INDEX

Overview..........................................................................................................................2 Pre-recession economic imbalances:...............................................................................5 Commodity boom........................................................................................................5 Housing bubble:...........................................................................................................7 Inflation:.......................................................................................................................8 Causes..............................................................................................................................8 Debate over origins......................................................................................................9 Effects............................................................................................................................11 Political instability related to the economic crisis.........................................................12 Policy responses.............................................................................................................14 IMF recommendation.................................................................................................15 United States policy responses...................................................................................15 Asia-Pacific policy responses....................................................................................22 European policy responses.........................................................................................23 Global responses........................................................................................................24 Countries maintaining growth or technically avoiding recession:.................................26 Countries in economic recession or depression.............................................................27 Comparisons with the Great Depression........................................................................30 In the United States:...................................................................................................31 In the United Kingdom..............................................................................................34 In Ireland....................................................................................................................35 Job losses and unemployment rates:..............................................................................36 Economics & Investing: Risks of a 2008 style crisis are rising.........................................36

INTRODUCTION: The late-2000s recession, by some called the Great Recession or Lesser Depression, is a severe ongoing global economic problem that began in December 2007 and took a particularly sharp downward turn in September 2008. The Great Recession has affected the entireworld economy, with higher detriment in some countries than others. It is a global recession characterized by various systemic

imbalances and was sparked by the outbreak of the late-2000s financial crisis. There are two senses of the word "recession": a less precise sense, referring broadly to "a period of reduced economic activity", and the scientific sense used most often in economics, which is defined operationally, referring specifically to the contraction phase of a business cycle, with two or more consecutive quarters of negative GDP growth. By the economic-science definition of the word "recession", the Great Recession ended in the U.S. in June or July 2009. However, in the broader, layperson sense of the word, many people use the term to refer to the ongoing hardship (in the same way that the term "Great Depression" is also popularly used). In the U.S., for example, persistent high unemployment remains, along with low consumer confidence, the continuing decline in home values and increase in foreclosures and personal bankruptcies, an escalating federal debt crisis, inflation, and rising gas and food prices. In fact, a 2011 poll found that more than half of all Americans think the U.S. is still in recession or even depression, despite official data that shows a historically modest recovery.

Overview According to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions) the recession began in December 2007. The financial crisis is linked to reckless lending practices by

financial institutions and the growing trend of securitization of real estate mortgages in the United States. The US mortgage-backed securities, which had risks that were hard to assess, were marketed around the world. A more broad based credit boom fed a global speculative bubble in real estate and equities, which served to reinforce the risky lending practices. The precarious financial situation was made more difficult by a sharp increase in oil and food prices. The emergence of Sub-prime loan losses in 2007 began the crisis and exposed other risky loans and over-inflated asset prices. With loan losses mounting and the fall of Lehman Brothers on September 15, 2008, a major panic broke out on the inter-bank loan market. As share and housing prices declined, many large and well established investment and commercial banks in the United States and Europe suffered huge losses and even faced bankruptcy, resulting in massive public financial assistance. A global recession has resulted in a sharp drop in international trade, rising unemployment and slumping commodity prices. In December 2008, the National Bureau of Economic Research (NBER) declared that the United States had been in recession since December 2007. Several economists have predicted that recovery may not appear until 2011 and that the recession will be the wor Paul Krugman, who won the Nobel Memorial Prize in Economics, once commented on this as seemingly the beginning of "a second Great Depression." The conditions leading up to the crisis, characterized by an exorbitant rise in asset prices and associated boom in economic demand, are considered a result of the extended

period of easily available credit inadequate regulation and oversight, or increasing inequality. The recession has renewed interest in Keynesian economic ideas on how to combat recessionary conditions. Fiscal and monetary policies have been significantly eased to stem the recession and financial risks. Economists advise that the stimulus should be withdrawn as soon as the economies recover enough to "chart a path to sustainable growth".

