12 Sep Five Years After Lehman

Believe it or not, it was five years ago this week that Lehman Brothers, then one of the largest Wall Street houses, fell apart. In the week or two after the largest bankruptcy filing ever ($600 billion in assets) on September 15, 2008, tremendous fear spread through our economy and financial system. Lehman had significant exposure in the credit market surrounding housing, which was imploding. That pretty much did them in.

The rumors spread a few days later that Goldman Sachs also may not make it. If Goldman were to go down, would the entire economy fall with it? This freaked me out for sure, and it takes a lot to freak me out. Thankfully, Warren Buffet showed confidence by investing $5 billion in Goldman on September 23. Then Congress passed the bailout for the banks known as TARP and everyone began to calm down. Of course the stock market took another 6 months before it hit its low and then started its slow march back to today’s record highs.

TARP, and government bailouts in general, are controversial. The Dodd-Frank Act which followed may ultimately be seen as an over-reaction handing too much power to the government to regulate the largest institutions deemed “too big to fail.” But in the end the worst was averted. Much like Bush Jr. being hit with 9/11 shortly after taking office changing everything, Obama also found himself overwhelmed right from the start. The current recovery is fragile and small and mostly jobless, but it still beats the alternative.