This week marks the ten year anniversary of the collapse of Lehman Bros. It also marks the ten year anniversary of Great Financial Crisis revisionist history.
Let’s cut to the quick … the collapse of Lehman Bros did not cause the GFC; better to think of it as a conspicuous domino in a sequence.
How do we know this? In order to understand this assertion, we need to carefully examine the course of financial events of 2008. In the middle of that year – late June into early July – the value of the dollar began to soar as a wave of deflation of hit the global financial system. Dollar denominated prices went into a precipitous tailspin, over two months before Lehman imploded. This was most obvious in real time markets such as the commodity pits. Oil prices for example had been on fire and topped out at $147 a barrel in early July. At that point oil prices went into freefall. By the time Lehman finally waved the white flag oil was courting double digits in dollar terms, down over 30% in just a couple of months. By the end of that same year oil was trading in the $30s. But it wasn’t about oil … copper prices topped and turned down hard in late June, to be cut nearly two thirds from the peak before the end of the year. World stock prices hit a peak in May and went into decline from there. The Baltic Dry index also turned down and began to plunge mid year. Prices were falling because the dollar was rising so that it took fewer of them to buy the same stuff. Unless you’re prepared to believe there was some kind of spooky metaphysical conspiracy between these disparate entities, you have to look at the one common denominator they all shared – the prices we’re citing were in US dollars. Dollar demand had surged as people and entities around the world were scrambling to cover dollar shorts – debt – that had grown far past their ability to pay. Anything that could be sold for dollars was sold. This was a hair-raising, white-knuckle, deflationary crash. As the dollar soared in value, the shorts – conspicuously including Lehman Bros – were wiped out … not as a cause but as a consequence.
Remember that Lehman was highly leveraged. Boiled down to its essence, it was short dollars, profiting big from their rapid decline in value over the preceding few years. This made it vulnerable in the event of a short covering event in which dollar demand surged and the market value of the dollar along with it.
Meanwhile those of who lived through it may remember that in the middle of that year the giant mortgage GSEs – Fannie Mae and Freddie Mac – got into trouble and were taken into conservatorship on September 6, again before the collapse of Lehman on September 15. These were trillion dollar enterprises and while their story received a lot of attention at the time, the ten year anniversary of their rescue has passed with virtually no media attention. A cynic might wonder whether the narrative has been sanitized in an effort to exculpate the US government and minimize the taint to these entities, which are very popular with Wall Street and the home mortgage industry. After all, they were the conduit through which taxpayers subsidized them. Fannie and Freddie are still in business – along with their powerful constituencies – while Lehman Bros is no longer around to defend itself.
The trail of doomed paper from the subprime mortgage crisis to the financial collapse didn’t begin with Lehman Bros. The point of no return had been passed earlier in the inflation of a mortgage bubble and whose collapse was the true seminal event in sparking the Great Financial Crisis. Whatever it was, it occurred in the middle of 2008, well before the Lehman collapse. Cause precedes effect, not the other way around.