On September 15th, 2008, the world witnessed one of the most dramatic moments in the history of modern economics – the bankruptcy of investment bank Lehman Brothers.
Founded in 1850, Lehman Brothers was one of the pillars of the United States (U.S.) financial system, with assets worth around 600 billion dollars at the time of its collapse.
This event not only caused panic in financial markets but also sparked the worst global financial crisis since the Great Depression of the 1930s.
Lehman Brothers, like many other banks, was deeply involved in trading mortgage-backed securities based on subprime mortgages – loans given to high-risk borrowers.
As the real estate market grew, these securities brought significant profits but also represented enormous risk. When housing prices began to fall and borrowers defaulted on their loans, the entire financial system faced collapse.
By 2007, the first signs of the crisis had begun to appear, but Lehman Brothers, like many other major financial institutions, ignored the warnings. By mid-2008, losses related to mortgage-backed securities and bad investments began to mount, and investor confidence in Lehman Brothers rapidly declined.
In the weeks before the bankruptcy, Lehman Brothers desperately sought a way out. The bank tried to find a buyer to avoid collapse but was unsuccessful. Talks with United Kingdom (UK) bank Barclays and Bank of America failed because potential buyers demanded government guarantees, which the U.S. government was not willing to provide.
The decisive factor was the decision of then-Secretary of the Treasury Henry Paulson, who believed that saving Lehman Brothers could create moral hazard – the signal that the government would always come to the aid of large financial institutions. This decision proved controversial, as the consequences of the bankruptcy were more far-reaching than anyone could have predicted.
Consequences of the bankruptcy
The bankruptcy of Lehman Brothers sent shockwaves through global financial markets. The Dow Jones index fell by more than 500 points in just one day, while European and Asian markets faced declines and increasing fears of a total collapse. Banks stopped lending to each other due to fears of insolvency, which triggered a liquidity crisis.
Governments worldwide had to take emergency measures to stabilize financial systems. In the U.S., a 700 billion dollar bailout program called TARP (Troubled Asset Relief Program) was launched, while the European Central Bank and other central banks also took extraordinary steps to ensure liquidity and prevent the spread of the crisis.
Long-term consequences and legacy
The bankruptcy of Lehman Brothers symbolized the failure of a deregulated financial system and became a strong impetus for reforms. The following years saw the introduction of new laws and regulations aimed at strengthening financial stability, such as the Dodd-Frank Act in the U.S., which aimed to increase transparency in financial markets and reduce the risks banks take.
The 2008 crisis remains a warning about the importance of responsible risk management and the fragility of financial systems that, when they falter, can drag down entire economies.