Pre-recession economic imbalances: The onset of the economic crisis took most people by surprise. A 2009 paper identifies twelve economists and commentators who, between 2000 and 2006, predicted a recession based on the collapse of the then-booming housing market in the U.S: Dean Baker, Wynne Godley, Fred Harrison, Michael Hudson, Eric Janszen, Steve Keen, Jacob Brchner Madsen & Jens Kjaer Srensen, Kurt Richebcher, Neural Roubini, Peter Schiff and Robert Shiller. Among the various imbalances in which the U.S. monetary policy contributed by excessive money creation, leading to negative household savings and a huge U.S. trade deficit, dollar volatility and public deficits, a focus can be made on the following ones: Commodity boom Further information: 2000s energy crisis and 2007 2008 world food price crisis See also: 2008 Central Asia energy crisis, 2008 Bulgarian energy crisis, and 2000s commodities boom

Brent barrel petroleum spot prices, May 1987 April 2011. The decade of the 2000s saw a global explosion in prices, focused especially

in commodities and housing, marking an end to thecommodities recession of 19802000. In 2008, the prices of many commodities, notably oil and food, rose so high as to cause genuine economic damage, threatening stagflation and a reversal of globalization. In January 2008, oil prices surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the course of the year. In July 2008, oil peaked at $147.30 a barrel and a gallon of gasoline was more than $4 across most of the U.S.A. The economic contraction in the fourth quarter of 2008 caused a dramatic drop in demand and prices fell below $35 a barrel at the end of the year. The high of 2008 may have been part of broader pattern of spiking instability in the price of oil over the preceding decade This pattern of spiking instability in oil price may be a product of Peak Oil. There is concern that if the economy was to improve, oil prices might return to pre-recession levels. The food and fuel crises were both discussed at the 34th G8 summit in July 2008. Sulfuric acid (an important chemical commodity used in processes such as steel processing, copper production and bioethanol production) increased in price 3.5-fold in less than 1 year while producers of sodium hydroxide have declared force majeure due to flooding, precipitating similarly steep price increases. In the second half of 2008, the prices of most commodities fell dramatically on expectations of diminished demand in a world recession.

Housing bubble:

UK house prices between 1975 and 2010. Further information: Real estate bubble By 2007, real estate bubbles were still under way in many parts of the world, especially in the United States, United Kingdom,United Arab Emirates, Italy, Australia, New Zealand, Ireland, Spain, France, Poland. U.S. Federal Reserve Chairman Alan Greenspan said in mid-2005 that "at a minimum, there's a little 'froth' (in the U.S. housing market) ... it's hard not to see that there are a lot of local bubbles".The Economist magazine, writing at the same time, went further, saying "the worldwide rise in house prices is the biggest bubble in history". Real estate bubbles are (by definition of the word "bubble") followed by a price decrease (also known as a housing price crash) that can result in many owners

holding negative equity (a mortgage debt higher than the current value of the property).

Inflation:
In February 2008, Reuters reported that global inflation was at historic levels, and that domestic inflation was at 1020 year highs for many nations. "Excess money supply around the globe, monetary easing by the Fed to tame financial crisis, growth surge supported by easy monetary policy in Asia, speculation in commodities, agricultural failure, rising cost of imports from China and rising demand of food and commodities in the fast growing emerging markets," have been named as possible reasons for the inflation. In mid-2007, International Monetary Fund (IMF) data indicated that inflation was highest in the oilexporting countries, largely due to the unsterilized growth of foreign exchange reserves, the term "unsterilized" referring to a lack of monetary policy operations that could offset such a foreign exchange intervention in order to maintain a country's monetary policy target. However, inflation was also growing in countries classified by the IMF as "non-oilexporting LDCs" (Least Developed Countries) and "Developing Asia", on account of the rise in oil and food prices.[41] Inflation was also increasing in the developed countries, but remained low compared to the developing world.

