A Decade After Lehman's Collapse, Some Say It Can Happen Again

It may be known as the era of “too big to fail,” but during the throes of the Great Recession, one financial institution cratered in spectacular fashion and became the largest bankruptcy in U.S. history. The aftershocks rippled through the economy and the bankruptcy served as a lesson in smart lending.

Or did it? 

With $639B in assets at $619B in debt, Lehman Brothers filed for Chapter 11 bankruptcy on Sept. 15, 2008. The investment bank had been one of the first to enter the arena of mortgage origination, and it quickly became a leading source of subprime mortgages following a string of acquisitions, including that of BNC Mortgage. Lehman’s ties to subprime mortgages made it particularly vulnerable to any downturns in real estate values. Following the U.S. housing bubble's burst in 2007, Lehman’s stock plummeted in the months leading up to its bankruptcy filing, including a 48% drop after the near-collapse of Bear Stearns in March 2008. 

Its collapse has become the poster child of the Great Recession, but has anyone in finance and real estate learned anything? Ten years after the Lehman collapse, Bisnow reached out to an array of industry players to get their take on if its demise should have been predicted, whether it should have been saved, what — if anything — has changed and if something like it could ever happen again. 

Keith Breslauer — Patron Capital Partners Managing Director and Senior Partner, London

Bisnow: What was the climate like at the time of Lehman’s collapse?

I left Lehman 10 years before its collapse. As to the industry, the idea of confidence is a big deal. These firms historically operated with a large level of leverage. Confidence sells. I personally thought Lehman was the best firm I ever worked for. It had fantastic bosses and management, and I worked with great people. It was just an amazing firm. It had its challenges, as do all firms. 

It had a certain type of individual. I believe our culture at Patron is where everyone is intellectually curious. It doesn’t matter where you come from or what you look like, and that’s what Lehman was like. It was really about how hard you were going to work, how smart you were, and if you’d explore new opportunities.

Bisnow: Did you ever anticipate something like that could occur?

I was disconnected from the firm for many years. What ultimately happened was I had a lot of shares I got from when I worked there, was pleased to get them, and I never sold them. When the stock started to drop in value, I got calls to see what I thought, and I never thought it would fail. I figured the government would force a bailout.

Other times banks had near-death experiences, someone stepped in. What I thought would happen is I’d own shares in another bank. 

Bisnow: Should or could Lehman have been saved?

It absolutely could have been saved. It was easy to save it. We saved Fannie Mae and so many groups, so, to me, Lehman could have been, too. 

Bisnow: How have things changed?

The issue Lehman had and all investment banks had was, at that time, most of these investment banks became large principal investors. From a regulatory perspective, they were taking on the wrong kind of risk to allow capital to flow. Hedge funds have really become that principal capital. Many who run those are the traders of these big firms. In many ways, you can argue from a risk perspective, it’s a better deal for the world.

From a capital perspective, the post-Long-Term Capital Management reaction by developing markets focusing on saving and the emergence of a middle class in China and India has brought a lot of money into the savings system that needed to be invested. In many ways, the system has evolved because there are now a ton of investors out there willing to invest. 

Bisnow: It seems like everyone is more cautious this cycle. Do you think anything like this could happen again?

Of course, it could happen again. The question ultimately is what causes these things and why are they bad or not bad and what creates the quantum of the problem. The big argument why people say it can’t happen right now is fundamentally tied to debt. The amount of credit in the industry is significantly lower at the personal level than it was in the past. If you buy that argument, it’s that it can’t happen in the immediate term to the same degree because all cycles fail from consumer confidence because of a rise in interest rates.

The reality is consumer debt is now increasing and government debt is now very high. There are strong words from Washington against buyers of U.S. debt, so will those buyers retaliate and say there is now going to be a higher rate to buy money because U.S. fiscal debt is too high? There is a fear that could happen.

Gemma Geldmacher — Berkadia Senior Director, Boston

Bisnow: Where were you when it was announced Lehman had collapsed, and what went through your mind? 

I was working for a multifamily lender as a Fannie Mae underwriter and had just been moved to the HUD team, which I wasn’t very happy about at the time. I don’t recall the actual moment, but I know that everything changed for HUD financing at that time because banks just stopped lending, and HUD and the agencies were the only ones making loans. In hindsight, one of my worst moments turned into the best career choice I’d ever made, which is a perspective I’ve tried to keep.

Bisnow: Did you ever anticipate something like that could occur? 

