10-Year Anniversary of Lehman Bros. Collapse- My Memories

The 10-year anniversary of Lehman Brothers (then traded under the stock ticker symbol "LEH") is coming up on September 15. Yes, it has been almost 10 years since Lehman shocked the stock market and declared bankruptcy on Monday, September 15, 2008. Some would say this was the straw that broke the proverbial camel's back. This mushroomed into a worldwide financial news event in no time. I remember people talking about collapses in places like Ireland and Iceland, of all places. Iceland? How in the world could that tiny island be in trouble?


At the time I worked in the financial industry as a stock broker. I had been in the biz for 11+ years and had followed the markets and traded well before that. I experienced first hand the Asian Contagian, the Tech Bubble, the 911 Terrorist Attacks, and NOTHING was quite like Lehman. Perhaps part of that was due to technology. Although lots of people used the web in the late 90's, the internet itself wasn't nearly as mature as it was a decade later. So perhaps that helped spread the wildfire.


Oh yeah, as if the Lehman news wasn't enough there were two other big stories that day. Insurance giant AIG (Ticker: AIG) said they needed a $100 billion bailout from the U.S. government or they too would declare bankruptcy. And story number three was that Bank of America (Ticker: BAC) was buying Merrill Lynch (Ticker: MER). Normally the target of a buyout could easily go up perhaps 20-40% on the day of the announcement. Merrill's stock went up just one penny that day! Wow- what a day!


Two of the Big 3 auto makers (GM (Ticker: GM) and Chrysler (Ticker: DCX)) declared bankruptcy shortly thereafter and Ford's stock (Ticker: F) was teetering near $1 a share. Was it a screaming buy at that price, or would it declare bankruptcy as well to say goodbye to a mountain of debt? Nobody really knew at the time- it was just that wild. Footnote: with the full benefit of 20/20 hindsight- it was a screaming buy and went back to $10+ pretty quickly.


I remember over a year in advance of the day (specifically on 8/3/07) hearing Jim Cramer's famous rant to Erin Burnett of CNBC when he referred to the Fed and said "they know nothing". He was early. Then after the collapse began (early October, 2008- I don't have the exact date) I remember hearing him on satellite radio while visiting a relative in Michigan. He told listeners not to commit any new capital to the stock market unless they could sit on it for at least five years. And he was very emphatic about this. Fortunately the market came back a lot faster than that.


Until the market bottomed almost 6 months after Lehman declared bankruptcy (the bottom was in place on March 9, 2009), it was truly a wild time.


For those who are too young to remember this time or perhaps didn't have any skin in the game, there were quite a few movies made about the collapse. A documentary that I saw at a theater and later bought was called Inside Job (2010), as narrated by Matt Damon. This movie used actual clips of many people (Ben Bernanke, Alan Greenspan, Maria Bartiromo, Eliot Spitzer, George Soros and many others) to detail the events. I was so overwhelmed by the details and by the admissions that people made that I started taking notes. I ended up with a Word document that was 7-8 pages long.


It was truly quite an event. Oh yeah, I have a stock certificate of Lehman that I bought online to keep as a momento of this unbelievable time.

The handwriting was on the wall well beforehand.

Human memory is flawed, but as i recall :

The real estate and construction industry bubble started to burst in 2006 because borrowed money was much too available.

This borrowed money was created out of thin air within The Federal Reserve System. In my opinion, it was necessary to create massive currency inflation to support the phenomenal growth of the global economy at the time. As the USD is the global reserve currency ... a lack thereof would stifle chances of growth. It also insured our place as the provider of the global reserve currency and cemented our stronghold. There are plenty of other nations that would much prefer that it was their currency that was used as the global reserve. There's even been a good argument that the IMF should provide the global reserve because of their significant gold holdings.

Anyway ....the way to get all of that newly created ( debased) money out into circulation was through the big banks and major financial institutions.

It's complicated ... but the bottom line is that this was bad economic policy on our part. It was bound to end badly.

