2 Years Ago, Lehman Brothers Filed Bankruptcy
LINDA WERTHEIMER, host:
Two years ago, Lehman Brothers, one of Wall Street's most respected and most profitable firms, collapsed. The Bush administration and the Federal Reserve made the decision to let Lehman go down and then watched, horrified, as the collateral damage spread through the economy.
To talk about Lehman Brothers is Peter Chapman. He's an editor at the Financial Times. He's just published a history of Lehman Brothers, called "The Last of the Imperious Rich."
Mr. PETER CHAPMAN (Editor, Financial Times): Good morning there, Linda.
WERTHEIMER: Lehman Brothers was a legendary firm. It survived two world wars, it survived the Depression; but it did not survive the financial crisis of 2008. Could you just give us a capsule of what happened that day?
Mr. CHAPMAN: Lehman Brothers had some enormous investments in subprime mortgages - mortgages being given to people who in the end, couldnt pay them. Therefore, it had huge amounts of debt. And what happened then is, the money that Lehman Brothers owed to other banks was called in. And Dick Fuld was the CEO, and he was getting calls from other CEOs saying, Dick, you owe us money. Your credit rating is not looking too good; your stock price is going through the floorboards; hand over some money.
When Lehman Brothers went, it was like pulling the plug out of the sink. All the confidence seemed to be draining out of the Western capitalist system - not just in the United States, but it spread throughout the world. Financial armageddon was a term that people used. And certainly, that was a great fear at the time.
WERTHEIMER: And of course, one of the other things that happened was that the United States government, which had decided not to bail out Lehman Brothers because of the improbably huge amount of money that would've required, then had to spend even more money trying to sort of get the stopper in that drain.
Mr. CHAPMAN: Indeed. And it was a gross indignity politically as well. The administration of George W. Bush had probably been the most ideologically free-market administration since the 1920s. Suddenly, it was taking over banks. It was almost as if a communist regime were there, if you like. Marx used to talk about seizing control of banks and things. And suddenly the most Republican, the most ideologically right-wing government for many a year, was having to do that.
WERTHEIMER: Was it the right thing to do at the time? Did it prove to be the right thing to do now, two years later?
Mr. CHAPMAN: In my opinion, absolutely not. And if I could cite a bit of history there - President Franklin D. Roosevelt's right-hand man in building the New Deal was Herbert Lehman, partner of Lehman Brothers. And he saw that the failure of banks was the key factor which turned the Great Crash of '29 into the Depression of the 1930s. He fought to keep banks open, knowing it would drain confidence out of the system.
Ironically, 70 years or so later, it was his own family bank that was involved in this very kind of thing. Certainly, if Herbert Lehman had been around, he'd have saved his bank. He wouldnt have let it off. He'd have rigorously regulated it afterwards. But I think - certainly, in my opinion, anyway - it was a serious mistake to let Lehman Brothers go.
WERTHEIMER: This week, financial regulators who are meeting in Switzerland agreed to some new rules: increasing the amount of money that banks must keep in reserve to balance against potential losses. If those rules had been in place two years ago, would Lehman Brothers have been able to get in so much trouble?
Mr. CHAPMAN: Those rules would've certainly helped. Lehman Brothers, for example, had only $1 in reserve for every $40 it had borrowed. That kind of ratio was completely unsustainable. But there's all the other things that people are worried about as well. What about the trading departments of these banks? Are their activities going to be curbed in any way? What about the bonuses? What about the bankers' salaries, and things like that? If the economy grows, then people might forget about that. If we move towards a double-dip recession then once again, the anger will rise.
WERTHEIMER: Peter Chapman, thank you very much.
Mr. CHAPMAN: Well, thank you, Linda.
WERTHEIMER: Peter Chapman's new book is called "The Last of the Imperious Rich: A History of Lehman Brothers."
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