Causes

The great asset bubble: 1. Central banks' gold reserves $0.845 tn. 2. M0 (paper money) - $3.9 tn. 3. traditional (fractional reserve) banking assets $39 tn. 4. shadow banking assets $62 tn. 5. other assets $290 tn. 6. Bail-out money (early 2009) $1.9 tn.

Debate over origins

The central debate about the origin has been focused on the respective parts played by the public monetary policy (in the US notably) and by private financial institutions practices. On October 15, 2008, Anthony Faiola, Ellen Nakashima, and Jill Drew wrote a lengthy article in The Washington Post titled, "What Went Wrong". In their investigation, the authors claim that former Federal Reserve Board Chairman Alan Greenspan,

Treasury Secretary Robert Rubin, and SEC Chairman Arthur Levitt vehemently opposed any regulation of financial instruments known as derivatives. They further claim that Greenspan actively sought to undermine the office of the Commodity Futures Trading Commission, specifically under the leadership of Brooksley E. Born, when the Commission sought to initiate regulation of derivatives. Ultimately, it was the collapse of a specific kind of derivative, the mortgage-backed security, that triggered the economic crisis of 2008. While Greenspan's role as Chairman of the Federal Reserve has been widely discussed (the main point of controversy remains the lowering of Federal funds rate at only 1% for more than a year which, according to the Austrian School of economics, allowed huge amounts of "easy" credit-based money to be injected into the financial system and thus create an unsustainable economic boom), there is also the argument that Greenspan's actions in the years 2002 2004 were actually motivated by the need to take the U.S. economy out of theearly 2000s recession caused by the bursting of the dot-com bubble although by doing so he did not help avert the crisis, but only postpone it. Some economists - those of the Austrian school and those predicting the recession such as Steve Keen claim that the ultimate point of origin of the great financial crisis of 20072010 can be traced back to an extremely indebted US economy. The collapse of the real estate market in 2006 was the close point of origin of the crisis. The failure rates of subprime mortgages were the first symptom of a credit boom turned to bust and of a real estate shock. But large default rates on subprime mortgages cannot account

for the severity of the crisis. Rather, low-quality mortgages acted as an accelerant to the fire that spread through the entire financial system. The latter had become fragile as a result of several factors that are unique to this crisis: the transfer of assets from the balance sheets of banks to the markets, the creation of complex and opaque assets, the failure of ratings agencies to properly assess the risk of such assets, and the application of fair value accounting. To these novel factors, one must add the now standard failure of regulators and supervisors in spotting and correcting the emerging weaknesses. Robert Reich believes the amount of debt in the US economy can be traced to economic inequality, where middle class wages remain stagnant while wealth concentrates at the top, and households "pull equity from their homes and overload on debt to maintain living standards."

Effects

International trade, 2000-2010. 2000=100. A plunge in the volumes of exchanges can be seen as of the second half of 2008. The late-2000s recession is shaping up to be the worst post-World War II contraction on record: Real gross domestic product (GDP) began contracting in the third quarter of 2008, and by

early 2009 was falling at an annualized pace not seen since the 1950s. Capital investment, which was in decline year-onyear since the final quarter of 2006, matched the 195758 post war record in the first quarter of 2009. The pace of collapse in residential investment picked up speed in the first quarter of 2009, dropping 23.2% year-on-year, nearly four percentage points faster than in the previous quarter. US Domestic demand, in decline for five straight quarters, is still three months shy of the 197475 record, but the pace down 2.6% per quarter vs. 1.9% in the earlier period is a record-breaker already. A report in 2009 by Bloomberg states that $14.5 trillion of value of global companies has been erased since the crisis began.

