Welcome back to "This Day in American History." I'm your host, Chuck Tanraty. Today, we’re going to discuss an event that sent shockwaves through the global financial system and marked a pivotal moment in the 2008 financial crisis: the bankruptcy of Lehman Brothers Holdings Inc. on September 15, 2008. This was the largest bankruptcy in U.S. history, a collapse that highlighted the fragility of global finance and became a symbol of the Great Recession. Let’s dive into the events leading up to this moment, the impact of the bankruptcy, and its far-reaching consequences.
Lehman Brothers was founded in 1850, and by the 21st century, it had grown into the fourth-largest investment bank in the United States. With its roots in commodities trading, the firm evolved over the decades into a global powerhouse involved in investment banking, equity trading, and fixed income. However, by the mid-2000s, Lehman became heavily exposed to the U.S. real estate market—specifically, the subprime mortgage sector.
The early 2000s saw a massive boom in housing markets, fueled by an expansion of credit and loose lending standards. Lehman Brothers, like many other financial institutions, bet big on the housing market. The firm packaged subprime mortgages into complex financial products known as mortgage-backed securities (MBS) and collateralized debt obligations (CDOs). While profitable during the boom, these financial instruments became toxic once the housing bubble began to burst.
By 2007, signs of trouble were emerging. Home prices began to decline, and homeowners started defaulting on their loans. The value of mortgage-backed securities plummeted, eroding the balance sheets of banks that had invested heavily in them. Lehman Brothers, more than most, was exposed to this downturn. It held vast amounts of mortgage-related assets, and as these assets lost value, so did the firm’s stability.
Throughout 2008, Lehman’s troubles deepened. In March of that year, Bear Stearns, another major investment bank, was rescued by JPMorgan Chase with assistance from the Federal Reserve. That event signaled how fragile the banking system had become. Lehman, facing massive losses, scrambled to find a solution. The firm attempted to raise capital, sell assets, and even sought buyers. There were talks with potential buyers, including Bank of America and Barclays, but no deal could be finalized.
As Lehman’s stock price collapsed, its credit rating was downgraded, and counterparties began to pull away from doing business with the firm. By September 2008, Lehman was on the brink of collapse, with billions in losses and no lifeline in sight. On September 13, in a last-ditch effort, government officials, including then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, convened a meeting with the heads of major Wall Street firms to discuss a rescue plan for Lehman. Unlike the Bear Stearns bailout earlier that year, the government refused to step in to save Lehman Brothers.
Unable to find a buyer or secure additional capital, Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. With over $600 billion in assets and liabilities, it was—and remains—the largest bankruptcy in U.S. history. The immediate fallout was catastrophic. The global stock markets plummeted, credit markets froze, and panic set in as investors and institutions grappled with the implications of such a massive failure.
The collapse of Lehman Brothers is widely considered the tipping point of the 2008 financial crisis. In the weeks and months that followed, the U.S. government took unprecedented steps to stabilize the financial system. The Federal Reserve and the Treasury Department intervened to rescue other major institutions, including AIG, and Congress passed the $700 billion Troubled Asset Relief Program (TARP) to provide emergency funds to stabilize the banking sector. Despite these efforts, the economy plunged into the Great Recession, a global downturn that led to millions of job losses, foreclosures, and a significant contraction in economic activity worldwide.
The Lehman bankruptcy revealed systemic issues within the global financial system, including excessive risk-taking, inadequate regulation, and a lack of transparency in financial markets. It sparked intense debates about the role of government in regulating financial institutions, and in the aftermath of the crisis, significant reforms were enacted. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law, aimed at preventing future crises by increasing oversight of the financial industry, improving transparency, and reducing the likelihood that any single institution could become "too big to fail."
While Lehman Brothers no longer exists, the lessons of its collapse continue to influence financial policy and regulation. The crisis it precipitated has had a lasting impact on how we understand and manage systemic risk in the global economy. To this day, the downfall of Lehman Brothers serves as a stark reminder of the dangers of unchecked financial speculation and the interconnected nature of modern economies.
Thank you for joining us on today’s episode of "This Day in American History." I’m your host, Chuck Tanraty, and I hope you’ll tune in next time as we explore another moment that shaped the history of the United States. Stay curious, and see you soon.
September 15, 2008 - Bankruptcy of Lehman Brothers