- The demise of Lehman Brothers, the bailout of AIG, and the sale of Merrill Lynch in the span of a few days in 2008 unmasked the economy for what it was.
- These events heralded – or perhaps even triggered – the global financial crisis, but their impact was far greater than that.
- The events of 2008 brought angry Tea Partiers to Congress, and a new form of right-wing populism was born – paving the way for Donald Trump’s presidency.
On Sunday evening, September 14, 2008 at 8 p.m., I sat in the CNN International studios at Columbus Circle in Manhattan to comment live as Asian markets began their trading day on Monday.
We were in the midst of yet another set of dramatic upheavals in the global financial landscape. This particular weekend saw the demise of Lehman Brothers (and, as added surprises, the bailout of global insurer American International Group and the sale of Merrill Lynch), but the situation felt eerily routine by that point.
Some believe, even today, that the events of 2008 were notable because they heralded (or even triggered) the global financial crisis, exacerbated the already-in-progress Great Recession, or were the inevitable comeuppance for years of fraud and abuse by the large financial institutions.
While all true in some respects, they miss a bigger point – 2008 presaged the full-on deterioration of western economies and domestic political discourse in the US and Western Europe. The shifts in the global economy impacted the working households of these advanced economies led to the credit bubble and the crash and the disillusionment and economic disenfranchisement of millions. It also led to wholly unexpected phenomena: the Tea Party, fiscal austerity politics in the US and Europe, the rise of populism on both the left and the right, and ultimately to the rise of Donald J. Trump.
By the time “Lehman Weekend” rolled around, the financial markets had already experienced the unthinkable. The investment bank Bear Stearns has its own “weekend” in March of 2008, which devolved into a shotgun wedding to J.P. Morgan Chase (with the government holding the gun at the altar) in the space of 48 hours.
Only ten days before I went live to Asia with the Lehman news, on September 5, 2008, the federal government had placed the US mortgage giants commonly referred to as Fannie Mae and Freddie Mac into conservatorship– effectively nationalizing the two nominally private sector behemoths that had long supped on implicit government backing.
Additionally, that very morning, Merrill Lynch was bought out by Bank of America, at a whopping 70% premium to its market value. It was a side deal of sorts, without the government doing much more than providing its blessing of a transaction that raised eyebrows on Wall Street but eliminated a potential run on Merrill in the aftermath of the Lehman debacle.
After bearing witness to so many prior financial funerals, in the sterile calm of the modern electronic newsroom, announcing to the first-opening markets in the world that the US government and financial sector had just allowed Lehman to file for bankruptcy and had bailed out the largest insurer of garbage derivative securities (AIG’s failure was a bigger systemic threat than Lehman’s as a practical matter) seemed almost rote.
Step one: State the facts as we knew them (“the government had no legal basis or stomach to nationalize a private investment bank”). Step two: Provide some hope (“this would not itself be the end of the world”) and some cautionary notes (“the enormous losses piling up in the financial system required more aggressive action to avoid a downward spiral”). The words were familiar.
But the situation was far worse than anything I was able to express in a few minutes of television banter. A few of us who had been studying the credit bubble and writing on the roiling crisis since 2007 saw the writing on the wall quite clearly. Most of the rest of the world – many in the financial markets and certainly those in government – entered Lehman weekend almost completely unprepared for what was to come and oblivious to the larger origins of the crisis.
After all, there was still an absence of general consensus, in September 2008, that the enormous bubble in housing prices was driven by excessive and often fraudulent lending practices of large financial institutions and the gullible pension funds, insurance companies, and the like that bought their mortgage-backed securities. Connecting these events to the global secular shifts and systemic links that underpinned the global financial crisis was virtually unheard of at the time.
A “global savings glut” had entered the economic lexicon by the mid-2000s. Outsourcing by American manufacturers and the dramatic loss of high-quality production jobs in the US were certainly on the minds of the intelligentsia, if not yet the electorate. But the ties between the credit bubble and the financial crisis on one hand, and the tsunami of low-cost global labour, production, and excess foreign capital on the other, was years away from being generally understood by economists and policymakers. In 2008, the connection between these factors and the emergence of a financially impaired and fearful electorate had yet to be so much as broached in mainstream economic discussion.
The bleeding of good jobs from the US economy, sluggish economic growth, and dramatically rising wealth and income polarization were well masked by the doubling of household debt in the years before the crisis at the low interest rates delivered by enormous foreign demand for US treasury securities.
But it was all there, waiting to be unmasked on that Sunday in September 2008.
Ten days later, Treasury Secretary Henry Paulson took to bended knee before Speaker of the House Nancy Pelosi, imploring her to pass the $US700 billion Troubled Asset Relief Program which, in its ultimate iteration, bailed out the US banking system with almost no strings attached and with no senior bankers held accountable for seemingly endless incidents of financial fraud and malfeasance.
Fifty days later, America elected Barack Obama as president, with a decisive and historic mandate to clean house after eight years of Republicans delivering the US into endless foreign wars and domestic financial ruin.
Yet the economic and financial house was never cleaned, even as the US lost 8.8 million jobs, saw 31.4% of homes with mortgages fall to values below their outstanding mortgage debt, and household savings were dissipated.
208 days after Lehman Weekend, Americans were furious about government bailouts of financial institutions, and mortgage relief to homeowners was being provided by the government rather than lenders recognising losses. CNBC’s Rick Santelli stood on the floor of the Chicago Mercantile Exchange to call for a Boston Tea Party redux, a meme that disgruntled citizens and conservative policy groups around the nation latched onto almost immediately.
The midterm elections two years after Lehman Sunday brought those angry Tea Partiers to Congress and a new form of right-wing populism was born. The left-wing populism of Bernie Sanders, equally and understandably furious, followed, with his announcement that he was running for president in May 2015. One month later, Donald Trump descended the golden escalator of Trump Tower to announce his unlikely bid for the same office, with the backing of many of the same voters who delivered the Tea Partiers.
I didn’t see those things coming in September 2008, though perhaps I should have.
Daniel Alpert is the founding managing partner of the US investment bank, Westwood Capital, LLC, an adjunct professor of law of Cornell Law School, and a senior fellow in financial macroeconomics at Cornell’s Jack G. Clarke Business Law Institute.
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