Today is the 10 year anniversary of Lehman Brothers’ bankruptcy (the largest bankruptcy in the history of bankruptcies), which triggered the crash of the global economy!
I remember thinking that today that we might soon be living in a world of anarchy and chaos, marking the end of civilization as we knew it. It was a very scary moment, but it’s good that it didn’t happen. And because of that, I’m able to share with you some of my most memorable moments working as an investment banking analyst at Lehman Brothers, including:
* Sneaking into Stanford University and scoring a job at Lehman Brothers
* How Lehman Brothers’ conservative dress code and culture sparked my creativity and interest in entrepreneurship and fashion
* Smuggling beer in duffel bags and organizing secret weekly happy hours inside of Lehman Brothers
* Why I left Lehman Brothers 80 days before it went bankrupt
Even though Lehman Brothers is gone forever, I will always still remember the simple life lesson as to why this all happened. Banks like Lehman Brothers failed to follow the golden rule: “do unto others as you would have them do unto you.” Banks did not treat their customers or their investors the way that they would have wanted to be treated.
What happened was in the years prior to Lehman Brothers’ bankruptcy, banks found new ways of increasing revenues by lowering their loan qualification standards for homeowners by creating “subprime loans,” and marketing these loans to lower income and riskier “unsophisticated borrowers”. Because of this, previously unqualified people become now became qualified borrowers, and these borrowers used their loans to buy homes they really could not afford in the long run (“subprime loans”). Banks knew it was a long-term risk for these people to take on that debt but still sold it to them because of the short-term revenue they generated for each mortgage they sold. Because of this increased demand from new home buyers, home prices became artificially increased, which then made even more homeowners feel more wealthy, and gave even more people the confidence to borrow more money against the inflated value of their homes (which created even more debt in the form of “home equity loans”). As this was happening on a mass scale across the U.S., banks like Lehman Brothers were compiling, bundling, marketing, and selling these loans (called “mortgaged-back securities”) to investors who wanted a piece of this booming real estate market, and banks like Lehman Brothers were generating even more revenue by selling these securities to investors. This was happening for years, and bank profits were going up and up as the market kept booming, until this booming real estate bubble came to an epic, apocalyptic bust with the bankruptcy of Lehman Brothers.
The bankruptcy triggered an intense fear that the failure of Lehman Brothers would cause other major banks to fall like a stack of dominos in a major seismic wave, which would completely collapse the financial and economic world as we knew it. I did not work in the real estate division at Lehman Brothers, as there are hundreds of different divisions within a global investment bank, but it was because of the decisions made by this part of the firm that ended up destroying the company and the world’s economy.
And yes, this could have all been avoided.
Borrowers, homeowners, and investors should have all been treated the same way the banks should have wanted to be treated. When the banks didn’t don’t do that, and they were taking short-term value without properly giving long-term value, the world eventually corrected itself. And in this case, it was an extremely dramatic and cataclysmic correction. In business, it’s difficult to refuse new ways of generating revenue, and it is always important to do new things to stay ahead of the competition. But at the same time, it’s vital to always analyze how that new shorter-term business opportunity stacks up against its longer-term societal impact.
Lehman Brothers was a global prestigious investment bank that had been in business for over 150 years, and avoiding events likes these in the future should not be complicated. All we have to do is treat others the way we would want to be treated. Even though it was 10 years ago, the lesson of the collapse of Lehman Brothers is still extremely timely and relevant to the consequences of what may happen when we don’t follow the golden rule.