Absolutely not. I vaguely remember someone comparing it to the savings and loan crisis, but I was a kid when that happened. Banks just didn’t fail. I imagined the scene from Mary Poppins where there was a run on the bank and everyone was clamoring for their money. Turns out it was worse than that.

Bisnow: Do you think it could/should have been saved? 

I don’t think they deserved it any more or less than some of the banks that were saved. But no one was expecting it. I think in hindsight, saving them may have averted some of the worst of what was to follow, but perhaps the fact that they weren’t has served as the tiniest of warnings to others who implement such risky strategies.

Bisnow: How has your day-to-day work changed in the years since? 

I screened over $1B in HUD deals in the year to follow, and our team closed more that year then we had in almost five years prior combined. Prior to the Lehman fall, I had intended to get out of HUD underwriting as soon as I possibly could. But when I finally did move out of HUD financing, about two years ago, it wasn’t for another underwriting job — it was to move to HUD origination. And I wouldn’t change a thing.

Bisnow: Have things in the industry changed, for the better or worse? 

I do think credit standards have gotten tighter, and although they may have loosened in the past few years, we are (hopefully) still better situated to avoid some of the worst that happened. Ensuring that laws like Dodd-Frank are effective and efficient regulations and well-enforced will continue to aid in this. 

Bisnow: It seems like everyone is more cautious this cycle. Do you think anything like this could happen again?

Good Lord, I hope not, at least not in my lifetime. I think robots taking all our jobs or climate change uprooting our lives is a bigger concern, frankly.

Jason Escamilla — ImpactAdvisor CEO, San Francisco

Bisnow:  Where were you when it was announced Lehman had collapsed, and what went through your mind?

We were in the final few weeks of launching our short-hedge fund, Dancing Bear. We spent the bulk of 2008 preparing for the September/October fund launch. At the start of the day, we could have tweeted “funding secured.” As shocking as the news was at the time, we ended the day assuming we were still on track for an October launch, only to watch the opportunity slip away in slow motion like drying sand through the fingers of our hands. Our initial backers, fund of funds, got hit with unprecedented withdrawals. We kept pushing out the launch until finally throwing in the towel by early 2009.

Recall that by the end of the week, on Sept. 19, the S&P 500 had recovered, closing back above the Sept. 12.

Bisnow: Did you ever anticipate something like that could occur?

No doubt I was very bearish on the market, launching a short-fund most of 2008. There was no shortage of news stories, friends and family members accessing easy credit to fuel all sorts of borrowing and spending.

Did I think a Lehman bankruptcy could occur? Of course — especially after Bear Stearns failed earlier that year.

But if I were asked then, after the Long Term Capital Management and Bear Sterns bailouts, I would have bet the Fed, the Treasury and industry leaders would have worked out a smoother wind-down, going back to the concept of “too big to fail,” or that the costs of a failure outweigh the costs of a bailout.

Bisnow: Do you think it could or should have been saved?

Lehman did not “deserve” to be saved. 

Could? I think the officials made the right calls at the time. They had neither the legal nor political authority to do more, at least that weekend. The contagion was still grossly underestimated, as evidenced by the S&P 500 trading back above Lehman bankruptcy levels by the end of the week.

Should? That said, looking back, the Fed, the Treasury and industry leaders theoretically could have avoided some of the permanent job loss that occurred as a result of the contagion, etc. The asymmetric global trading regime well established by then (unfair, but designed to promote growth overseas) meant those jobs would never come back.

But it’s unclear what permanent side effects would have been created as a result.

Today, our economy and corporations are among the most efficient in the world. The number of blatant signs of excess pale by comparison with 10 years ago.

Bisnow: How has your day-to-day work life changed in the years since?

The financial services industry became much leaner and all around more efficient. The advancement of information technology is also a major factor but beyond the scope of this article.

Meanwhile, the social effects from 10 years ago cannot be underestimated. Things like Lehman and Bernie Madoff left individual investors highly skeptical in these 10 years since, unlike the 15 years before in my career in financial services.

Going through these cycles has made me a wiser investor and a better financial adviser.

The new visceral skepticism today helps keep the industry in check, even when returns are good. In the past, Bernie Madoff needed only put up good numbers to keep the skeptics in check.

Lance Patterson — Patterson Real Estate Advisory Group CEO, Atlanta

Bisnow: What was the climate like at the time of Lehman’s collapse?

