Podcast | Digging Deeper - 10 years After: The demise of Lehman Brothers, and the lessons we need to learn

What lessons have we learnt from that crisis which finished off a prominent financial organisation and wiped off $10 trillion from the markets in a matter of months?

The 2010 documentary Inside Job, which won an Oscar for its examination of corruption in the financial services industry in the US that led to the crash of 2008, signs off with a damning indictment:

“For decades the American financial system was stable and safe. But then something changed. The financial industry turned its back on society, corrupted our political system and plunged the world economy into crisis. At enormous cost, we've avoided disaster and are recovering. But the men and institutions that caused the crisis are still in power and that needs to change. They will tell us that we need them and that what they do is too complicated for us to understand. They will tell us it won't happen again. They will spend billions fighting reform. It won't be easy.”

While the public attitude towards investment banking and such financial institutions has changed a fair bit - in that nobody trusts them anymore - the general attitude towards banking has remained largely unchanged. We do not debate the industry. It could be that talking numbers and statistics in debates isn’t sexy, so they’re never the subject of serious debate beyond one or two evenings of prime time cacophony.

Tomorrow is 10 years to the day since the collapse of Lehman Brothers, the most prominent casualty of the financial bloodbath in 2008. We’re taking a look at the 2008 financial crisis that has shaped our attitudes towards financial institutions and governments, and has shaped our cynicism in all things financial. We will also see what lessons can be learnt so a similar crisis doesn’t explode again.

Let’s refresh that memory about the 2008 financial crisis.

On September 15, 2008, Lehman Brothers, a global financial services firm that was founded in 1850, became the largest bankruptcy case in US history.

Lehman had more than $639 billion in assets, but it came to light that the firm also had over $619 billion in debt. The company’s 26,200 employees were watching, first in mild discomfort, then bemusement, and later in no small amount of shock as the fourth-largest US investment bank declared Chapter 11 bankruptcy.

When Lehman shut shop, it ended a 158-year-old business that had been a marquee name in financial services around the world. It was the fourth biggest investment bank behind Goldman Sachs, Morgan Stanley and Merrill Lynch.

A few months prior, in April, Henry Paulson, then US secretary of the treasury, met the CEO of Lehman Brothers, Richard Fuld, at a dinner. Paulson told Fuld that he was “worried about a lot of things”. Andrew Ross Sorkin recounts this meeting in his book Too Big To Fail.

Paulson told Fuld he was “anxious about the staggering amount of leverage—the amount of debt to equity—that investment banks were still using to juice their returns”.

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