I'm just a guy with a H.S. education and it was clear as day what the end result would be. I don't really figure myself for being all that smart. Why on earth didn't the big dawgs in business and finance see this coming ? This should have been right up their alley ?

Were they blinded by greed and avarice ?

Sorry .... i guess i'm still a little PO'd about the whole thing. :-/

I'm PO'ed as well.

To me, one of the big signs of a bubble forming was residential real estate. I frequently stay up late at night and used to have those infomercials sometimes playing in the background while I was on the computer. I remember seeing some guy who said he didn't yet get his H.S. diploma and was a cab driver. He bragged about owning something like 30 homes and being a multimillionaire. He said how easy it was to buy and flip homes while risking very little money. Was he planning on walking away from his debt obligations if things got tough for him? I remember a story about a waitress in Florida (not THAT KIND of waitress) who said she made over $300k/year to get a home loan. The banker knew what she was doing and the loan still got approved. Banks didn't really care because they were selling their loans to others.

I have a good friend who lives in Florida. I visited him in early 2009 and he told me something shocking. He had not made a mortgage payment on his beachfront condo for over a year, and still had not been evicted from his place. I was floored! But then I realized that there were so many people under water on their mortgages that a true panic could have been triggered if all had been kicked out around the same time. (Disclaimer: Even though he is my friend, I absolutely disagree with how he handled the situation.)

And then after the collapse interest rates went down to virtually zero. So unskilled people who had no business running a company were able to get loans really cheap (or speculate in the stock market with margin interest rates that were ridiculously cheap- Interactive Brokers had margin interest rates in the 1-1 1/2% range). Yet a thrifty person who had saved money all their life and was too old to work got shafted by banks paying 1/100% PER YEAR in interest. So a million dollars in cash would only earn $100 of interest PER YEAR. Around 2005-07, I remember when that same million would earn $50k in interest per year. So some people could live off the interest they earned along with social security.

Then, after real estate went down sharply (especially in places like Florida, Arizona and Nevada- where it collapsed), people got nervous about speculating so much on real estate (which is good in a way). Except that virtually non-existent interest rates along with the knowledge that real estate could actually go DOWN in value started to force some people to speculate more in the stock market. The acronym TINA (there is no alternative) started to be used for the stock market.

Even though I love trading stocks, it is scary how popular certain stocks like the FANG stocks (Facebook, Amazon, Netfilix, Google) are. When too many people love the same few stocks, that is a sign that something bad can happen really quickly once the tide turns.

There were all kinds of derivatives polices created (financial engineering if you will) that allowed companies like Goldman Sachs and others to do things that people would have never believed could happen just a few years ago. Example: Chances are many on this site have a homeowners insurance policy that will cover their homes if they burn down. That's fine, but Goldman and others were actually allowed to buy policies essentially betting that their neighbor's homes WOULD BURN DOWN. They were allowed to bet against their clients. Many went to insurance giant AIG to have policies issued. AIG (on 9/15/08) had enough and demanded that that U.S. government bail them out to the tune of $100 billion dollars, or they would declare bankruptcy. Yet, on an earnings call shortly before this happened, an executive of the company insisted that there was nothing wrong. Oh, by the way, the actual bailout ended up being something like $150 billion.

It is really sad what has happened.

I was running my own construction business in the years leading up to the collapse so i saw it first hand. Jeez ... those early years were the glory days. There was no end of work and i was booked at least 18 months in advance at any given time.

From what i was seeing with my middle and upper income customers ... it looked like they were racking up a mountain of debt !

I traced that back and realized that The Fed had done away with transparency and stopped reporting the M3. That, along with the M1 & M2 will give you a fairly good idea of how much newly created money is being pumped into the economy.

See ... at the time ... it didn't matter if somebody was creditworthy or not. The mission was to get all of this newly created money out into circulation by any means possible.

It was bound to be self limiting and it was. There came a point where all of my customers had hit their debt limit and all of the reckless spending came to an abrupt halt. That's when the recession hit over winter of 2007-2008.

