Lehman Brothers Collapses
On 15 September 2008, Lehman Brothers, one of the largest investment banks in the United States, filed for bankruptcy protection after days of failed efforts to find a buyer or secure government support. It remains the largest bankruptcy filing in American history by assets. The collapse turned a worsening credit squeeze into a global panic and is widely treated as the defining moment of the 2008 financial crisis, the most severe since the Great Depression.
Lehman, founded in 1850 as a cotton-trading business in Alabama, had grown into a major force on Wall Street. In the 2000s it expanded aggressively into mortgage-related securities, borrowing heavily to buy and package loans, many of them tied to subprime housing lending. When US house prices began falling from about 2006, those assets lost value and became hard to sell. Lehman's leverage, meaning its high ratio of borrowed money to its own capital, left it with little cushion. Rival Bear Stearns had already been rescued in March 2008 through a deal backed by the Federal Reserve.
Through the summer, Lehman reported large losses and its share price tumbled, while investors and trading partners lost confidence. In the weekend before the filing, US Treasury and Federal Reserve officials convened Wall Street leaders to seek a private solution. Interest from Barclays and Bank of America fell through, and officials said they lacked the legal means or the will to rescue the firm. Lehman filed on Monday morning. Within a day, the Fed lent to the insurer AIG to prevent its failure, a sharp contrast with the decision on Lehman.
The shock spread quickly. A major money market fund, the Reserve Primary Fund, "broke the buck" because of its Lehman holdings, prompting investors to pull funds from similar accounts. Short-term lending between banks seized up, and stock markets fell sharply around the world. Governments responded with extraordinary measures, including the US Troubled Asset Relief Program, bank guarantees and recapitalizations in Europe, and sharp interest rate cuts. A deep recession followed, with large job losses and a eurozone debt crisis in the following years.
Historians and economists still debate whether letting Lehman fail was a mistake or whether it was effectively unavoidable given the firm's condition and the legal limits on officials. Its legacy is clearer in policy: the Dodd-Frank Act in the US, tougher capital and liquidity rules internationally, and an enduring argument over the problem of institutions considered "too big to fail."