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One Year after Lehman: It's Business as Usual Again for Wall Street's Casino Capitalists

By SPIEGEL Staff

One year after the bankruptcy of US investment bank Lehman Brothers, governments are divided over what lessons should be learned from the crisis. But the more the economy recovers, the less desire there is to implement radical reforms -- and many bankers have already returned to their old casino capitalism ways.

Everything moves faster on Wall Street, whether it's winning, losing -- or forgetting.

On New York's Seventh Avenue, between 49th Street and 50th Street, there is no evidence today to suggest that this is where the investment bank Lehman Brothers had its offices until a year ago.

The digital screen that encircles the front of the building has been reprogrammed, to reflect the change from the past to the future. The background color is now blue instead of green, and the name on the screen is no longer Lehman Brothers, but Barclays Capital, the building's new owner. The financial world hates losers.

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Photo Gallery: The Party Continues on Wall Street

The bank, founded by three German immigrants, existed for 158 years. It survived the American Civil War, two world wars, the Great Depression and the terrorist attacks of Sept. 11, 2001.

Lehman Brothers quickly grew from small to big and then, in furious bursts, mushroomed from big to too big. Finally, in the night between Sunday and Monday, Sept. 15, the deeply traditional firm collapsed.

In the end, there were more risks than assets on Lehman's books. Its bankers' good sense had been trumped by greed. The blend of brilliance and arrogance, ambition and megalomania typical of the industry had proven to be fatal.

Calling the President

Investment bankers are known for their extreme ideas, so it comes as no surprise that Lehman employees believed in the impossible until the very end. In that dramatic night, they persuaded George Walker to put in a call to the president at the White House.

In addition to being the head of Lehman's investment management division at the time, Walker is a second cousin of then-President George W. Bush. "You have to make it clear to him what will happen if $6 billion in credit default swaps, $30 billion in leveraged loans, $40 to 60 billion in residential mortgage-backed securities and another $30 to 40 billion in commercial mortgage-backed securities suddenly go up in smoke," one colleague urged Walker.

Walker reached for the phone, dialed the White House and said that he had to talk to the president, explaining that he was his cousin.

The White House operator placed Walker on hold. After a few anxious minutes, the operator cheerfully informed him that the president was unavailable at the moment.

Lehman Brothers' last outrageous idea had failed. Overnight, a real estate crisis had turned into a global financial earthquake.

Shaking in Terror

Until the morning of Sept. 15, 2008, the demise of an investment bank was considered an impossibility. Surely the masters of the universe couldn't die -- or could they?

The collapse of Lehman Brothers came as a shock to everyone in the financial district. As Wall Street looked on in horror, the flow of money dried up. Before long, what had begun as a tremor at the epicenter of global finance became something that those involved could no longer control without outside assistance. Greed had turned into fear. Bankers who until recently had delighted in taking risks suddenly found their hands shaking in terror.

It became clear that the powerful of the financial world were powerless to cope with the risks that had accumulated over the years. Most of all, it was suddenly apparent that their perceptions of those risks had been completely unrealistic.

"Bear Stearns' balance sheet, liquidity and capital remain strong," said CEO Alan Schwartz back in March 2008, while Alan Greenberg, chairman of the bank's executive committee, called liquidity rumors about the company "totally ridiculous." About a week later, competitor JPMorgan Chase acquired the bank in a deal backed by generous federal funds.

In the summer of 2008, Deutsche Bank CEO Josef Ackermann said that there were no systemic risks in the global financial system. Lehman Brothers imploded a short time later.

Apparently even the head of Lehman Brothers failed to recognize the internal crisis within his company until it was too late. Only a week before the collapse, he rebuffed a takeover bid from a Korean bank, arguing that the offer was too low.

Darkest Chapter

One year has passed since that dramatic night in September when Lehman Brothers collapsed once and for all. The people involved wrote history: the darkest chapter in economic history since the Great Depression 80 years earlier.

Since then, the world has suffered an estimated $15 trillion (€10.3 trillion) loss of wealth, or about 35 times the German national budget. Entire countries -- most notably Iceland, but also Hungary and Latvia -- have teetered on the brink of collapse. The International Monetary Fund (IMF) has already pledged twice as much in aid to ailing countries as it lent to nations affected by the Asian financial crisis in the mid-1990s.

Although its onset was delayed, the ensuing social crisis was all the more relentless, spelling the loss of 59 million jobs worldwide and up to 850,000 monthly additions to the unemployment rolls in the United States alone. Now that its scrapping premium program to stimulate car sales has expired, Germany is also expected to see a sharp rise in unemployment, especially when benefits associated with state-supported short-time work programs come to an end.

Today, the failure to rescue Lehman Brothers is widely viewed as the last serious blunder of the Bush era, a period already rife with mistakes. After that, both the US government and the US Federal Reserve quickly shifted into hyperactive mode, nationalizing banks, acquiring worthless real estate and pumping more money into the economy than ever before in history. In the United States alone, the Fed and the government have already made about $11 trillion available to save the economy -- roughly the equivalent of all US corporate earnings in this century.

These efforts have helped soften the shock waves of the global financial upheaval in recent months. Although there is still rumbling within the global economy, governments and central banks have managed to avert the complete collapse of the economic system -- so far.

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© SPIEGEL ONLINE 2009
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Graphics: Trans-Atlantic Trauma


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