I saw the lead up to it though. Things were going good for me but the work was starting to play out for the other guys starting in the second quarter of 2006. It finally hit me about a year later and net profits from the business dropped by about 47 %.

I had already diversified the business so i survived the hit but it was never the same after that.

Anyway ... the bottom line is that irresponsible economic policy from the early 2000's laid the ground work for everything that followed straight up to to The Emergency Economic Stabilization Act of 2008 ?

True cost to the taxpayers will eventually end up being something like 16.8 trillion dollars ?

Same time frame local bank went down and swallowed up by Chase
he Story Behind the Largest Bank Failure in History

BY KIMBERLY AMADEO Updated June 04, 2018
Washington Mutual was a conservative savings and loan bank. In 2008, it became the largest failed bank in U.S. history. By the end of 2007, WaMu had more than 43,000 employees, 2,200 branch offices in 15 states, and $188.3 billion in deposits. Its biggest customers 60 percent of its business came from retail banking and 20 percent came from credit cards. Only 14 percent were from home loans, but this was enough to destroy the rest of its business. By the end of 2008, it was bankrupt.
https://www.thebalance.com/washingto...nkrupt-3305620

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Originally Posted by street_sweeper

Same time frame local bank went down and swallowed up by Chase
he Story Behind the Largest Bank Failure in History

BY KIMBERLY AMADEO Updated June 04, 2018
Washington Mutual was a conservative savings and loan bank. In 2008, it became the largest failed bank in U.S. history. By the end of 2007, WaMu had more than 43,000 employees, 2,200 branch offices in 15 states, and $188.3 billion in deposits. Its biggest customers 60 percent of its business came from retail banking and 20 percent came from credit cards. Only 14 percent were from home loans, but this was enough to destroy the rest of its business. By the end of 2008, it was bankrupt.
https://www.thebalance.com/washingto...nkrupt-3305620

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Got one of WaMu's stock certificates in my collection. Them, Lehman Bros., Enron, etc. One of my faves is the Policy & Procedure manual for Enron. The cover letter is signed by the infamous Ken Lay and he talks about the importance of honesty. Really? Cmon Ken, couldn't you have written something else? Almost anything would have been better.

The worlds economy is built around bubbles caused by cheap and easy to get loans. Back when economies were built around manufacturing you didn't have these problems (but you also didn't have the same growth to keep national debt sustainable). So ANY ripple in that cheap money spigot and everything falls apart.

The only car company in the US that didn't need a bailout was the one that had taken loans on everything they owned just before the collapse.

Look at it this way pretty much every individual spends more then they have (anyone with a home loan for example). Every city spends more then they bring in while pushing long term liabilities like city workers pensions down the road. Same with every state and then we have the Federal government that is starting to sweat the fact that SS taxes are not going to cover SS payouts and the IOU of money collected is worthless.

Housing values is a funny topic. People only have so much money to spend on homes every month. When interest rates rise home prices drop because people can only afford so much monthly to pay. Low interest rates cause home prices to rise so the economy can grow building new houses to meet demands. The second you raise the interest rates that all goes to hell.

The only way to finance debt is to either inflate it away (which would cause the end of the world because home values would drop) or keep increasing the economy with low interest rates financing bull**** causing bubbles. So people feel rich one half of every decade and then poor the other half when the bubbles break and they have to pick up the pieces. Sooner or later people are going to ditch debt causing the economy to stagnate or like japan deflate. Then the local, state, and national debt load will go super nova. The big fish will eat the smaller ones on the way down but in the end they will all die because our setup just does not work anymore.

There is a group that can get by consuming more than they produce, and that is affluent retirees. Someone with $10 million in the stock market invested in stocks paying an average 2.5% dividend is getting $250k per year. Even if they were all cash, it would still be close to $200k/yr. In the next few weeks, it will likely be over $200k- the Feds are supposed to have a 100% chance of raising rates this coming Wednesday. There is a trickle down effect, so it could be a few weeks after the announcement before brokerage firms and banks raise their rates.

