Shock and awe: the aftermath of Lehman Brothers’ collapse

Mining the wreckage

This article was first published on the Financial Times website on 10 September 2018. 

It was the biggest bankruptcy in history – ten times bigger than Enron – and the tipping point into a global recession.

But what really happened on the ground during those fateful days, as the myth of certain banks being ‘too-big-to-fail’ exploded on a global scale?

It was a huge historical event, yet one with a distinctly human face.

Susan Roscoe, Dispute Resolution Partner at Linklaters, remembers putting out her washing in the garden when she got the call to head into the office.

It was Sunday September 14, and by the following morning the unthinkable would have happened. Tony Bugg, Global Head of Banking at Linklaters, recalls:

“After working through the night from a standing start on Sunday afternoon we held a number of board meetings at our offices from 5.30am on Monday that went on until 7.30am. We had a judge lined up and set up a courtroom in one of our board rooms. Lehman was put into administration at 7.56am.” Roscoe says:

“At the time, I was working on the tail end of the Enron collapse. People were saying to me that Lehman wouldn’t go bust, it would be fine. I have a very clear recollection of people saying the same thing about Enron, that it had been too-big-to-fail. And they were wrong. So before heading into the office I packed a suit, just in case.”

It was a wise call. She would not come home for another 48 hours and the following morning was wearing that suit as a judge formally dissolved Lehman Brothers.

A banking crisis with no blueprint

The team assembled by Linklaters to advise PwC, the administrators to Lehman’s main UK and European entities, saw the brutal fallout of the banking crisis as they went in to the ghost ship of the company’s UK headquarters day after day for months on end.

Five thousand staff worked at Lehman’s European HQ in London. When they arrived at work that sunny September morning, many realised they were out of a job.

Graduate trainee Jack Reynolds, who had been at the company for just one week, left the building in Canary Wharf, London, carrying a Lehman Brothers branded umbrella and rugby ball.

“My career has been screwed,” he said. “No one is happy. Everyone is upset and down but they've just got to get on with it.”

Some burst into tears. Others were on the phone to headhunters straight away. For the administrators and the lawyers, however, the hard work had just begun.

In these unprecedented circumstances the demand for Linklaters’ highly specialised, value-added legal advice was immense, with a multi-jurisdictional, cross-practice team of more than 300 lawyers assembled within days working around the clock on issues of unparalleled scale and complexity.

The immediate problem facing the administrators was that they quite simply didn’t know where relevant information was. Even when it could be located, how could they know if it was accurate? Bugg says:

“There was no blueprint around a bank like Lehman Brothers going in to administration…We had to work closely with the administrators to rapidly piece together information and develop a plan that would introduce some clarity and stability back into a market in panic.”
Back from the brink of collapse

At Lehman’s London office in Canary Wharf, Euan Clarke, Dispute Resolution Partner, was part of the rapidly growing Linklaters team tackling a mountain of paperwork.

Still fresh in his mind is the extraordinary achievement of his corporate colleagues in securing the sale of the London-based investment banking business to Nomura.

“That was the kind of deal that would normally take weeks, if not months, to complete,” he said. “But we helped the administrators to sell that business within a week of being appointed. That allowed about half of the UK workforce – about 2,500 people – to be transferred over to Nomura within that first week, which was quite an achievement.”

Then, within a month, Linklaters received instructions from both RBS and Lloyds Banking Group on their bailouts from the UK government.

“I am often asked which of my 1,000 days as chancellor was the worst,” the then Chancellor of the Exchequer Alistair Darling has recalled. “I am very spoiled for choice, but that was it. We were on the brink of a complete collapse of the world's financial system. RBS would have taken the rest of them down.”

Yet somehow they got through it and – perhaps most extraordinarily of all – succeeded in repaying every creditor to the tune of 100 pence in the pound. This is in addition to every creditor having the right to receive an interest payment on their claims.

It transpired that while Lehman Brothers’ European operation was cash-flow insolvent (because it did not have the cash to make payments for its short-term needs), it was not balance-sheet insolvent.

The after-effects of its very public collapse, however, were all too visible. Mortgages dried up, stock markets tumbled, and businesses went to the wall.

A salutary lesson

The man who took the blame – the ‘schmuck’, to use his own bitter terminology – was Dick Fuld, the final chairman and chief executive of Lehman Brothers, who over the previous quarter of a century had transformed it into a Leviathan of Wall Street.

“This is a pain that will stay with me for the rest of my life,” he said, while insisting blame for the crisis should be shared between politicians who pushed looser lending standards, homeowners who used their homes “like an ATM” and regulators who “mandated” the firm’s bankruptcy.

Back in London everything had changed for the banks’ money-makers. Peter Bevan, another of the Linklaters administration team and now Global Head of Financial Regulation, recalls: “On the very first day a guy came to me several times to explain just how important his ideas were, how much money they were going to make for the bank, and why it was essential to keep him on through this administration.

“But we just weren’t able to pursue that. What we needed then were the people who could show us where the bodies were buried.

“And that was quite the salutary lesson in how a bank transitions from life to death.”