Risk register · entry
Q4 · Where models dieGlobal financial crisis
Complexity and leverage, and nobody knew who was on the other side.
The world stops matching the model. Regime change and leverage turn a small error fatal.
Why this quadrant
Layered CDOs and credit default swaps, carried at 20 to 30 times leverage, were priced on an assumption that had held for as long as the data ran, that house prices do not fall across the whole country at once. When that stopped being true the models had no way to reprice. It moves toward fraud only where the record shows concealment rather than error, as with Lehman's Repo 105 and the fraudulently documented loans fed into the machine.
The record
- Lehman Brothers filed Chapter 11 on September 15, 2008, largest bankruptcy in US historycertain
- Lehman held about $680 billion in assets supported by only $22.5 billion in firm capitalcertain
- Lehman's Repo 105/108 practice reduced its reported balance sheet by more than $138 billion between Q4 2007 and Q2 2008certain
- Lehman general unsecured creditors recovered 41 cents on the dollar ($9.4 billion) after liquidation concluded in 2022certain
- AIG received approximately $182 billion in combined Treasury and Federal Reserve supportcertain
- US TARP program totaled $700 billionlikely
- Global stock markets lost roughly $10 trillion in value following Lehman's collapselikely
- US household wealth fell $11 trillion, from $61.4 trillion (Q2 2007) to $50.4 trillion (Q1 2009)certain
- US economy lost 8.8 million jobs; unemployment peaked at 11.0% in October 2009certain
- Nearly 10 million US homeowners foreclosed on between 2006 and 2014certain
- California zip codes with over 15% fraudulent mortgage origination saw 44.6% average home price declines vs 5.4% in low-fraud zip codescertain
- Ernst & Young settled NY AG fraud allegations over Repo 105 for $10 million in 2015, admitting no wrongdoingcertain
- Kareem Serageldin (Credit Suisse) sentenced to 30 months in 2013, the only US banker jailed over the crisis, for concealing ~$500 million in lossescertain
- FCIC concluded the crisis was avoidable, citing regulatory failure and "systemic breaches in accountability and ethics at all levels"certain
Sources
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