Solvency should be a simple financial concept: if your assets are worth more than your liabilities, you are solvent; if not, you are in danger of bankruptcy. But on the afternoon of Friday, September 13, 2008, experts from the country’s biggest commercial and investment banks met at the Wall Street offices of the Federal Reserve to ponder the fate of Lehman Brothers, and could not agree whether or not the 157-year-old firm was solvent.
Only two days earlier, Lehman had reported shareholder equity—the measure of solvency—of $28 billion at the end of August. Over the previous nine months, the bank had lost $6 billion but raised more than $10 billion in new capital, leaving it with more reported equity than it had a year earlier. – Financial Crisis Inquiry Commission Report
On September 8, 2008, Lehman Brothers stock closed at $7.79 – down 55% from the day previous. Five years ago yesterday, Lehman Brothers hopes of finding a buyer collapsed, and so did the bank. On the early morning of September 15, 2008, Lehman Brothers Holdings Inc. filed for bankruptcy protection and by the end of the day its stock closed down 93% from Friday’s close.
The S&P 500 declined 7.5% over the next traumatic three days. But what happened with the other financials?
Looking at companies with greater than $1 billion in market capitalization during those same days, the results are mixed. Two of the top three reported positive gains over those three days. The largest capitalized financial, Bank of America (BAC), gained 2.4% – most likely because they didn’t BUY Lehman and instead bought Merrill Lynch! Although a decision they would come to regret, it was cheered at the time. Wells Fargo (WFC), another soon-to-be grave dancer, gained 7.8%.
The real eventual winner in the group’s consolidation, JP Morgan (JPM), was down modestly 3.3%. BNY Mellon (BK) and Citigroup (C) were Lehman’s two largest creditors, the later also saddled with its own problems.
The biggest losers of the bunch included a hodge-podge of victims. Clearly AIG, whose problems came to light on September 16th, was down the greatest (-56.9%). Fears that Morgan Stanley would be the crisis’ next victim lost one third of its value over those three days. Goldman Sach (GS) was swept into the same basket, but only lost 15%. Both Morgan and Goldman ended up converting to bank holding companies shortly thereafter. Alliance Capital Management (AB) and Genworth (GNW) took a beating as well. Genworth subsequently applied for TARP money, but was ruled ineligble.
The biggest gainer was obviously Merrill Lynch (ML), but the remainder were a mixture of deemed solid banks and trust companies.
Those three days presented themselves as a calamity (and they were!), but few knew the turmoil that was still to come.