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 room
The payoff structure was genuinely complex, layered CDOs, CDS, and 20-to-30x leverage priced on a tail assumption (no national home price decline) that quietly failed, the textbook Q4 signature; the crisis only slides toward Q-Fraud once the record shows firms like Lehman actively concealed that model failure through Repo 105 and originators fed the machine with fraudulently documented loans rather than disclosing the breakdown.
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
The book
This entry is one of 111 in the register. The full story, and what it cost the people who lived it, is in Risky Business by Claudia Zeisberger, David Munro and Joanna Reijgersberg-Siew.
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