The Lehman Brothers Mandela Effect
The failure of Silicon Valley Bank highlights our false memory of the last financial crisis
When Silicon Valley Bank failed earlier this month, my first reaction was to compare the venture capital industry’s financial institution of choice to the collapse of Lehman Brothers in 2008. “It’s Lehman all over again,” one of my former trading colleagues said on a phone call later that day.
Of course, SVB wasn’t an investment company like Lehman; it was a regional bank. It wasn’t nearly as large of a business as the bulge-bracket bank, which had 25,000 employees globally. But for some reason, the failure of the country’s 16th-largest bank — its second-largest banking collapse — raised the specter of Lehman Brothers.
Based on the media coverage, laying the lion’s share of the blame for the 2008 crisis on Lehman was much more widespread than I realized.
In the days following SVB’s demise, HDFC Bank chief economist Abheek Barua assured CNBC viewers that SVB wasn’t “a Lehman moment,” implying that the now-defunct investment bank sparked the 2008 financial meltdown.
Around the same time, The New York Post published a piece entitled, “Top Silicon Valley Bank execs worked at notoriously troubled Lehman Brothers, Deutsche Bank,” in reaction to a viral post on social media. It was as if simply hiring a former Lehman employee somehow increased the likelihood of SVB’s failure. Besides being a tenuous journalistic angle, the story was false.
Fairly or not, Lehman Brothers’ bankruptcy bears an outsized share of the blame for causing the financial crisis. The government’s failure to come to the company’s rescue? Not so much. Conventional wisdom is that the investment bank’s collapse was the catalyst for the global financial crash and the subsequent recession.
But in a 2018 article for The Brooking’s Institute, David Skeel, a law professor at the University of Pennsylvania School of Law, challenges what he calls The Lehman Myth:
In the 10 years since Lehman Brothers filed for bankruptcy, debate continues to rage over many aspects of the crisis, such as the question of whether regulators could have bailed out Lehman if they wished to. But a standard narrative about the implications of not bailing Lehman out quickly took hold. According to this narrative, the failure to rescue Lehman was the defining event of the 2008 crisis, the match that started the conflagration. And its consequences show that, under the financial architecture in place at the time, bailouts were the only effective response to the financial distress of a systemically important financial institution.
In my view, this settled wisdom, which I have elsewhere called the “Lehman Myth,” is largely mistaken.
Skeel believes the narrative that Lehman Day, as the day of the bankruptcy has come to be known, sparked the crisis might have more credibility if not for the events preceding the investment bank’s failure.
SVB was more like Bear Stearns than Lehman
During my stint on Wall Street, I experienced the internet bubble, 9/11, and the 2003 blackout. In the lead-up to the 2008 financial collapse, I managed the equity trading desk of a boutique (the Street’s code word for small) investment bank in midtown Manhattan.
One morning in April 2007, I noticed a story about a relatively obscure real estate investment company named New Century Financial. The Irvine, California company was the second-largest issuer of subprime mortgages — risky real estate loans made to borrowers with bad credit.
According to the article, the New Century was filing for bankruptcy. Although I cut my teeth in the mortgage-backed securities business in the early eighties, I'd never heard of New Century or the mortgage product that got them into financial trouble.
Cinephiles may recall that in The Big Short, the 2015 film based on Michael Lewis’s book by the same name, it was New Century’s default, not Lehman’s demise over a year later, that signaled the beginning of the housing market collapse.
In the months following the subprime lender’s bankruptcy, rumors swirled throughout the financial community regarding the soundness of Wall Street banks that invested heavily in subprime mortgages.
About six months before Lehman failed, Bear, Stearns & Company, the smallest of Wall Street’s so-called bulge bracket banks, was on the verge of collapse due to its exposure to subprime mortgages. Skeel describes how differently regulators treated Bear Stearns’ troubles:
After regulators were alerted to Bear Stearns’ impending collapse in March 2008, they dismissed the possibility of a bankruptcy filing. Instead, they arranged for a distressed sale of Bear Stearns to J.P. Morgan Chase. To facilitate the sale, the New York Fed provided $29 billion of assistance. Although the sale price was later renegotiated, the bailout enabled Bear Stearns to avoid default.
If regulators had not bailed out Bear Stearns, the consequences for Bear would have been unpleasant, but the markets and managers of troubled, systemically important financial institutions (“SIFIs”) would have known they needed to prepare for bankruptcy if they fell into financial distress. By bailing out Bear Stearns, regulators sent a very different signal — that they would rescue a major financial institution that threatened to default on its obligations.
J.P. Morgan bought Bear Stearns on a Sunday in March 2008 for $2 a share. When the news broke, my wife and I had just returned from dinner with friends. When the notification popped up on my Blackberry, I thought it was either a misprint or the result of too much wine.
A few days later, J.P. Morgan upped the purchase price for Bear Stearns to $10 a share. Pre-crisis, Bear Stearns had a 52-week high of $133.20 a share.
Weeks before Lehman Day, a colleague and I had a meeting at Lehman’s gigantic midtown Manhattan office. By then, most investment banks had stopped trading with Lehman, although no one would say so publicly. The company’s clients were siphoning cash from their accounts. Effectively, a slow-motion run happened to one of the world’s oldest and largest investment banks.
That visit to Lehman, my last before the company went under, was one of my saddest business experiences. It was like attending a funeral for someone who didn’t realize they’d passed away. Everyone we encountered that day seemed to be waiting for a bailout that would never come. And why wouldn’t they? A much smaller firm was bailed out a few months earlier.
On September 15, 2008, Lehman Brothers, an investment bank founded before the Civil War, filed for bankruptcy. The next day, the Fed rescued insurer AIG in an $85 billion bailout. In the following months, there was an economic collapse not seen since the Great Depression. It was a bloodbath.
To be sure, Lehman Brothers played a role in the financial crisis, but the bank’s failure wasn’t where the contagion began. That’s what makes comparing SVB to Lehman so absurd. Regulators left Lehman in the lurch, but SVB received what could arguably be seen as a bailout — at least in the case of its depositors.
But a “Mandela Effect” surrounds Lehman’s role in the Great Financial Crisis, a collective misremembering of what really happened.
It’s the same memory hiccup that makes us believe Humphrey Bogart said, “Play it again, Sam,” in the movie Casablanca, when no one in the film actually says it; what makes us think the Monopoly Man wears a monocle when he does not.
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And yet as a nation we are still addicted to having so much power and wealth consolidated in one place. It's like we haven't learned a damn thing.