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Category: Economics

A decade on it’s still too early to tell what the legacy of Lehman Brothers will be

The legacy of Lehman’s collapse can only be understood by viewing it in the context of ongoing financial risk, erroneous money-printing and the...

12 September 2018

Alex Matchett

The legacy of Lehman’s collapse can only be understood by viewing it in the context of ongoing financial risk, erroneous money-printing and the rise of protectionism and populism – and it is a chapter that is far from over

Ten years on from the bankruptcy of Lehman Brothers, it is apt to reflect on the financial crisis’ catalyst. Yet, while a decade makes a good time-frame, it is by no means the end of this chapter. The real answer to ‘what was the impact of the collapse of Lehman Brothers?’ is ‘it is too soon to tell’.

The reason for this is not that that particular bank’s collapse was so cataclysmic that we will never be able to see beyond it. It is too soon to tell for two reasons: the economic and social change the financial crisis triggered is ongoing and the side-effects of the monetary medicine prescribed by governments and central banks following the crisis, have not worn off. These two themes are intertwined and underpin the current status quo in myriad ways.

Firstly, how significant was it? At the time the reverberations of Lehman Brothers’ $600 billion bankruptcy threatened to tip the whole financial system over the edge; much has been written, then and now, but one recent revelation is particularly illuminating: A year before Lehman the then BBC business editor Robert Peston, defended his decision to report on the state of Northern Rock, just before a bank run and collapse some accused him of precipitating. “If I had not reported that event, I would have been guilty of playing God in an incredibly patronising way. I’d have been effectively saying that adults were not capable of understanding the significant information and that would have been an appalling thing for any journalist to do.”

Lehman Brothers offices

Lehman Brothers offices

Conversely, this week The FT’s chief markets commentator and Long View columnist, John Authers, admitted he chose not to report a bank run taking place on Wall Street two days after Lehman declared bankruptcy: “Was this the right call? I think so. All our competitors also shunned any photos of Manhattan Bank branches. The right to free speech does not give us the right to shout fire in a crowded cinema…” We don’t know if other journalists would have reported this but, clearly, by September 2008 the crisis-point juncture of Lehman’s collapse was leading to economic, survivalist, decisions being made on every level.

This makes the Lehman collapse that rare thing: genuinely poignant. Whether it was indeed seminal in the subsequent play-out of the financial crash becomes academic. It so epitomised the zeitgeist that it became a hook on which history could swing. Indeed, the images we all remember of suited young professionals carrying small, laden cardboard boxes, arguably, gave such a shock of a broken system that they allowed the preconception for bank bailouts.

Television cameras outside Lehman Brothers New York offices

Television cameras outside Lehman Brothers New York offices

However, happening too slowly for television cameras, but more poignant, were the wary steps of Spanish doctors beginning their medical careers by spending five years waiting London cafe tables and the 800,000 British children slipping below the poverty line as the global recession and austerity that paid for those bank bailouts bit.

Context is everything. Lehman and the contraction it encapsulated, matter because it lost investors’ capital, but it matters much more because it took away prospects for the many more people who were not investors, meaning they are unlikely to be ever become real stakeholders in the financial system.

This is for two, not unrelated, reasons: Firstly, the recovery in the West has not been enough for people to see their real income increasing – on both sides of the Atlantic, wage growth is being outstripped by the cost of living.

Secondly, the money printing program (quantitative easing) embarked upon by the world’s leading central banks in order to keep the global financial system moving and ‘liquid’ following the crash, has led to a massive rise in asset prices and a further centralisation of finance in the multi-national establishments whose recklessness caused the initial crash.

The creation of so much ‘cheap’ money meant financial institutions were forced to invest in stock and bond markets, pushing them higher to extreme valuations. The already wealthy, with the means to do this, have benefitted from record high asset prices, while the majority ‘just about managing’, who likely lost savings in the initial crash, are left with the other consequence of money printing: inflation. The rich are getting richer while the poor are getting poorer and this has led to discontent.

This discontent is widely manifested, but its underlying theme is distrust of elites and government. If this is a result of the collapse of Lehman Brothers and the financial crash, it has been exacerbated by the flood of media engendered by the digital age. It has never been easier to be factually correct or harder to know what those facts mean. That is the paradox that fosters ‘fake news’ – at least for those pertaining to believe in the possibility of such an oxymoron: news is news, fake news is lies.

Was Donald Trump's election the result of Lehman's collapse?

Was Donald Trump’s election the result of Lehman’s collapse?

The reactionary catch-alls of ‘populism’ have harnessed the endemic fatigue with mainstream politics and highlighted the failures of the governing to fix finance. The sentiment might be sincere and apt, but the approach is that of a pontificating and clumsy drunk. It deliberately obfuscates and denies the intelligence and nuance needed to properly identify and nullify the causes and effects to our ongoing economic woes. Globalisation is not evil and access to labour markets will be crucial for economies removing themselves from trading blocs. In markets prone to populism, protectionism is the low-hanging but ultimately poisoned fruit; as Donald Trump will soon find out.

Meanwhile, the financial system is still inherently over-leveraged and exposed to systemic risk, arguably more so than 2007. The lack of competition has made bigger beasts with a higher risk of conflict of interest. Additionally, and perhaps more worryingly, it has facilitated the unholy and unnecessary, alliance of governments and corporates; not least through the bailouts that burdened so many tax payers and furthered sovereign debts.

It is telling that Jens Hagendoff, professor of finance at the University of Edinburgh Business School said on the Lehman anniversary that he saw the current goal as being not to design a banking system in which banks do not fail – “that would never be possible. Banks have failed since the time of the Medicis in Renaissance Florence. The goal is to design a financial system in which banks may fail without endangering the stability of the global financial system. The Lehman bankruptcy has taught us how not to fail a bank. Global regulators are still working on the rest.”

So, will it be another relapse or a recovery that draws the Lehman Brothers chapter to a close? Regulation has risen along with capitalisation and the power of technology everywhere, but many feedback flaws remain in the financial system, not least in the conflicts of interest recently unearthed within the operations of its auditors and in the very housing market that began the domino effect of bad debts in 2007.

If or rather when, another financial earthquake like the collapse of Lehman Brothers does come to pass, will we be then able to recognise a flawed system and the need for fundamental reform? Will we enhance competition, empower tech-driven open banking and target inflation or will there be the same abortive attempt at a solution which just underlines the original flaws by printing money to keep finance internally fluid but not holistically beneficial. In our media age the bankruptcy of Lehman and its difficult progeny continue to cast long shadows.

Alex Matchett is the editor of Glint Perspectives

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