Political instability related to the economic crisis

Beginning February 26, 2009 an Economic Intelligence Briefing was added to the daily intelligence briefings prepared for the President of the United States. This addition reflects the assessment of United States intelligence agencies that the global financial crisis presents a serious threat to international stability. Business Week in March 2009 stated that global political instability is rising fast due to the global financial crisis and is creating new challenges that need managing. The Associated Press reported in

March 2009 that: United States "Director of National Intelligence Dennis Blair has said the economic weakness could lead to political instability in many developing nations." Even some developed countries are seeing political instability. NPR reports that David Gordon, a former intelligence officer who now leads research at the Eurasia Group, said: "Many, if not most, of the big countries out there have room to accommodate economic downturns without having large-scale political instability if we're in a recession of normal length. If you're in a much longer-run downturn, then all bets are off." Globally, mass protest movements have arisen in many countries as a response to the economic crisis. Additionally, in some countries, riots and even open revolts have occurred in relation to the economic crisis. For example, the Arab Spring revolts taking place in the Arab world since December 18, 2010 were ostensibly sparked by the self-immolation of an unemployed Tunisian man namedMohamed Bouazizi who was prevented from even selling produce from a cart. This act, combined with general discontentment about high unemployment, food inflation, corruption lack of freedom of speech and other forms of political freedom, and poor living conditions led to the most dramatic wave of social and political unrest in Tunisia in three decades, resulted in scores of deaths and injuries, and an eventual regime change in Tunisia. To date, there have been revolutions in Tunisia and Egypt; a civil war in Libya; civil uprisings in Bahrain, Syria and Yemen; major protests in Algeria, Iraq, Jordan, Morocco and Oman, as well as on the borders of Israel; and minor protests

inKuwait, Lebanon, Mauritania, Saudi Arabia, Sudan, and Western Sahara. In January of 2009 the government leaders of Iceland were forced to call elections two years early after the people of Iceland staged mass protests and clashed with the police due to the government's handling of the economy. Hundreds of thousands protested in France against President Sarkozy's economic policies. Prompted by the financial crisis in Latvia, the opposition and trade unions there organized a rally against the cabinet of premier Ivars Godmanis. The rally gathered some 10-20 thousand people. In the evening the rally turned into aRiot. The crowd moved to the building of the parliament and attempted to force their way into it, but were repelled by the state's police. In late February many Greeks took part in a massive general strike because of the economic situation and they shut down schools, airports, and many other services in Greece. Police and protesters clashed in Lithuania where people protesting the economic conditions were shot by rubber bullets. In addition to various levels of unrest in Europe, Asian countries have also seen various degrees of protest. Communists and others rallied in Moscow to protest the Russian government's economic plans. Protests have also occurred in China as demands from the west for exports have been dramatically reduced and unemployment has increased. Beyond these initial protests, the protest movement has grown and continued in 2011.

Policy responses
The financial phase of the crisis led to emergency interventions in many national financial systems. As the crisis developed into genuine recession in many

major economies, economic stimulus meant to revive economic growth became the most common policy tool. After having implemented rescue plans for the banking system, major developed and emerging countries announced plans to relieve their economies. In particular, economic stimulus plans were announced in China, the United States, and the European Union. Bailouts of failing or threatened businesses were carried out or discussed in the USA, the EU, and India. In the final quarter of 2008, the financial crisis saw the G-20 group of major economies assume a new significance as a focus of economic and financial crisis management. IMF recommendation The IMF stated in September 2010 that the financial crisis would not end without a major decrease in unemployment as hundreds of millions of people were unemployed worldwide. The IMF urged governments to expand social safety nets and to generate job creation even as they are under pressure to cut spending. Governments should also invest in skills training for the unemployed and even governments of countries like Greece with major debt risk should first focus on long-term economic recovery by creating jobs. United States policy responses The Federal Reserve, Treasury, and Securities and Exchange Commission took several steps on September 19 to intervene in the crisis. To stop the potential run on money market mutual funds, the Treasury also announced on September 19 a new $50 billion program to insure the investments, similar to the Federal Deposit Insurance Corporation (FDIC) program.[86] Part of the announcements included

