Lehman Bros. collapse triggered economic turmoil

ByABC News
September 10, 2009, 9:29 PM

NEW YORK -- The fallout was fast and frightening, and will reach far into the future.

Almost 6 million lost jobs. A 5,000-point Dow plunge. The government bailing out cash-starved banks. General Motors and Chrysler declaring Chapter 11. The unemployment rate doubling to almost 10%. Consumers getting $4,500 handouts from Uncle Sam to buy a car. Talk of a 1930s-style depression.

To modern-day Wall Street historians, these bizarre events mimic the other-worldly feel of a Ripley's Believe It or Not episode. But all those unthinkable occurrences made news in the past year. They all tie back to Sept. 15, 2008, the day Wall Street titan Lehman Bros. filed for bankruptcy. The collapse of the investment bank was so shocking it triggered a financial tsunami of such size and scope that it was compared to the Great Depression.

And while the events of that panic-drenched day are probably not etched into peoples' memories as are the "I remember where I was" vividness of the bombing of Pearl Harbor, the assassination of JFK, the space shuttle Challenger explosion or the Sept. 11 terrorist attacks, it will be remembered as the day Lehman's demise almost triggered a global financial meltdown.

"Lehman's bankruptcy will forever be synonymous with the financial crisis and (resulting) wealth destruction," says Paul Hickey, founder of Bespoke Investment Group.

The legacy of Lehman's fall is still playing out. Investors and consumers are adapting to a new world that many analysts warn will be far less ebullient than the high-risk, credit-fueled system that came crashing down a year ago in a rubble of bad loans.

"We are on a bumpy journey to a new destination," says Mohamed El-Erian, CEO of giant money manager Pimco. "The new destination will look much different than where we came from."

In the years leading up to the Lehman collapse, the economy was artificially fueled by cheap money that made it easy for anyone who wanted a loan to buy a house, a car or expand a business to get one. Before the housing crash, many Americans treated the rising value of their homes and other investments as a substitute for savings. But the $14 trillion in household wealth destruction caused by plunging home prices and the worst stock swoon since the 1930s has wiped away that false sense of financial security for a generation of Americans.

Trust in the stability of the financial system took a major hit when, after having hinted that it would not let any major financial institution fail, the government did a 180-degree turn and refused to bail out Lehman, says John Garvey, head of the U.S. financial services practice at PricewaterhouseCoopers.

"That shook market confidence to its core and caused people to believe the whole system could blow up," says Garvey. "I don't think anyone fully understood the impact of confidence and what it means to the proper functioning of the system."