Lehman Brothers fall fifteen years ago still reverberates today

by Zain Jaffer

On September 15, 2008, Lehman Brothers, the fourth largest Wall Street investment bank at that time, filed for bankruptcy and threw thousands out of work after it had exhausted efforts to sell off its toxic subprime mortgage assets to institutional investors. Its story and the subsequent near collapse of the global financial system has been told in several popular Hollywood films like The Big Short, 99 Homes, Margin Call, and others.

Wall Street had realized years before that they could make money from bundling thousands of US home mortgages that were generating cash flows, get the SEC to securitize it and get an AAA stamp of approval from the ratings agencies like Fitch, Standard & Poor’s and Moody's.

Theoretically they were right, except that in the flurry of sales activity and handsome commissions paid to agents, they had neglected to guard against the fact that many of the mortgages in these instruments were issued to No Income, No Job and Assets (NINJA) applicants. Since there were so many who benefited from these commissions, they conveniently looked the other way.

We all know the ending. Astute observers like Dr. Michael Burry and other hedge funds looked at the underlying mortgages, found the instruments to be junk rated instead of AAA, and shorted these instruments. They made their pile of money, and the rest of the world’s financial system almost collapsed, including those who created synthetic derivatives and insured these from default like AIG.

Fifteen years later we seem to have learned our lessons. Over leveraged individuals, projects, and companies are in trouble now because of high interest rates that require higher payments. A looming recession is helping to cut back on overvalued risk-on assets, although as of mid September 2023, Price to Earnings (P/E) ratios on tech stocks like ARM, Nvidia, are still extremely high given that future earnings have a lower present value at current interest rates.

But have we really learned the lessons of September 2008? Right now we see real estate firms pushing one percent down payment mortgages to homebuyers just to survive. Many people are hesitant right now to take on the 7.5% average interest rate on the thirty year Fannie Mae or Freddie Mac mortgage, which basically doubles the monthly payments due each month from the pre-Fed rate hike rate of roughly 3%.

Some are being cajoled to even delay paying their student loans for a while to go ahead and sign up for a mortgage at this time. Really aggressive sales tactics.

Personal savings from the pandemic CARES Act stimulus checks are almost gone now. Instead many of us are now relying on credit cards to sustain us. Unfortunately we have exceeded the one trillion dollar level on credit card debt, and rates are now at 20% or higher.

So for those paying a car loan, 20% interest credit card loan, student loan, and the 7.5% mortgage, many of them are now in dangerous Debt to Income ratios, meaning that they are just paying off their loans, buying their food, paying their electricity, water, and basics, and saving very little each month.

Some aren’t actually saving anything at all. Worse, some are entering into dangerous delinquency payment territory, and actually defaulting.

In the midst of this comes mortgage sales tactics like one percent downpayment and balloon payments. Sure these people have income and a job, but with a recession looming and high interest rates at play, a high percentage of these buyers will default. Just because the industry wants people to sign up.

So the question now is, have we really learned the lessons of Lehman’s crash in 2008? It doesn’t appear so.