temporary exceptions to section 23A and 23B (Regulation W), allowing financial groups to more easily share funds within their group. The exceptions would expire on January 30, 2009, unless extended by the Federal Reserve Board.[87] The Securities and Exchange Commission announced termination of short-selling of 799 financial stocks, as well as action against naked short selling, as part of its reaction to the mortgage crisis.[88] Market volatility within US 401(k) and retirement plans The US Pension Protection Act of 2006 included a provision which changed the definition of Qualified Default Investments (QDI) for retirement plans from stable value investments, money market funds, and cash investments to investments which expose an individual to appropriate levels of stock and bond risk based on the years left to retirement. The Act required that Plan Sponsors move the assets of individuals who had never actively elected their investments and had their contributions in the default investment option. This meant that individuals who had defaulted into a cash fund with little fluctuation or growth would soon have their account balances moved to much more aggressive investments. Starting in early 2008, most US employer-sponsored plans sent notices to their employees informing them that the plan default investment was changing from a cash/stable option to something new, such as a retirement date fund which had significant market exposure. Most participants ignored these notices until September and October, when the market crash was on every news station and media outlet. It was then that participants called their 401(k) and retirement plan providers and discovered losses in

excess of 30% in some cases. Call centers for 401(k) providers experienced record call volume and wait times, as millions of inexperienced investors struggled to understand how their investments had been changed so fundamentally without their explicit consent, and reacted in a panic by liquidating everything with any stock or bond exposure, locking in huge losses in their accounts. Due to the speculation and uncertainty in the market, discussion forums filled with questions about whether or not to liquidate assets[89] and financial gurus were swamped with questions about the right steps to take to protect what remained of their retirement accounts. During the third quarter of 2008, over $72 billion left mutual fund investments that invested in stocks or bonds and rushed into Stable Value investments in the month of October.[90] Against the advice of financial experts, and ignoring historical data illustrating that long-term balanced investing has produced positive returns in all types of markets, [91] investors with decades to retirement instead sold their holdings during one of the largest drops in stock market history.

Loans to banks for asset-backed commercial paper

How money markets fund corporations During the week ending September 19, 2008, money market mutual funds had begun to experience significant withdrawals of funds by investors. This created a significant risk because money market funds are integral to the ongoing financing of corporations of all types. Individual investors lend money to money market funds, which then provide the funds to corporations in exchange for corporate short-term securities called asset-backed commercial paper (ABCP). However, a potential bank run had begun on certain money market funds. If this situation had worsened, the ability of major corporations to secure needed short-term financing through ABCP issuance would have been significantly affected. To assist with liquidity throughout the system, the US Treasury and Federal Reserve Bank announced that banks could obtain funds via the

Federal Reserve's Discount Window using ABCP as collateral.[86][92] Federal Reserve lowers interest rates Federal reserve rates changes (Just data after January 1, 2008 ) Date Discount Discount Discount rate rate rate Primary Secondary rate change October -0.50% 8, 2008* April 30, 2008 March 18, 2008 March 16, 2008 -0.25% new interest rate 1.75% 2.25% new new rate interest interest change rate rate 2.25% 2.75% -0.50% 1.50% -0.25% 2.00% Fed funds Fed funds rate

-0.75%

2.50%

3.00%

-0.75% 2.25%

-0.25%

3.25%

3.75%

January 30, -0.50% 2008 January 22, -0.75% 2008

3.50%

4.00%

-0.50% 3.00%

4.00%

4.50%

-0.75% 3.50%

* Part of a coordinated global rate cut of 50 basis point by main central banks.[93] See more detailed US federal discount rate chart:[94]

