안에서 우리는 정녕 ‘어쩔 수 없는’ 이기적인 개인이 될 수 밖에 없나?
2008년 세계 금융 위기의 시작을 알린 리먼 브라더스 사건을 다루고 있는 이 영화는 금융, 주식, 경제에 대한 지식이 없더라도 우리가 이 사회에서 존경하고 갈망하는 소위 ‘성공’한 사람들이 얼마나 더럽고 치사한 방법으로 그 자리를 지키고 있는지 여실히 보여준다. 회사 직원들의 커리어가 산산조각이 나던, 수십년을 함께 일한 동료가 백수 빚쟁이가 되던, 심지어 전세계 경제가 패닉에 빠지던, 윤리나 상식이나 그 어떤 것도 그들에겐 손실을 감수할 이유가 되지 못한다. 그들은 그저 살기 위해 이윤을 추구하고 이윤을 위해 살아갈 뿐이다.
이에 반해 주인공이라고 할 수 있는 케빈 스파이시는 이 사회에 남아있는 실낱같은 양심을 상징한다. 회사의 일방적인 구조조정은 어찌하지 못하지만 적어도 모든 불합리에 있어 자신의 부하직원들에게 다시 일어설 수 있는 희망을 주는 인물이다. 그러나 선택의 순간, 돈과 양심 사이에서 갈등하던 하던 그도 결국엔 돈을 택한다. 영화는 그를 절대악인 기업 회장에 반하는 주인공으로 그리고 있지만, 사실 그의 모든 행동은 그저 최후의 선택에 대한 자기 면죄부에 불과했을지도 모른다. 씁쓸하지만 자본주의란 그런 것이 아닌가. 기승전’돈’이 되는 세상. 아 그러고보니 절대악은 기업 회장님이 아니라 케빈 스파이시 본인이었을지도 모르겠다.
힘겨웠던 하루가 지나고 이제 케빈 스파이시 앞에 놓인 탄탄대로와는 달리, 영화는 그가 자신의 애완견 시체를 땅에 파뭍는 것으로 끝이 난다. 그것도 전처의 집 앞에다가… 뭐하는 짓이야 이 양반아. 엔딩 크레딧이 올라가면서도 배경음악 대신에 그의 삽질소리가 이어진다. “푸쉭 퍽 푸쉭 퍽” 돈이 아무리 많아도 죽음이라는 순리 앞에서, 돌아갈 수 없는 행복했던 시간들 앞에서 한없이 무력하기만한 중년의 인생이 그렇게 땅에 뭍힌다. 자본주의의 현실 앞에 ‘어쩔 수 없는’ 우리들의 양심과 함께.