Papers released by law firm Jenner & Block LLP show the reckless attitude of the bank’s management in the period leading up to its failure in September 2008, which sent shockwaves through the market and triggered a financial crisis.
According to Bloomberg’s analysis of the documents, a presentation given in a Lehmans board meeting in September 2007 included a clear summary of the brewing crisis.
“The initial tremors were felt at the end of 2006,” the board was told, “when the poor loan performance of sub-prime borrowers began to be a cause for concern in the marketplace. This was evidenced by a gradual spread widening in the asset backed index.”
The presentation continued: “The market continued to widen as it became apparent that the performance problems in mortgage loads was not going to abate.”
By August 2007, the commercial paper market was “facing challenging conditions, with very little liquidity” and “funding for almost any type of mortgage or ABS” – asset-backed security– “product dried up.”
Goldman Sachs also recognised these “initial tremors” and placed a huge proprietary bet – referred to internally as the ‘Big Short’ – that paid off in 2007 and helped put the firm in a position to weather the financial crisis a year later, Bloomberg reported.