It was a big event, but it was so far into the crisis period that it was almost not a big event. Merrill Lynch, which was a big real estate lender, announced a substantial write-off of real estate and loans. It sort of woke everyone up, as nobody was expecting that. I was in the process of closing a sizable loan with Merrill and was told they were just cleaning things up and not to worry. It didn’t even take 30 days before I was told I couldn’t close the loan. By the time September 2008 rolled around, it wasn’t much because I had already been through it. 

You can look back at all the stupid things we, as an industry, did. When you look backward, it was obvious there were clear signs.

Bisnow: Do you think it could/should have been saved? 

My view on that is there should have been efforts taken to try and save it along with trying to save the overall U.S. and global economy. There were some things done that were instrumental in making sure we didn’t go off a cliff. They aren’t the only ones who were doing things the wrong way, but they are the poster child.

Bisnow: How have things changed?

It’s changed for the better — substantially so. It really comes down to three concepts: caution, regulation and memory.

Some of the things that make it better also make it harder. There’s no stupid money out there today. I don’t see it. Money is very cautious and prudent. We all remember the stupid stuff we did last time around and don’t want to do it again. There are some deals that make me wonder, but I don’t see stupid money

The old adage is history repeats itself, but I don’t see that. I was the 25th employee at my former company. I hired us to 80 and fired us back to 0, and you never want to go through that again.

Bisnow: It seems like everyone is more cautious this cycle. Do you think anything like this could happen again?

The real answer is nobody knows and just spouts stuff to make it seem like they do. 

If you really focus on the real estate part of our business, how are properties performing? They are doing pretty good everywhere with the exception of multifamily or a few product types in a few cities. They’re all doing good or super-duper good. It’s all doing well.

Save for world economic shock, the only thing I’m beginning to see are deals that developers are trying to get done in my opinion shouldn’t get done. That’s relatively a new thing.

Dejan Ilijevski — Sabela Capital Markets President and Investment Manager, Chicago

Bisnow: Where were you when it was announced Lehman had collapsed, and what went through your mind?

I was a trader at the Chicago Board of Trades but have since opened up an investment advisory firm. As you can imagine, nobody can value where prices should be after something like that happens. It was basically like the Wild West. 

Bisnow: Did you ever anticipate something like Lehman’s bankruptcy could occur?

There’s always hindsight bias. There were very few indicators [that] suggested something like this could happen. Instead, it was a mass psychology that things are great and there’s nothing going on here. Even the credit agencies were rating the credit flops as Triple-A.

When it happened, it wasn’t as expected as people may think. 

Bisnow: Do you think it could or should have been saved?

I don’t know. I go back and forth. At the time, I didn’t understand why they were bailing out those subsequent banks that were not paying for all [the] brisks they were taking, so it seemed like they still got rewards.

In hindsight, it seemed like the government had no choice.

Bisnow: How have things changed?

In general, I don’t think much has changed. Banks and the financial industry are a big chunk of the economy, and the credit agencies still have a conflict of interest by being paid by the banks they’re in charge of rating. 

I left trading to become an investment adviser. Everything I do is in the client’s best interest, and there isn’t much push in the industry to make that a standard. Speculation persists. Even the consumer protection bureau put in place to protect consumers from speculative trading and products is being stripped of its powers. 

Bisnow: It seems like everyone is more cautious this cycle. Do you think anything like this could happen again?

Speculation is still a big driving force of the market and there’s always going to be something down the road to cause a crash. It’s impossible to predict or prepare for. There is always going to be the next crash, and now you hear people talking about a bubble perhaps in outstanding student loans, which is going to have a huge impact on the economy down the road.

The last financial crisis is starting to become a bit of a blur, and maybe some of the things we learned may have dissipated.

Stephen Taddie — Stellar Capital Management Managing Partner, Phoenix

Bisnow: Did you have any connections to Lehman? 

No, but, that being said, we got hit with the collateral damage from it. It was like a nuclear bomb. 

Bisnow: Did you ever anticipate something like that could occur?

Leading up to it, we were getting uncomfortable with what was happening in the economy. Our firm is a more macroeconomics-driven firm. The thing we were paying attention to was Federal Reserve monetary policy. A year in advance of the economy turning, one of the things that struck us was Financial Accounting Standard 157. [The measure by the Federal Accounting Standards Board was created in September 2006 to establish a framework for what is generally accepted as fair value. The measure, and others like it, have faced scrutiny by those who say it leads to assets being priced well below their true value.] That happened about three months after the federal funds rate peaked in June 2006. When banks saw the market-to-market rule, they realized they had to slow down lending and raise regulatory capital. It sort of rewrote the rules in how banks calculated assets.

