Lehman shock still reverberating five years on

On Sept 15, 2008, one of the biggest shocks to the global and financial system occurred when Lehman Brothers filed for Chapter 11 bankruptcy protection, the largest bankruptcy filing in US corporate history.

That event sparked a financial crisis that has taken a long time to recover from and is central to most of the problems that the global banking system is still trying to grapple with, not least the availability of credit in most of the developed world.

The US Treasury and the Federal Reserve did their utmost to protect the survival of the venerable institution, but eventually decided there was a price beyond which it was not worth paying. They did not realise the carnage that would ensue following its collapse and it is pretty clear that if they did, they probably would have adopted a vastly different approach.

The one thing that characterised the US approach to the crisis in the aftermath of Lehman Brothers was the speed and decisiveness of the response. It stands in marked contrast to the dithering and foot dragging that has characterised the eurozone response.

That is particularly the case here in Ireland, where we are still talking about the crisis and still far from an acceptable solution.

This week, for example, the troika specified that Irish banks would have to finalise arrangements with 25% of distressed mortgage borrowers by the end of March. Finalisation could mean that loans will have to be either modified so that distressed borrowers will face new, lower repayments, or enter a resolution process which could involve the sale of a home to trade down or face repossession.

While Ireland had built up massive imbalances by 2007 in areas ranging from credit growth to house prices to house building and to frightening levels of indebtedness, the collapse of Lehman Brothers created a global environment that no open economy could withstand, particularly one that had become as unbalanced as Ireland had.

We have an amazing tendency in this country to get totally caught up in a blame game which is unrelenting. Social media demonstrates that the blame is still being apportioned to politicians, whether in government or opposition; business leaders; economists; banks and bankers; newspapers which carried property supplements; journalists who were not critical enough; and many more besides. Giovanni Trapattoni has not yet been apportioned any blame, but somebody will presumably come up with a theory at some stage.

It has to be accepted that many mistakes were made, of course, but the carnage unleashed by the outbreak of the sub-prime crisis in 2007, and the collapse of Lehman Brothers a year later, blew any possibility of Ireland achieving a relatively good outcome out of the water.

The most direct impact of the collapse of Lehmans and other large banks was that sources of external funding for Irish banks totally dried up and liquidity problems pushed them to the edge of a precipice. What started off as a liquidity problem quickly became a solvency problem as house prices collapsed and loan losses mounted. For the Irish banking system and economy, it was a perfect storm.

The frightening thing is that six years after the outbreak of the crisis and five years after the collapse of Lehmans, serious global issues are still being grappled with. Over the past three months or so we have started to see an upturn in almost all economic indicators in almost all developed economies. It has to be hoped that this trend can be maintained and built upon.

Meanwhile, in Waterford earlier this week, I witnessed the impact on the psyche of a people that a sporting victory can have. The economic impact of sport is massive and certainly without it, the past six years would have been even more difficult to bear in this country.