September 15, 2008 was the date which will live in infamy for the financial world.
US investment bank Lehman Brothers collapsed, sparking the global financial crisis, the effects of which the world is still feeling.
The biggest banking failure in history sent shock waves not just through the US financial markets, but also caused a meltdown in global share markets.
In response the US central bank, the Federal Reserve, pumped more than $2 billion into the banking system on that day to prevent a domino effect and soon slashed its benchmark interest rate to zero.
That was just the start: by August of this year the number of central bank rate cuts around the world since the collapse of Lehman Brothers had reached 666.
US Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke quickly put together a bailout plan to prevent other Wall Street banks going the same way as Lehman.
The US Congress then approved that plan – known as the Troubled Asset Relief Program, or TARP – to prevent a total crash and deep recession.
Lehman was in the spotlight, making nearly 26,000 staff members redundant, but Merrill Lynch was facing a similar fate and had to be hurriedly taken over by Bank of America.
Within days the contagion had spread around the world with governments having to use taxpayers money to bail out over-extended banks.
What caused the Lehman collapse?
On September 10 2008, Lehman Brothers posted a $3.93 billion loss for the 3rd quarter. That was because the bank had had to write down $5.6 billion on investments linked to so-called toxic mortgages – that is loans that were never going to be repaid.
The sub-prime mortgage crisis – in which people were given loans without proper checks on their ability to repay them – was triggered by a large decline in property prices after the collapse of a housing bubble in the US.
Those loans were then bundled together and repackaged as investment opportunities, with a safe ‘AAA’ rating. When it became clear they were not, the whole house of cards collapsed.
Has the banking world recovered?
The effects of what happened in September 2008 and the following months are still being felt today, particularly in Europe.
Indeed, just one day after the anniversary, Germany’s Deutsche Bank was hit with a demand for $14 billion from the US Department of Justice related to the alleged mis-selling of mortgage-backed securities.
Europe’s bank shares are, on aggregate, at only half their levels on September 15, 2008.
Shares of three banks – Eurobank and Alpha Bank in Greece and Italy’s Banca Monte dei Paschi – have lost more than 99 percent of their value.
Germany’s Commerzbank is down 94 percent, while Royal Bank of Scotland, is off 92 percent.
By contrast US banks on the S&P 500 index are up more than 14 percent since the day before Lehman.