By Bob Ivry, Mark Pittman and Christine Harper
Mohammed Grimeh, global head of emerging-market debt at Lehman Brothers, hopes for the best on Sunday, September 14, 2008. Photo / AP
On September 15 last year, investment bank Lehman Brothers collapsed, sparking a global financial meltdown. A year later, the Business Herald looks at how the crisis played out. Here, we focus on the weekend that led to the bankruptcy of a US giant
The warning was ominous: "Massive global wealth destruction." That's what Lehman Brothers executives predicted before they filed the biggest bankruptcy in US history.
"Impacts all financial institutions," read one bullet point in a confidential memo prepared for government officials obtained by Bloomberg. "Retail investors/retirees assets are devastated".
The message didn't get through. Two dozen of the world's most powerful bankers, brought together by Treasury Secretary Henry Paulson and Federal Reserve Bank of New York President Timothy Geithner the weekend of September 13 last year to devise a rescue plan for Lehman, were too busy saving themselves to see the larger threat.
"The discussion among the CEOs was 'How do we prevent the next firm from going under?"' said former Merrill Lynch chief executive John Thain, who cut a deal to sell his company that weekend.
"There should have been much more discussion about the impact directly on the markets if Lehman went bankrupt."
While everyone assembled at the New York Fed was aware that unbridled sub-prime-mortgage lending and the packaging of such inferior loans into investment vehicles such as collateralised- debt obligations had pushed the financial system to breaking point, what the bankers missed almost destroyed them, and the rest of the global economy.
Lehman's downfall on Monday, September 15, sparked a run on the US$3.6 trillion money market industry, which provides short-term loans called commercial paper used by businesses worldwide to cover everyday expenses, including payroll and utilities. The panic left companies such as Goodyear Tire & Rubber stranded with insufficient cash and ravaged the accounts of millions of people.
For Goldman Sachs chief executive Lloyd Blankfein, JPMorgan Chase & Co's Jamie Dimon and the rest of the financial chieftains who spent a weekend trying to unwind derivatives trades and keep bank-to-bank loans flowing, ignoring the commercial-paper market, the lifeblood of the economy, proved a catastrophic oversight.
Within a week, the US stepped in to halt withdrawals from money market funds, leading to a US$1.6 trillion industry backstop, part of US$13.2 trillion it has committed to beating back the worst financial crisis since the Great Depression.
'SYSTEM AT RISK'
Of all last year's quakes - the fall of Bear Stearns in March, the takeover of mortgage buyers Fannie Mae and Freddie Mac and the salvaging of American International Group - the failure to account for the effects of Lehman's demise was the most critical because its aftershocks came closest to wrecking the world economy.
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