Why Is 15th September A Memorable Day For The Global Financial World

Fifteen years back in 2008, the global financial world was shaken by the fall of one of the biggest American financial services firm when, Lehman Brothers, filed for Chapter 11 bankruptcy protection following the exodus of most of its clients, drastic declines in its stock price, and the devaluation of assets by credit rating agencies.

The collapse was largely due to Lehman's involvement in the subprime mortgage crisis and its exposure to less liquid assets. Lehman's bankruptcy filing was the largest in US history, and is thought to have played a major role in the unfolding of the financial crisis of 2007-2008. The market collapse also gave support to the "too big to fail" doctrine.

After Lehman Brothers filed for bankruptcy, global markets immediately plummeted. The following day, major British bank Barclays announced its agreement to purchase, subject to regulatory approval, a significant and controlling interest in Lehman's North American investment-banking and trading divisions, along with its New York headquarters building.

Lehman is the biggest investment bank to collapse since 1990, when Drexel Burnham Lambert filed for bankruptcy amid a collapse in the junk bond market.

What Do We Learn From The Collapse

That, nothing is permanent. The story of Lehman is a tragedy for the house owners caught up in the risky mortgages the bank bet on and for the millions who lost employment and economic opportunities in the grinding crisis that came following that. But for a select group of people, the saga became the defining, even positive, turn in their careers.

In 2023, Banks like Credit Suisse, Sillicon Valley Bank may follow Lehman's suit.

But, this is not the same as what happened in 2008. While it is true that Lehman Brothers, Bear Stearns, Washington Mutual and AIG suffered from poor investments in debt of the US real estate industry, what we had there was very different than what we have now.

For starters, those financial institutions were facing an issue with interbank lending as they were unable to borrow even when rates were effectively zero as the assets that they were holding faced severe credit losses. That is a very different scenario than the one we are facing now as the assets that were being sold were US-government issued or backed securities. So, while the rate hikes have certainly hurt the mark-to-market value of those debt instruments, they are still money-good, according to Corporate Finance Institute.

Secondly, this is not an interbank issue. If it were, SVB would have simply been able to use their US government bonds in their portfolio to guarantee their interbank liabilities or even transfer them to other banks to fulfill their obligations. The situation with SVB is depositor-driven - a classic bank run.
Hence, this is very different from a systematic liquidity crunch for the entire banking sector but rather more limited to a few individual banks.

All in all, what we learnt is over confidence can push event a giant down the road if all facts are not checked.