Crash! A dramatic hour by hour reconstruction of the fateful day US bank Lehman Brothers collapsed, triggering a global financial meltdown, ten years ago

  • Today marks the tenth anniversary of the day Lehman Brothers went bankrupt
  • Finance chiefs on both sides of the Atlantic fought to stave off disaster 
  • The global financial crisis is known to be the worst since the Great Depression 

Today marks the tenth anniversary of the day the U.S. bank Lehman Brothers filed for bankruptcy — and tipped the global economy into a crisis from which the world is still recovering.

Pictures of Lehman employees stumbling out of the London headquarters carrying their possessions in boxes came to sum up the chaos that swept the City in those febrile days.

Here, a gripping hour-by-hour reconstruction describes how the crisis unfolded as the then chancellor Alistair Darling, the Bank of England governor and a series of finance chiefs on both sides of the Atlantic fought to stave off disaster.

A worker carries a box as she walks away from the office of the U.S. investment bank Lehman Brothers in the Canary Wharf district of London

A worker carries a box as she walks away from the office of the U.S. investment bank Lehman Brothers in the Canary Wharf district of London

Wednesday, Sept 10, 2008, 10am, UK (5am New York time)

Bleary-eyed after four hours’ sleep, Richard Fuld steps into a chauffeur-driven Mercedes and begins his daily commute to central Manhattan.

As the car rolls away from his 12-acre estate in Greenwich, Connecticut, the 61-year-old CEO of Lehman Brothers glances at the New York Times, whose front page declares that ‘Wall Street is gripped by fears’ about his company.

Just seven months ago, Fuld was a fully paid-up Master of the Universe, who’d earned more than half a billion dollars since the mid-Nineties, and owned Lehman shares worth a billion more.

He was nicknamed ‘The Gorilla’ for his pugnacity (for years he kept a stuffed toy silverback in the office), and famed for such macho catchphrases as ‘every day is a battle!’ and ‘you’ve got to kill the enemy!’

Today, however, Fuld is the one being killed. Lehman shares, which had peaked in February 2007 at $86.18, are now changing hands for a paltry $7.79, due to concerns over its exposure to toxic mortgages. In a few hours, he must announce a staggering $3.9 billion quarterly loss.

11am (6am NY)

Mervyn King, governor of the Bank of England, presides over the monthly meeting of its ruling Court of Directors.

It’s been a gruelling few hours. Markets are ‘tense’, they are told, with ‘considerable nervousness around Lehman Brothers’. The ‘position remains very fragile’, minutes of the meeting state, with fears that the fallout could soon threaten ‘UK mortgage banks’.

Behind the crisis lies a simple fact: major financial institutions, unsure of the scale of losses rivals may be exposed to, are starting to question each other’s solvency.

As a result, they are offloading investments and calling in debts. At Lehman, this has created a major cash-flow crisis.

3.30pm (10.30am NY)

At the London Stock Exchange opposite St Paul’s Cathedral, traders are glued to Richard Fuld’s crucial earnings statement, where he reveals that Lehman has had to write down (i.e. reduce the value of) $5.6 billion linked to home loans that recently turned sour.

Brokers trade dollars on the currency market at BGC Partners in London, September 15, 2008

Brokers trade dollars on the currency market at BGC Partners in London, September 15, 2008

As the jumpy atmosphere suggests, few believe this already gargantuan figure to be anything other than the tip of an iceberg.

Over the past decade, mortgages have been used as raw materials for trillions of dollars’ worth of highly complex financial products. But U.S. house prices began tumbling the previous autumn, causing many of those products to fail.

Today, no one is entirely sure what — if anything — they’re now worth. Or who exactly might be exposed to them.

Computer screens turn red as investors begin offloading banking stocks. Shares in Barclays and Lloyds, a staple of many Britons’ pension funds, will have fallen by 4 per cent by the closing bell in 90 minutes. HBOS, whose shares have halved in recent months, also tumble. The FTSE ends the day down 40 points at 5327. A year ago, it had peaked at 6730.

