In the age of turbulence that we live in, collapsing banks and unstable financial institutions are not an unusual sight. However, when Lehman Brothers filed for bankruptcy on Monday, The Wall Street recorded its worst day of trading in the last seven years after the 9/11 attacks. Comparisons are already being made with the Great Depression of the 1930s. Shaken by the news, major global investment banks decided to set up a 70 billion dollar emergency fund to prevent meeting the same fate. Former Fed Reserve chief Alan Greenspan has described it as a once-in-a-century event.
When the group of Lehman brothers started selling cotton in the 1850s, few would have thought that this group would one day generate a tsunami of panic in the world markets. A hundred and fifty years down the line, stock markets and shareholders all over the world are trying to grapple with the enormity of the collapse that they have witnessed. Economic giants like Germany, Italy and Japan are busy with their account books, trying to figure out what the downfall means for them.
It is not just the bare fact of the collapse of the investment bank that has rattled the world; it is the stunning manner of its collapse. For months now, Lehman brothers was rumoured to be in troubled waters. However, no one had an idea about how deep the crisis was. Many assumed that in the worst case, the US Treasury would rescue the company using taxpayer’s money. There were many who argued that Barclays or the Bank of America would probably buy out Lehman, just as Merrill Lynch was saved by the Bank of America. Sadly enough, no knight in shining armour appeared to rescue the bank, and after 158 years of stellar performance, Lehman Brothers finally shut shop.
In recent times, Lehman Brothers had not been the colossus that it once used to be. Richard Fuld, CEO of the group, had reportedly pulled all stops to save the bank to which he had devoted his life for the past fourteen years. Finally, when the US Treasury Secretary, Henry Paulson, point-blank refused to have anything to do with Lehman, the shock was both economic and psychological. As the Dow Jones Industrial Average performed a nosedive, shareholders all over the world were left to wonder if things could get any worse.
The reason why the fall of Lehman Brothers has hogged media headlines all over the world is not just because it lost ninety three percent of its share value in one day; it is because when the fourth largest investment bank in the world goes bankrupt, it is time to question the credibility of a banking system that has been marred by regular crises in the last year. Whether it is Bear Stearns or Fannie Mae or now AIG and Lehman, the last year has exposed Achilles heel of the US banking system. Its sheer vulnerability and volatility has been brought to the fore. And the scary fact is that there are no shock absorbers to deal with such crises; all that one can do is stand by and watch, as Goliaths collapse.