Who has $10 million in the market? Not me, but PLENTY of people (dare I say thousands?) I have spoken with on the phone over the years.

Of course, virtually everyone under age 16 (who isn't working) consumes more than they produce.

Outside of utility and bank stocks nobody pays dividends. I don't know anybody with $10M in stock that actually worked for it (outside of some celebrities), most people with that kind of money inherited it or sold a family business and parked it there.

Stocks have gone up over the last few decades because companies quit their Pension plans and started contributing to 401K plans plus personal IRA. So each payday billions of dollars are dumped into the stock market which has to buy something with it and stock prices rise. Those stocks pay nothing and are only worth having if they go up in value so some other sucker will buy them back at a profit. The second money coming out is less then money going in the whole thing starts to implode (baby boomers all retire). The jobs most people have today just can't finance the payout plus Wall streets cut. Why do you think home loans quit being financed for by small local banks and they ended up going to wallstreet to package those loans and were then sold overseas? When the locals can't finance stuff let the rich in Europe and Asia do it for you. Banks used to want people to have savings accounts with them so they could lend that money and make a profit with it and share that with you. Interest rates for band deposits now are under 2% and unless you have $x amount in that account they charge you a month annoyance fee to digitally keep track of your money. Banks get their loan money from the fed for nothing. Federal reserve banks pay 2.5% (was lower last year and after the crash it was pretty much free) for all the money they want from the FED which just makes it up out of thin air.

Just a note: Apple 's stocks are now 'valued' at over $1 trillion

There are a lot of insane "investors" out there apparently .

Apple brings in something like $50-60B per quarter and has been having double digit revenue growth lately. Plus they have been buying back their stock which makes the price rise. Also they are paying a dividend in august. I think the buyback and dividend was just to push them over $1T to be the first to do so.

Apple shares are what $220 and they are giving a dividend of $.73 a share whoopy.

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Originally Posted by unknownk

Apple brings in something like $50-60B per quarter and has been having double digit revenue growth lately. Plus they have been buying back their stock which makes the price rise. Also they are paying a dividend in august. I think the buyback and dividend was just to push them over $1T to be the first to do so.

Apple shares are what $220 and they are giving a dividend of $.73 a share whoopy.

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Any buyback AAPL ever did has been more than offset by options and stock grants.

Makes for a shiny headline for the herd, though.

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Originally Posted by unknownk

I don't know anybody with $10M in stock that actually worked for it (outside of some celebrities), most people with that kind of money inherited it or sold a family business and parked it there.

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If you go to the San Francisco Bay Area, you will find lots of people worth $10 million or more who work for tech companies such as Facebook, Square, and Twilio (but NOT GoPro and a few others) and they got that level of net worth due often times to the value of their stock options.

I've personally spoken with some of these people, often from their late 20's to early 30's. Many of them were in school or too young to intimately remember the great recession. I remember one who had probably 95% or more of their net worth tied up in company stock. He wouldn't flinch about spending $2-3 million for a pretty small house. I remember several of these people felt invincible. It reminded me of Leonardo DiCaprio shouting "I'm on top of the world!" in the movie Titanic. We all know what happened shortly after he shouted that.

I tried to explain a bit about diversifying, learning about stock options such as collars to reduce risk, and the person in his 20's worth over $10M was like "Yeah, whatever..." Some day they will get hurt and will have nobody to blame but the person in the mirror who looks just like them.

It's funny- I would think someone in the Bay Area would know that some tech stocks haven't done well for long stretches (like GoPro mentioned above). You would think that would make them wise up a bit, but NOOOOOOOOO (as Steve Martin used to say).

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Originally Posted by unknownk

Outside of utility and bank stocks nobody pays dividends.

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Sorry, but I've got to challenge this. Here are some of MANY non-utility and bank stocks that pay divs.
MSFT
INTC
PG
PEP
KO
UPS
FDX
BA
HON
UTX

There are too many to list, frankly.