4.30pm (11.30am NY)

Bob Diamond, the ambitious head of Barclays Capital, convenes a meeting of senior staff at the bank’s headquarters, pejoratively known as ‘the Bungalow’, in Canary Wharf.

During today’s earnings statement, Richard Fuld effectively hoisted up a ‘for sale’ sign over Lehman Brothers, saying he needs to raise cash by offloading assets. And Diamond, a brash American responsible for transforming what was once a small British bank with 3,000 employees into a global juggernaut boasting 15,000 of them, smells an opportunity in the crisis.

Though Barclays has its own problems — shares have lost a third of their value in 2008 — he wants to launch an audacious bid to take over the whole of Lehman in a move that will effectively place him in charge of the world’s biggest investment bank.

Thursday, Sept 11, 2.30pm (9.30am NY)

After his morning run, Timothy Geithner, fitness fanatic president of the Federal Reserve Bank of New York, hits the telephones.

United States Secretary of the Treasury Timothy Geithner returns from a run before the G20 finance ministers meeting on November 7, 2009 in St Andrews, Scotland

United States Secretary of the Treasury Timothy Geithner returns from a run before the G20 finance ministers meeting on November 7, 2009 in St Andrews, Scotland

Lehman shares have opened down yet again, this time a staggering 42 per cent, to $4.44, on the back of grim morning briefing notes from brokers to their clients. The Fed now believes only a deep-pocketed buyer will be able to prevent its collapse.

One possible bidder, Bank of America, has been mulling a deal overnight. But Geithner is desperate to bring a second ‘white knight’ to the table. He duly passes Bob Diamond’s mobile telephone number to Fuld.

‘I understand I’m supposed to call you. I think we should talk,’ says the Lehman boss.

‘We are going to be flying over tonight,’ replies Diamond.

5pm (Noon NY)

In America, Lehman shares collapse another 13.5 per cent, while shares in Merrill Lynch and Washington Mutual, thought to be the next two most vulnerable banks, are also tumbling.

Meanwhile, Alistair Darling, the Chancellor of the Exchequer, has just ended a day-long meeting in Nice with European finance ministers.

Britain's former Chancellor of the Exchequer Alistair Darling (L) talks with President of the European commitee of regulation for stock market, Eddy Wymeersch, on September 12, 2008

Britain's former Chancellor of the Exchequer Alistair Darling (L) talks with President of the European commitee of regulation for stock market, Eddy Wymeersch, on September 12, 2008

The Labour government is terrified by the growing likelihood of a crash, which has already seen UK unemployment rise from 5 to 6 per cent this year. News that Barclays is courting Lehman fills him with dread.

‘You should know that we have serious concerns about this deal,’ he tells U.S. treasury secretary Hank Paulson during a stern phone call. ‘Barclays shouldn’t take on any more risk than they could possibly manage.’

Ironically, just minutes after the conversation ends, Barclays boss Bob Diamond arrives at the Lehman Brothers’ headquarters in a blacked-out Mercedes.

11pm (6pm NY)

A dozen of Wall Street’s most powerful CEOs are summoned to the Federal Reserve building by Hank Paulson. They are told to spend the weekend inside this imposing edifice, which is modelled after the Strozzi Palace of Florence, working out how to save Lehman.

‘We’re going to need to find a solution before the weekend is out, and it’s not going to be government money,’ declares Paulson, adding that by Monday morning the firm will be insolvent. ‘You’re going to have to figure this out.’

Despite carnage in financial stocks, the FTSE ends the week almost exactly where it started, on 5,416, while the Dow will nudge up 1.8 per cent, reflecting the public’s apparent ignorance of the growing threat to the economy.

Saturday, Sept 13, noon (7am NY)

Jamie Dimon, chief executive of JPMorgan Chase, drinks coffee as he flicks through the Wall Street Journal in his Park Avenue apartment. The front page headline screams: ‘Lehman Races Clock; Crisis Spreads’.

If anything, he knows the real situation is far more precarious: Lehman’s collapse will cost other banks billions, most likely pushing first Merrill Lynch, then his own company and even Goldman Sachs into the firing line.

