It all began some time ago and concluded in 2008. That year, Lehman Brothers filed for what is perceived as the biggest bankruptcy in US history, if not the world (for more info on this, do visit www.lehman.com which will tell you precisely what I just mentioned to you — “Lehman Brothers Holdings Inc. has filed for bankruptcy protection in the US.”).
As an investment bank, Lehman Brothers had no limits on where it could invest or where it could emphasise its presence. This is why the crunch was felt by everyone.
And this is also why the effects of such a bankruptcy went beyond any limits that anyone had expected or foretold. It was all about exposure, and Lehman Brothers were pretty much exposed, in the poorly diversified meaning of it.
The story goes thus. Lehman Brothers were looking for new and cool stuff to invest in. For that, finance guys had “the thing” for them. What they did was that, after realising how safe mortgages can be and how committed people are to paying them, they started listing all unsafe mortgages.
That is, they pooled all mortgages into one big investment pool, issuing bonds or investment certificates on those and selling them to all interested risk-takers. Theoretically, the risk was underestimated and many thought that the combination of all would make the investment sound enough.
When people defaulted, as they were most likely going to default sooner or later, there was a problem. The more defaults, the worse the situation got as banks couldn’t get their money back nor pay the interest on whatever bonds held by investment banks and individual investors.
And this went on. Lehman Brothers were too exposed which in fact brought them down.
Financial markets are so well connected, which can be for the good and the bad, right?
And companies that invested with Lehman got affected, countries that Lehman invested in got affected, and companies that partnered with Lehman were affected. Almost everyone else got affected too.
Lehman Brothers filed for bankruptcy — the norm to protect partners and introduce changes for future survival if any could be achieved. The bankruptcy of companies and individuals, the value loss of stock markets, the high unemployment rates and close to 0 interest rates are all repercussions of the Lehman Brothers’ bankruptcy in one way or the other.
A couple of weeks ago, there was a piece on whether or not we will see such a bust any time soon and it was assumed that there won’t be such a thing at least in this decade. The interesting part was the analysis on what the new big bankruptcy would be and where.
China seems okay, except for the small bubbles in real estate markets as more Chinese move into the middle-class ranks. The US is said to be safe too because of improved financial rules that were synchronised with global rules to ensure that certain loopholes were closed.
Anyways, Japan also seems to be doing alright along with other countries in Central Asia. Europe’s case, though, is dubious.
Despite the hardship and austerity measures imposed, there have been no major changes to financial rules. Also, the ECB doesn’t seem to enjoy the luxury of imposing a one size fits all interest rate, like the Fed, without having to deal with problems in individual countries.
Now the last thought that I want to leave you with is this: can the world afford such a big bankruptcy again in the near future? (not in the next seven years, of course...)
— The writer is a commercial consultant and a commentator on economic affairs. You can follow him on Twitter at www.twitter.com/aj_alshaali.