Collapse of Lehman Brothers: How American bank went bankrupt triggering 2008 financial crisis

America’s fourth-largest bank Lehman Brothers filed for bankruptcy, setting off a financial wrecking ball that demolished global stock markets, pushing the world economy

On September 15, 2008, America’s fourth-largest bank Lehman Brothers filed for bankruptcy, setting off a financial wrecking ball that demolished global stock markets, pushing the world economy into what’s regarded as a once-in-a-generation crisis. A look at what happened then and its impact

Lehman Brothers world headquarters is shown Monday, Sept. 15, 2008 in New York. (AP File Photo)

The Trigger: Sub-prime mortgages
Lehman’s woes go back to a period of exuberant investment in real estate and mortgage assets and instruments, a trend that also coincided with a housing bubble.

As the bubble burst and house prices began falling in 2006-07, households with fragile finances began defaulting on monthly payments, which climbed with rising interest rates.

Banks such as Lehman Brothers were saddled with instruments with rapidly depleting value, usually bundled high-risk (or sub-prime) mortgages. These came to be known as sub-prime assets.

By September 2008, after nearly 18 months of the sub-prime crisis unravelling, Lehman’s stocks had already taken a beating and its debt had piled up to $619 billion as compared to its assets of $639 billion.

The aftermath
The 2008 economic crisis caused tens of millions of people to lose their homes, led to hundreds of millions losing their jobs and destroyed trillions of dollars in wealth.

Impact on India
Sensex went from 21,000 levels to 8,500 in three months. In 2007-08, India’s GDP was at 9.32% which fell to 6.72% in 2008-09.

To combat the slowdown, the Indian government cut taxes and upped spending, widening the fiscal deficit, which was 2.8% in 2007-08 and went up to 6.5% in 2009-10.