Jamie Dimon, chairman, president and chief executive officer of JPMorgan Chase & Co

Jamie Dimon, chairman, president and chief executive officer of JPMorgan Chase & Co

At 7.30am, he tells a conference call with 24 members of the management team: ‘You are about to experience the most unbelievable week in America ever and we have to prepare for the absolutely worst case. We have to protect the firm. This is about our survival.’

2pm (9am NY)

More than 100 bankers, along with a throng of regulators and treasury officials, arrive at the Federal Reserve, where they will spend 48 hours exploring options to rescue Lehman Brothers. Bank of America declares itself out of the running, believing a takeover would only make financial sense if the U.S. government were to provide a subsidy of $80 billion.

Bob Diamond of Barclays seems to think he might know better. On the fourth floor, his team is holed up in a room with a sheet marked ‘bidder’ taped to the door. There is a problem: in London, his firm’s top lawyer, Mark Harding, reckons any deal will require a shareholder vote, taking up to two months.

They need to find a way to guarantee Lehman’s whopping debts, which no one can properly value, during that period.

Sunday, Sept 14, 1pm (8am NY)

Bob Diamond has a plan: Barclays will sign a deal to buy the whole of Lehman, with the exception of its real estate debts. These will be parcelled off into a separate entity, financed by $3.5 billion from Barclays (the maximum Diamond can spend without a shareholder vote) along with contributions from other Wall Street banks.

A meeting of chief executives is convened at the Federal Reserve by JPMorgan Chase boss Jamie Dimon. ‘OK, let’s make this really simple,’ he declares. ‘How many of you would kick in $1billion — I don’t care what form it takes — to stop Lehman from going down?’ The answer is almost all of them. They are close to saving Lehman. Or so they think.

3.30pm (10.30am NY)

A frantic Hector Sants of the Financial Services Authority is driving up the A30 from Cornwall to London, discussing the Barclays takeover with his chairman Callum McCarthy.

They believe the UK bank has insufficient cash to carry out the deal without placing the entire UK financial system at risk. At 4pm, Alistair Darling calls America’s treasury secretary Hank Paulson and tells him that Britain will block any bid, snuffing out any hope of saving Lehman Brothers.

10pm (5pm NY)

A ping on the BlackBerry of Mo Grimeh, Lehman’s Head of Emerging Markets, confirms the Barclays deal is off. He rushes into the office, where hundreds of colleagues are converging.

‘If the bank was going to file for bankruptcy, we wouldn’t be able to enter the building on Monday morning,’ he later told Bloomberg. ‘That’s the reason everybody headed back to 745 Seventh Ave: to collect whatever personal items they might have.’

Richard Fuld, Chairman and C.E.O. of Lehman Brothers, listens to a speaker during a press conference organized by the US Climate Action Partnership 22 January 2007 at the National Press Club in Washington, DC

Richard Fuld, Chairman and C.E.O. of Lehman Brothers, listens to a speaker during a press conference organized by the US Climate Action Partnership 22 January 2007 at the National Press Club in Washington, DC

Inside, chaos reigns. ‘The trading floor was packed, but people were not working. Some were crying. Some were drinking beer. Some were doing shots of tequila. Most of them were smoking. There was total chaos.’

‘The girls were just packing boxes and boxes of shoes. I discovered that females tend to have multiple pairs of shoes under their desks. I had no idea until that day.’

Monday, Sept 15, 6.45am (1.45am NY)

The board of Lehman Brothers files for bankruptcy, It has $639 billion of assets, $613 billion of debts and 100,000 creditors, making it the largest ever corporate bankruptcy. Around $70 billion owed to other institutions is wiped out and 25,935 staff around the world face redundancy.

8am (3am NY)

Staff arriving at Lehman’s European headquarters at Canary Wharf in London are handed an A4 sheet of paper telling them of ‘high-level information regarding recent changes impacting the firm’. Namely: it has gone bust.

The note stresses ‘no trades or other transactions may be entered into by members of staff today without prior clearance from a member of the Europe and Middle East operating committee’.

