Downe: The market knew that underwriting and trading mortgage-backed securities was a big business for Bear Stearns. But it was a much bigger business for Lehman Brothers. So in terms of market participation … at the time one of the questions was, ‘Where’s Lehman?’
Gordon Nixon, Royal Bank of Canada:
We spent a tremendous amount of time looking at all of our different businesses, all of our different trading books … to see whether there would be exposure.
The initial shock from the Bear Stearns deal subsides and nerves calm. The Dow Jones industrial average climbs back to more than 13,000. In Canada, the S&P/TSX composite index hits a record high above 15,000 in June, 2008, on the back of a boom in commodities, particularly oil, which is headed toward $150 (U.S.) a barrel. Many people think the problems of the previous few months are in the past.
Rick George, Suncor Energy Inc.:
Oil prices were quite strong. ... You were kind of racing against time. We were short of manpower and inflation was quite high. ... You definitely felt that we were headed into the peak of the cycle.
Leo de Bever, Alberta Investment Management Corp.:
[Calgarians], you could barely peel them off the ceiling, they were so bullish on the future.
Leech: In July of ’08, I attended what’s called the international pensions conference, [attended by] CEOs of the 40 largest pension plans, corporate and public. … They were pretty oblivious to what was going on.
During the summer, however, new fears emerge behind the scenes. Bank of Nova Scotia CEO Rick Waugh is the vice-chair of the Institute of International Finance, and in July, 2008, he travels to the Federal Reserve Bank of New York to deliver a report on risk management. He barely gets the chance to present.
Waugh: I remember meeting with [N.Y. Fed president Tim] Geithner at seven in the morning, with Joe Ackermann [the former head of Deutsche Bank] and myself. The halls of the Fed were full. … Tim saw us, very politely, and said there’s some good stuff here – but it’s not the time.
Mark Carney, Bank of Canada:
The summer of 2008 was awful because the system was coming apart and people didn’t appreciate what was happening.
Investors start to catch on. The TSX composite sheds 9 per cent from the peak it set in June, and the S&P 500 falls 10 per cent from its peak in May. In the U.S., speculation grows that the U.S. government will need to bail out mortgage finance giants Freddie Mac and Fannie Mae.
That finally happens on the first weekend of September, when the U.S. government seizes control of both companies.
Nixon: What you were trying to do was run fire drills to make sure that you were prepared for whatever the consequences were.
A BLACK AUTUMN
As Freddie and Fannie become wards of the U.S. government, all eyes turn to Lehman Brothers Holdings, one of Wall Street’s most aggressive investment banks. Lehman once made billions of dollars by trading mortgage-backed securities, but once the U.S. housing market started to teeter, these investments became toxic.
After taking billions of dollars in losses, Lehman boss Richard Fuld makes a desperate move on Sept. 10, 2008, to save the bank, announcing the sale and spinoff of a large number of assets. But it’s too late. One by one, institutions that trade with and lend money to Lehman start to pull their funds. During the weekend of September 13-14, 2008, major Wall Street players converge to find a way to save Lehman. The last hope is a deal that would see U.K. bank Barclays PLC buy the ailing firm. It fails to come together.
Cohen: There’s a big meeting and then [Henry] Paulson and [Securities and Exchange chairman Christopher] Cox and [Tim] Geithner come out. The president of Lehman and I had been banished – we weren’t permitted in the room where the banks were discussing [the Lehman problem] – and they just tell us that it’s not going to happen because the British government won’t let Barclays go forward. The only option is a declaration of bankruptcy. We protest, we make a few calls. But the handwriting, it’s not on the wall now – it’s set in stone. ... They said at the highest level, the British government did not want the disease of Lehman to spread across the Atlantic to the U.K. And I said, ‘The fastest way to get it to the U.K. is to let Lehman fail.’