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“The first weekend of October 2008 was a point when people at the top of the global financial system genuinely thought, in the words of George W. Bush, ‘This sucker could go down,’” writes John Lanchester in his compelling July 5 essay “After the Fall” in the London Review of Books. Lanchester, a brilliant economics writer, has also worked as a football reporter, obituary writer, book editor, restaurant critic, and deputy editor of the London Review of Books, where he is now a contributing editor. He was born in Hamburg, brought up in Hong Kong and educated in England. The Royal Bank of Scotland (RBS) “at one point the biggest bank in the world according to the size of its balance sheet, was within hours of collapsing,” he writes. “And by collapsing I mean cashpoint machines would have stopped working, and insolvencies would have spread from RBS to other banks – and no one alive knows what that would have looked like or how it would have ended.”
Lanchester’s essay brought back a flood of memories for me from that surreal time almost a decade ago. By happenstance, I was travelling both times in that 2½-week period when the global economy came within a hairbreadth of seizing up in an unprecedented credit crunch.
At 1:45 a.m. on Sept. 15, 2008, Lehman Brothers filed for Chapter 11 bankruptcy protection following a mass exodus of most of its clients, drastic losses in its stock, and devaluation of its assets by credit rating agencies. Lehman’s bankruptcy filing remains the largest in U.S. history.
The name Lehman Brothers would soon become shorthand for one thing – and one thing only: the collapse of the investment bank triggered the financial meltdown that resulted in the Great Recession, the most financially cataclysmic event since the decade of the Great Depression from 1929 to 1939.
I had watched the beginning of the unravelling Sept. 14 with the overnight Asian financial markets on the Sunday night before driving with Jeanette a few hours later from Thompson, Manitoba to Winnipeg the morning of Monday, Sept. 15. She was working that week in Winnipeg; I was tagging along with her on a week’s vacation at the Place Louis Riel Hotel.
In a spectacular stroke of good fortune, about 1,250 United Steelworkers Local 6166 workers in Thompson, Manitoba inked a new three-year collective agreement with Vale, the Brazilian mining giant, on Sept. 15, 2008 – the very day Lehman Brothers collapsed. The tentative deal had been reached three days earlier on Sept. 12. Workers voted 65.5 per cent in favour of the contract, which included wage increases in each year of the agreement consistent with their previous contract, and pension improvements.
Thompson, Manitoba, in fact, remained for some time one of the premier economic outliers in North America, part of a shrinking circle that in the autumn of 2008 still included Manitoba and Saskatchewan, North Dakota and some of the high-plains Texas Panhandle. The anomaly of the good times rolling on here in Thompson, along with our neighbours in North Dakota and Saskatchewan, made the Great Recession almost everywhere else in the world seem surreal at first.
On Sept. 15-16, 2008, the failures of massive financial institutions in the United States began, due primarily to exposure of securities of packaged subprime loans and credit default swaps issued to insure these loans and their issuers, rapidly devolving into a global economic crisis resulting in a number of bank failures in the United States and Europe and sharp reductions in the value of stocks and commodities worldwide.
The failure of banks in Iceland resulted in a devaluation of the Icelandic króna and threatened the government with bankruptcy. In the United States, 15 banks failed in 2008, while several others were rescued through government intervention or acquisitions by other banks.
Eighteen days after the failure of Lehman Brothers – Friday, Oct. 3. 2008 – Jeanette and me were in the air, this time abroad an Air Canada flight from Winnipeg to Toronto, where we had a scheduled layover for several hours, before continuing on a short-hop flight from Toronto to Kingston’s Norman Rogers Airport, where we were to pick up a rental car to travel to nearby Wellington for Jeanette to compete in the PEC half-marathon on Sunday, Oct. 5. This would be the weekend, as Lanchester writes in his essay, “when people at the top of the global financial system genuinely thought, in the words of George W. Bush, ‘This sucker could go down.’” The Royal Bank of Scotland (RBS) “at one point the biggest bank in the world according to the size of its balance sheet, was within hours of collapsing,” as he notes, “And by collapsing I mean cashpoint machines would have stopped working, and insolvencies would have spread from RBS to other banks – and no one alive knows what that would have looked like or how it would have ended.”
