Five years ago this week, Lehman Brothers filed for bankruptcy and the financial and housing crisis ensued. With home prices falling and lending among banks frozen, it was the worst panic on Wall Street since the Great Depression in 1930. Lehman failed largely under the weight of risky real estate investments and an inability to finance its operations because it borrowed too much money.
Five years later, have we learned anything since the Lehman failure? Are banks safer today? Is housing entering another bubble?
The collapse of Lehman on Sept.15, 2008, was the domino that led to the implosion of Merrill Lynch, American International Group (AIG), Countrywide Financial and the near collapse of Goldman Sachs and Morgan Stanley. Lehman’s toppling ushered in the federal government’s $700 billion Troubled Asset Relief Program to bail out the major banks.
A week before Lehman came tumbling down, the feds nationalized Fannie Mae and Freddie Mac to the tune of $150 billion. And the Federal Reserve launched a massive $85 billion a month bond-buying policy — cleverly called quantitative easing — aimed at inflating both the stock and housing markets. The question remains: How does the Fed turn off the QE spigot? Once the Fed starts to taper off its bond-buying policy will mortgage interest rates shoot up and harm the nascent housing recovery?
The U.S. financial world — and America’s housing markets — changed forever after the Lehman debacle. More than 4 million homeowners lost their homes to foreclosure, while the housing bust has left 10.7 million homeowners deeply underwater — despite the recent increases in home prices. Hundreds of banks went belly-up. Thousands of financial services jobs vanished. Unemployment skyrocketed. And housing prices plunged.
Five years after Lehman’s collapse set off a global financial crisis, the U.S. economy is on the mend but remains far from fully healed. Surprisingly, the biggest Wall Street banks are far larger today than they were then. Housing prices are rising, but millions remain underwater. Unemployment is slowly improving, but millions of displaced workers have abandoned the job market altogether. And with the federal government largely involved in every aspect of the housing financial arena, the markets remain nervous about the recovery’s ability to stand on its own without trillions of dollars from the Federal Reserve.
Happy fifth birthday, born-again Wall Street.