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January 29, 2022

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Lehman Files Chapter 11; Fed to Meet Today

POSTED: September 16, 2008, 12:00 am

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It may not attain the lore of Wall Street’s “Black Monday” on October 19, 1987 but the events of Monday September 15, 2008 will be remembered in the financial markets for some time to come. As the Dow closed down more than 500 points – the largest single day decline in seven years - investors conveyed their lack of confidence in the market and concern over the precarious state of some of the nation’s largest financial institutions.

To appreciate the magnitude of the economic fallout, it’s important to rewind to last Friday. At the end of last week investment banking giant Lehman Brothers was put on a death watch. The mood in their midtown Manhattan headquarters was reported as somber with employees simply waiting for the other shoe to drop. Going into the weekend it was clear that no bailout from the federal government, similar to the relief given Bear Stearns, would be forthcoming. Instead the Federal Reserve Bank of New York summoned the senior leadership of the nation’s largest financial institutions over the weekend to see if a deal could be struck to stave off the collapse of Lehman. No one blinked and no deal emerged. Going into Monday it was clear that Lehman would be heading toward a Chapter 11 bankruptcy filing.

In a press release Lehman Brothers announced, “The Board of Directors of LBHI [Lehman Brothers Holdings, Inc.] authorized the filing of the Chapter 11 petition in order to protect its assets and maximize value. In conjunction with the filing, LBHI intends to file a variety of first day motions that will allow it to continue to manage operations in the ordinary course. Those motions include requests to make wage and salary payments and continue other benefits to its employees.”

Then if Lehman’s troubles were not enough, insurance giant American International Group (AIG) announced it would need shoring up to the tune of $40 billion and would be requesting a bridge loan from the federal government to avoid having its credit downgraded. In reaction the Federal Reserve Bank has asked two investment banks to come up with $75 billion in loans to help the ailing insurer. To top things off, Bank of America made a surprise bid for brokerage house Merrill Lynch, capping off one of the most dizzying 48 hours in the history of high finance in the United States.

All of these developments come on the heels of the government takeover just one week ago of mortgage giants Fannie Mae and Freddie Mac, and a volatile tropical storm season that had storms repeatedly threaten oil rigs in the Gulf Coast and refineries in Louisiana and Texas. The collapse of the mortgage market combined with a spike in gasoline prices has strangled the nation’s economy, crippling large industries along the way and sending investors into a deep funk. As Americans have seen their home values plummet, faced foreclosure proceedings, or worse, evictions, consumer confidence has taken a dramatic hit as belt tightening has effected spending. To make matters worse, lenders have tightened credit, making virtually impossible new business investments that could drive growth.

The collapse of Lehman has sent shudders through the market, as was evidenced by Monday’s steep decline. While the troubles at Bear Stearns was alarming, the fall of the venerable Lehman Brothers, a 187 year old institution in American finance, was the shot heard round the Street. The company traces its founding to 1850 when the Lehman Brothers – Henry, Emanuel and Mayer – opened their brokerage house in Alabama for the cotton industry. Undeniably, Lehman, like other financial institutions, made its money off slave labor as the principal commodity it traded was the crop that propped up Dixie. The firm made its way North after the Civil War and settled in New York City. Lehman was sold to Shearson/American Express in 1984 for $360 million and was spun off ten years later as an independent firm.

While much attention is paid to the role of investment banks in raising capital for large corporations and offering strategic counsel on mergers and acquisitions, these firms impact the lives of the average worker. The investment by pension funds in these complex transactions underscores just how intertwined average Americans are with the business of these financial titans. Pension funds reportedly hold over $20 trillion in institutional assets in the United States. So, as these firms take a hit the average worker whose retirement funds are tied up in investments is also susceptible; perhaps not immediately but over the long run if the market enters a prolonged downturn.

As disturbing as its collapse is, equally alarming to many is how Lehman Brothers was literally deserted, left to fend for itself despite its history and the symbolism behind its failure. The pace at which these firms have imploded or been put up for sale over the last half year has caused many employees at the surviving companies to keep looking over their shoulder in anticipation of the next bit of bad news.

If death truly comes in stages, what’s next for Lehman Brothers is the queuing of creditors seeking to protect their assets and the aftershock on Wall Street of thousands of employees potentially virtually impossible being let go at a time when there is little chance they will be absorbed by competitors. And not only employees bear the brunt of Lehman’s collapse but all the vendors and area businesses that relied on Lehman will be impacted. The shock wave will reverberate far beyond Wall Street. The Federal Reserve will meet today to address the financial crisis and seek to calm the nerves of investors and firms alike.

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