Says Lanchester: “No one had ever lived through, and no one thought possible, a situation where all the credit simultaneously disappeared from everywhere and the entire system teetered on the brink.”
After arriving in Toronto mid-morning Oct. 3, 2008 on our flight from Winnipeg, as we sat in the pre-boarding area waiting for several hours to depart for Kingston, scores of travellers, myself included, sat with our eyes alternately glued to television screens and the airplanes out on the tarmac of Pearson International Airport. The Dow Jones industrial average lost 1.5 per cent that Friday and 7.3 per cent for the week. On a point basis, the Dow lost 818 points for the week, its biggest weekly point loss in seven years and the third biggest weekly loss ever.
The Standard & Poor’s 500 index lost 1.4 per cent on the Friday and 9.4 per cent for the week. On a point basis, the S&P lost 114 points, the worst weekly point loss in seven years and the third biggest weekly loss ever.
The Nasdaq composite lost 1.5% that Friday and 10.8 per cent for the week. The 10.8 per cent decline was the worst in seven years and fifth worst ever.
As I sat there that Friday morning almost 10 years ago now at Pearson, the possibility that there might be no money that day in the system to re-fuel the planes out on the tarmac, and a full ground stop, this time not terror-related but due to financial implosion, was every bit as likely as the ATMs ceasing to dispense cash, was no longer hypothetical or abstract. It was, as we sensed then, and know with certainty now, imminent. That’s how close a call it was. And would continue to be for five very scary months, from early October 2008 through early March 2009, as the world economy was in free fall. Terms such as deleveraging, subprime mortgage, London Interbank Offered Rate (LIBOR), derivatives, credit default swap and bailout became part of our everyday vocabulary.
On Nov. 26, 2008, in an editorial for the Thompson Citizen, I wrote that “America may face financial tests such as of not been felt since the Great Depression. The words of Democratic president Franklin Delano Roosevelt, in his first inaugural address of March 4, 1933 ring as true today as they did some 75 years ago: ‘This is preeminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today the rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.'”
Bloomberg L.P., one of the world’s leading English-language financial news services, based in New York City, ran a remarkable story in January 2009, totalling up single-day job losses worldwide. “At least 21,000 jobs were targeted for elimination yesterday as employers from Hertz Global Holdings Inc. to Advanced Micro Devices Inc. grappled with recession-choked demand,” was how the story opened. “More than 20 companies said they were cutting jobs, ranging from Amonil SA, Romania’s second-biggest fertilizer maker, to Fiat SpA’s Magneti Marelli auto-parts division. Hertz, the second-largest U.S. rental-car company, said it will cut more than 4,000 jobs, as businesses and consumers slow travel because of the global recession.”
General Motors shares hit a low of $1.40 in morning trading March 6, 2009, marking their lowest point since May 23, 1933, reported the Center for Research in Security Prices at the University of Chicago. The Dow Jones Industrial Average closed at a 12-year low of 6,547.05 on March 9, 2009 – its lowest close since April 1997, and had lost 20 per cent of its value in only six weeks.
More recently, some Wall Street analysts have pondered the mystery of what appears to be seven-year economic cycles tied to shemitah years. And wondered why crashes often seem to come in September and October. Shemitahs, also spelled as shmitas, are grounded in the seventh year of the seven-year agricultural cycle mandated by the Torah for the Land of Israel and still observed in contemporary Judaism. Back beyond the five great economic crashes of the last 44 years in 1973, 1980, 1987, 2001 and 2008, during the Great Depression, a solar eclipse took place almost 87 years ago on Sept. 12, 1931 – the end of a shemitah year. Eight days later, England abandoned the gold standard, setting off further market crashes and bank failures around the world. It also heralded in the greatest month-long stock market crash calculated on a percentage basis in Wall Street history.
In the months just ahead, we will mark those days of trial and tribulation a decade ago, when the world stood on the precipice of financial ruin, a victim of investment bankers’ inestimable hubris. A cautionary tale? Probably not. “The bricks are fallen down, but we will build with hewn stones: the sycamores are cut down, but we will change them into cedars,” wrote Isaiah, the 8th-century B.C. Jewish prophet for whom the Book of Isaiah is named.
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