(BFM Bourse) – On September 15, 2008, the investment bank Lehman Brothers went bankrupt. If this event had caused a shock wave in the financial ecosystem, some had felt the tide turning a few months earlier. Even several years in advance for the most inspired.
15 years ago, on Monday September 15, 2008 at 1:45 a.m., the investment bank Lehman Brothers was officially declared bankrupt. This unimaginable scenario marked the start of a deep banking crisis that spread across the entire global economy. This resounding bankruptcy also left its mark on the financial markets.
In Paris, the CAC 40 ended down 3.78%, weighed down by its banking compartment, on the front line of this earthquake. In New York, it was the worst day for American indices since September 11, 2001. On the occasion of this fifteenth anniversary, the editorial staff of BFM Bourse looks back on the players in the financial sector who had predicted and anticipated this event which will forever mark the history of finance.
Nouriel Roubini or “Dr. Doom”
The most famous is undoubtedly the American-Turkish economist Nouriel Roubini, nicknamed “Dr Doom” (Doctor Apocalypse). He mainly owes his reputation to the fact that he had mentioned a real estate crisis as early as 2006. On September 7, 2006 exactly during a conference organized at the International Monetary Fund (IMF). He mentioned, in front of an audience of economists, a set of risks hanging over the American economy and that a crisis was looming. “In the months and years to come, the United States was likely to face an unprecedented housing crisis, an oil shock, a sharp decline in consumer confidence, and ultimately a profound recession,” he warned.
As he spoke, the bleak outlook became more and more detailed: homeowners defaulting on their mortgages, trillions of dollars in mortgage-backed securities leading to the collapse of the global financial system. The collapse of this domino would paralyze or destroy hedge funds, investment banks and other large financial institutions…
When these perspectives were announced, the audience was rather skeptical, while the moderator of the event, also unconvinced of Nouriel Roubini’s prophetic announcements, said: “I think we may need a good refreshment after that.”
A year after this notable intervention, that is to say in the summer of 2007, Janet Yellen, who was at the time president of the Federal Reserve of San Francisco, asserted (as reported by Agefi Dow Jones): “There is a challenge we are a scarecrow and it is the real estate sector”, while the most vulnerable households could no longer repay their real estate loans. The sequence of events proved him right.
As for Nouriel Roubini, “he looked like a madman in 2006”, explained to New York Times, Prakash Loungani, economist at the IMF, who had invited Roubini on several occasions. “But he had become a prophet when he returned in 2007,” during a new conference at the IMF, he added.
David Einhorn, a thwarted spy
David Einhorn could have pursued a career at the CIA but ultimately opted for finance. He joined the investment bank Donaldson, Lufkin & Jenrette in 1991 after successfully completing his studies at Cornwell University. Five years later, in 1996, David Einhorn created his investment fund, Greenlight Capital. In 2002, he tried his hand at the art of short selling and bet against Allied Capital, a private equity firm.
If this conviction initially played tricks on him, to the point of attracting the wrath of the SEC – the American financial policeman -, the outcome was favorable to him five years later. In 2007, the SEC investigated Allied and found it guilty of fraud.
David Einhorn’s battle against the Goliath Allied Capital was a trial run. His most famous masterstroke remains against Lehman Brothers. As early as May 2008, he announced that the bank was taking too many risks. In June 2008, the New York Magazine even wondered “Why did David Einhorn publicly attack Lehman Brothers?”. Three months later, Lehman Brothers collapsed. David Einhorn won a little over a billion dollars with this audacious bet.
Among his other feats of arms, this Wall Street star led a revolt against Apple in 2013, urging the apple brand to be more generous with its shareholders. Confident in his forecasts, he even bet in 2014 on a collapse of the French debt, estimating that “France looks like[ait] more to Greece than to Germany”… We cannot be right every time.
Michael Burry, the bubble chaser
Michael Burry is what you might call a bubble spotter. It was in 2000 that this medical graduate and trading enthusiast set up his investment fund called Scion Capital, with $30,000 in his pocket. And from the start of his adventure, his bets against technological stocks paid off, the bursting of the Internet bubble having happened there.
Then in 2005, Michael Burry changed his target and focused on the mortgage loan market. At the beginning of the 2000s, American households were encouraged to take on debt to become homeowners thanks to cheap credit and this increased the price of goods. However, Michael Burry noted that variable rate loans were granted to a financially fragile public. Convinced of a collapse of the mortgage market in the “two to three years to come” with real estate prices which were no longer going to increase, Michael Burry bet on the fall in the prices of these loans. He also convinced Goldman Sachs, for a tidy sum, to sell him insurance products against credit defaults, Credit Default Swaps or CDS.
And a decision by the Federal Reserve gave Michael Burry a boost. In 2005, the financial institution increased interest rates to curb this real estate bubble. The most vulnerable households are no longer able to repay their loans and to recover their investment, banks are seizing the property concerned. Which causes a collapse in the real estate market. And mechanically, the loans are no longer worth anything. Michael Burry’s feats of arms were made famous by the book “The Big Short” and then the Oscar-winning film of the same name in which he was played by Christian Bale. Michael Burry has since made several bets, betting for example on a decline in Tesla shares in 2021.
The bankruptcy of Lehman Brothers also inspired a number of films including the excellent film “Margin Call”. Several members of our editorial team cite it among their favorite feature films…
Sabrina Sadgui – ©2023 BFM Bourse