They begin boxing up belongings and swapping contact details. Some are in tears while the stoics among them are busy calling head-hunters in search of a new job.

10am (5am NY)

A walk of shame awaits the 4,000 bankers filing out of the Canary Wharf office, boxes in hand.

Graduate trainee Jack Reynolds, who had been at the firm for little more than a week, carries a Lehman Brothers branded umbrella and rugby ball.

‘My career has been screwed,’ he tells TV crews and newspaper reporters. ‘No one is happy. Everyone is upset and down, but they’ve just got to get on with it.’

Kirsty McCluskey, 32, who works on Lehman’s London trading floor, declares: ‘It is terrible. Death. It’s like a massive earthquake. It’s final. Everybody is just finishing up. I’ll now try to move into another industry.’

Thankfully, she adds, managers have promised to process her outstanding expenses.

12 noon (7am NY)

Jennifer Duthie, a 22-year-old graduate recruit, is one of roughly 4,000 London bankers who have spent the morning at Lehman’s Canary Wharf headquarters, processing the fact that they are out of a job.

‘By midday people were looting the office, sweeping up branded merchandise such as bags and stationery for memorabilia,’ she later told the Mail. ‘Other colleagues were having slap-up lunches in the canteen or buying boxes of Coke cans and chocolate bars to use up the money on their staff ID cards.

‘I went for a drink with colleagues in a bar, where we were harassed by Press and recruiters [from other banks]. They were like hyenas around a carcass . . . But we stayed anyway as we didn’t want to go home where reality would sink in.’

John Collins, 40, who works in equity derivatives product control, gives passers-by a first-hand account of proceedings inside the steel and glass building. ‘People are trying to put a brave face on it, but obviously there are some disconsolate people who have taken it very badly,’ he says. ‘They say the economy is in its worst position since the Twenties. They could be right. It’s only the guys at the top who know what’s happening.’

1pm (8am NY)

A sheepish-looking Lehman boss Richard Fuld arrives at the firm’s New York HQ and is escorted to his 31st-floor office by security guards who fear that angry colleagues might attack him.

Lehman employees were unique on Wall Street in that they owned about a quarter of the firm’s shares. Most had a five-year lock-in period, meaning huge sums of their own net worth had disappeared during the bank’s collapse.

As the world’s media converge on the building, staff create a 100ft ‘wall of shame’ on its south side, filled with angry graffiti along with photos of Fuld and his chief operating officer with the caption ‘Dumb and Dumber’.

The following days and weeks see carnage on global stock-markets, plunging the world into the deepest slump since the Great Depression. Merrill Lynch and HBOS are taken over, and Washington Mutual, once America’s biggest savings and loans bank, is shut by watchdogs.

As regulators pour trillions into attempting to bail out stricken financial institutions, the slump morphs into a worldwide recession, with international trade crashing by 30 per cent and unemployment spiralling across the globe, and Britain’s GDP falling by 7.2 per cent and unemployment doubling to 8.5 per cent. The stock market will lose almost half its value. And public finances will take a hammering that leads to almost a decade of austerity.

Three weeks after Lehman’s demise, on Tuesday, October 7, 2008, prime minister Gordon Brown talks his aide Damian McBride through last-ditch plans to bail out eight of the nation’s most troubled banks, at a cost of £2,000 for every British taxpayer.

‘We’ve got to get ourselves ready in case it goes wrong tomorrow. And I mean really wrong,’ he says.

‘If the banks are shutting their doors, and the cashpoints aren’t working, and people go to Tesco and their cards aren’t being accepted, the whole thing will just explode. If you can’t buy food or petrol or medicine for your kids, people will just start breaking the windows and helping themselves.

‘It’ll be anarchy. That’s what could happen tomorrow . . . We’d have to think: do we have curfews, do we put the Army on the streets, how do we get order back?’ Capitalism is a whisker from collapse.

The chilling question now, of course, as storm clouds gather over the global economy once more, is whether lessons have been learned that will stop the same thing happening all over again.

 

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