We changed some of our investments from being a tad aggressive to more conservative. We got our portfolio to a spot where we felt it wouldn’t experience any direct hits from stuff that got bad. As things got bad at [the] end of 2007, the Fed got aggressive. They chopped interest rates a half point in September and kept going down the ladder to rescue this thing.

Was I that surprised? I kind of was, even though we knew something was in the air and de-risked a lot of the portfolios. I wouldn’t have expected it to happen as quickly as it did. It was one day they’re open and the next they aren’t. Was I completely shocked? No. It could have been four other firms that could have gone down the tube.

Bisnow: Should or could Lehman have been saved?

Somebody had to fail, and I think Lehman found themselves as the odd man out. There were a lot of firms in trouble. The vaunted Merrill had to go under the cover of Bank of America. There were stocks and bonds of major firms that got cut in half or more because nobody knew who would get rescued or who would fail. 

Ben Bernanke oversaw the Fed, and he was such a student of the Great Depression and knew what and what not to do. The recession could have been a Depression if they had not behaved the way they did.

James Jakeman — Benson Elliot Partner, London

Bisnow: Did you ever anticipate something like Lehman’s collapse could occur? 

At the time, no. Only a few contrarian players who have since been well reported really felt it could happen and I suspect the reality out-scaled their projections. We had seen before and continue to see now pockets of risk which combine to impact a region, asset type or market, but the sheer scale and level of contagion which circled Lehman and was felt across multiple markets was unique. I feel today’s political landscape across the U.S. and Europe is not entirely an unconnected result as well, so the impact is taking a generation to work through.

Bisnow: Do you think Lehman could or should have been saved? 

On reflection, whilst the pain has been severe globally, the whole industry was in over its head when the music stopped. Government bailouts need to be a last resort, but are they appropriate for investment banks? If an offer for a major stake was really on the table earlier in 2008, then this is when the business could have saved itself. It would be interesting to learn more around what recapitalization options were or were not available and the decision-making rationale at the time to accept or not. Equally, the rescue offer from the Koreans in August could have saved many jobs and retained the brand and the option to rebuild the business. Others were in a similar position and took those deals and have gradually rebuilt. The private sector recaps have also probably performed better than the government bailouts.   

Bisnow: How has your day-to-day work changed in the years since?

If I’m honest, it’s less exciting but more rewarding when you achieve the results. That period in [the] mid-2000s, it was a bubble and risk was taken for granted. Now business models are more aligned to real estate fundaments — less leverage, more risk adjusted strategies, longer time frames. You need more than just a purchase contract and bank loan to play!

Bisnow: Have things in the industry changed, for the better or worse? 

From a real estate industry perspective, I think it’s for the better — there’s a greater depth of permanent long term capital committed to the sector and this is matched by more conservative, relationship led financing. This should help protect the market from suffering another Lehman style fall-out. From a number of perspectives, the real estate industry is much more aligned with contributing to a wider range of socio-economic and political objectives which should have wider reaching positive impacts on global development. 

Jerry Verseput — Veripax Financial Management President, Sacramento, California

Bisnow: What was the climate like at the time of Lehman’s collapse?

There was sort of this double whammy of Bear Stearns in March 2008 and later Lehman in September. I had just started my financial advisory firm about three years before. That entire financial collapse and Lehman being one of them had me wondering what did I get myself into thinking I could manage other people’s money?

Bisnow: Did you ever anticipate something like that could occur?

I don’t know how much of it was we weren’t getting all the information. I was probably paying closer attention to when Bear Stearns collapsed. A week before that it went from “we had a few problems” to “we don’t have a business anymore and are closing up the doors.”

No way did I think there was a way an 80-year-old company could do that. It rocked the confidence of the financial markets in general as to how accurate was the news coming out of them. 

Bisnow: Should or could Lehman have been saved?

No, I don’t think it should have been saved. I guess the Fed could have stepped in, but I think, going through that, the situation that we’re in now with the global banks is probably in a much better spot given what happened to Lehman than if the government had bailed them out. Now we have Basel III and an annual stress test to make sure they can sustain something like that.

I tell clients we live in a post-Lehman world. We don’t have to fully guard against another. If you consistently guard, you’ll miss out.

