September 15, 2008 wasn’t the day the world’s financial house caved in.

It was the day the world discovered that termites, which included everything from banks “to big to fail” to thousand of subprime borrowers to vampire squid, had been chewing on the wires, and eating their way through the infrastructure and chipping away at the world’s economic foundation. It was the day it began to dawn on the world just how bad the situation was. It was day that Lehman Brothers, a 158-year-old company with assets of $639 billion, filed for bankruptcy, the largest such liquidation in US history.

It will be five years next Sunday since Lehman’s brother crashed. Just why the investment bank was forced to shut its doors takes a little bit of history that goes back to the days of then-US Federal Reserve Chairman Alan Greenspan’s easy-money policies. The Fed has kept interest rates between 4 and 6 per cent for most of the 1990s, but on December 10, 2002 in brought the rate down to 1.25. One of the effects of this was a boom in homes loans. Suddenly it seemed that anyone who had a job could afford to buy a home, regardless of past credit history. These were the seeds of the US housing bubble and the subprime crisis.

Rates stayed low until 2004, when faced with the prospect of inflation, the Fed began to raise them. By 2005, the rates had jumped to 5.25 per cent. The effect on home owners, especially those with variable interest rates loans, was devastating. Home buyers who should have never qualified for loans (subprime borrowers) could no longer afford to make their monthly payments and home foreclosures skyrocketed.

The subprime crisis would have been bad enough for the US economy, but the creative financial minds at the country’s largest financial institutes, seeking to take advantage of the booming property market, made it worse. They had been “securitising” the income from mortgages they held and selling them as investments. By 2008, the effect of foreclosures on these securities was catastrophic and these securities failed to pay off. In the second quarter, Lehman lost $2.8 billion and was forced to sell $6 billion in assets. By September 15, it has debts of $619 billion in addition to $155 billion in bond debt.

Timothy Geithner, Governor of the Federal Reserve Bank of New York and the person who orchestrated a bail out of Bear Stearns in March of that year, called a meeting to decide the future of Lehman Brothers. The decision to let the bank fail has been much criticised, as Lehman Brother’s status as the first major fatality of the subprime crisis arguably made the Global Financial Crisis worse. It would not be the last, either. Over the next month, Merrill Lynch, Fannie Mae and Freddie Mac, Washington Mutual, Citigroup and AIG would also all either fail, be acquired or face a government takeover.

The events of those months in the Fall of 2008 are still being felt today. They lead directly to the Great Recession and the European Sovereign Wealth crisis. So for the next week Gulf News will be revisiting these events and how their effects were felt around the world, and especially here in the UAE.