Bisnow: How has your day-to-day practice changed?

For me, it’s just opened up a lot more investment opportunities. One is in the private debt world. The global banks have had to pull out of very attractive opportunities, which has left room for private funds to come in and fill the gap. 

On the CRE side, the real estate lending is pretty nice. A lot of banks can only go up to 50% loan to value, but it used to be 70%. The additional 20% is prime for some of these funds to come in and where a lot of mortgage REITs come. 

Bisnow: It seems like everyone is more cautious this cycle. Do you think anything like this could happen again?

Could it happen? I suppose it could, but I don’t think it will be the same mechanism. We have a tendency to try and optimize for the last thing that happened, and we’ll always miss the next thing. 

David  Johnson — HALO Financial Founding Director, London

Bisnow: Where were you when it was announced Lehman had collapsed, and what went through your mind?

I was in the dealing room at Halo Financial. We were a four-year-old company at the time, still building a portfolio of clients and we had been warning our clients that everything in the U.S. system was fragile and there may be further fallout from the [structured investment vehicle] and subprime mortgage debacle. Whilst they were in the frame for further problems, it was a surprise that the Fed allowed Lehman Brothers to go, but the flood waters had to break at some time and for someone. It just happened to be Lehman Bros.

Bisnow: Did you ever anticipate something like that could occur?

Banks have collapsed before and the scale of the financial fallout from the subprime mess was as bad as anyone had experienced in living memory. So there was always a chance something big could happen. High mortgage rates and dreadful default levels had to have an impact. The scale, geographical location and players involved in that impact were the unknowns until the news of Lehman Brothers broke.

Bisnow: Do you think it could/should have been saved?

I have no doubt whatsoever that the U.S. Fed could have saved Lehman Brothers if they had the will so to do. They have, after all, created $4.35 trillion of bond-buying funds in the years that followed the collapse. I have never been quite sure whether they needed a big failure to wake the markets up or whether they just didn’t quite fathom the breadth of the fallout they would witness when they allowed Lehman to file for bankruptcy protection. Either way, the impact was profound and we are still feeling it today.

Bisnow: How has your day-to-day work changed in the years since?

As Halo Financial is involved in the physical delivery foreign exchange market and have no involvement in speculative trading or asset classes outside foreign exchange, the impact for us has had more to do with regulatory changes than anything else. And the regulatory burden has grown exponentially. 

Some of that is driven by EU fears over derivative contracts and partly by concerns over the hidden elements of the financial markets. Of course, we have also had an increase in regulation to control money laundering and terrorist finance, so the weight of regulation has built from all directions. 

During the financial crisis and in the immediate aftermath, the markets were immensely volatile. For a company that helps clients make the most of the market volatility, that was a time when our services were in high demand and it helped a young company grow at a very healthy pace. Latterly, volatility had dropped a lot but Brexit looms, the new U.S. president acts erratically and global growth is spluttering into life in some areas but is dragging in others. And hovering in the background is the immense amount of cheap money that the central banks pumped into the economy but for which they don’t appear to have an exit strategy. Volatile conditions are set to continue. As far as Lehman is concerned, the world has moved on, as it did after the previous recession and after world wars and other cataclysmic events.

Bisnow: Have things in the industry changed, for the better or worse?

A bit of both but, the more things change, the more they stay the same. There will always be another seismic event in the financial markets and each time that happens, it will be hailed as the worst event since (fill in an appropriate date). Economies recover and the markets move on but the levels are different. 

Growth is slower overall and interest rates, which have been ludicrously low for a decade, are likely to remain below average for maybe a decade to come. The foreign exchange market deals with ratios, £1 to $1.3 for example. So, whilst the ratios change, the volatility and flows will continue unabated. As long as there is international trade, there will, be a market for good foreign exchange governance. 

Bisnow: It seems like everyone is more cautious this cycle. Do you think anything like this could happen again?

Never say never. Institutions and their staff are on a constant search for other means to make money from the system; creating new products and services to do so. Regulators will always be playing catch up in this cat and mouse game but are definitely in a better place than they were and the markets are better controlled than they were in 2007. Caution is partly driven by heavy regulation and partly by a reduced appetite for risk taking and, in almost all markets, that is probably a good thing. Could another major institution fail? Yes, indeed it could but, as with Lehman’s, there has to be a beefy catalyst to make that happen and we ought to be better forewarned and better prepared these days.