Legislation The Secretary of the United States Treasury, Henry Paulson and President George W. Bush proposed legislation for the government to purchase up to US$700 billion of "troubled mortgage-related assets" from financial firms in hopes of improving confidence in the mortgage-backed securities markets and the financial firms participating in it. [95] Discussion, hearings and meetings among legislative leaders and the administration later made clear that the proposal would undergo significant change before it could be approved by Congress.[96]On October 1, a revised compromise version was approved by the Senate with a 7425 vote. The bill, HR1424 was passed by the House on October 3, 2008 and signed into law. The first half of the bailout money was primarily used to buy preferred stock in banks instead of troubled mortgage assets.[97] In January 2009, the Obama administration announced a stimulus plan to revive the economy with the intention to create or save more than 3.6 million jobs in two years. The cost of this initial recovery plan was estimated at 825 billion dollars (5.8% of GDP). The plan included 365.5 billion dollars to be spent on major policy and reform of the health system, 275 billion (through tax rebates) to be redistributed to households and firms, notably those investing in renewable energy, 94 billion to be dedicated to social assistance for the unemployed and families, 87 billion of direct assistance to states to help them finance health expenditures of Medicaid, and finally 13 billion spent to improve access to digital technologies. The administration also attributed of 13.4 billion dollars aid to automobile

manufacturers General Motors and Chrysler, but this plan is not included in the stimulus plan. These plans are meant to abate further economic contraction, however, with the present economic conditions differing from past recessions, in, that, many tenets of the American economy such as manufacturing, textiles, and technological development have been outsourced to other countries. Public works projects associated with the economic recovery plan outlined by the Obama Administration have been degraded by the lack of road and bridge development projects that were highly abundant in the Great Depression but are now mostly constructed and are mostly in need of maintenance. Regulations to establish market stability and confidence have been neglected in the Obama plan and have yet to be incorporated.

Federal Reserve response

In an effort to increase available funds for commercial banks and lower the fed funds rate, on September 29, 2008 the U.S. Federal Reserve announced plans to double its Term Auction Facility to $300 billion. Because there appeared to be a shortage of U.S. dollars in Europe at that time, the Federal Reserve also announced it would increase its swap facilities with foreign central banks from $290 billion to $620 billion.[98] As of December 24, 2008, the Federal Reserve had used its independent authority to spend $1.2 trillion on purchasing various financial assets and making emergency loans to address the financial crisis, above and beyond the $700 billion authorized by Congress from the federal budget. This includes emergency loans to banks, credit card companies, and general

businesses, temporary swaps of treasury bills for mortgage-backed securities, the sale of Bear Stearns, and the bailouts of American International Group (AIG), Fannie Mae and Freddie Mac, and Citigroup.[99]

Asia-Pacific policy responses

On September 15, 2008 China cut its interest rate for the first time since 2002. Indonesia reduced its overnight repo rate, at which commercial banks can borrow overnight funds from the central bank, by two percentage points to 10.25 percent. The Reserve Bank of Australia injected nearly $1.5 billion into the banking system, nearly three times as much as the market's estimated requirement. The Reserve Bank of India added almost $1.32 billion, through a refinance operation, its biggest in at least a month.[100] On November 9, 2008 the 2008 Chinese economic stimulus plan is a RMB 4 trillion ($586 billion) stimulus package announced by the central government of the People's Republic of China in its biggest move to stop the global financial crisis from hitting the world's third largest economy. A statement on the government's website said the State Council had approved a plan to invest 4 trillion yuan ($586 billion) in infrastructure and social welfare by the end of 2010. The stimulus package will be invested in key areas such as housing, rural infrastructure, transportation, health and education, environment, industry, disaster rebuilding, incomebuilding, tax cuts, and finance. China's export driven economy is starting to feel the impact of the economic slowdown in the United States and Europe, and the government has already cut key interest rates three times in less than two months in

a bid to spur economic expansion. On November 28, 2008, the Ministry of Finance of the People's Republic of China and the State Administration of Taxation jointly announced a rise in export tax rebate rates on some labor-intensive goods. These additional tax rebates will take place on December 1, 2008.[101] The stimulus package was welcomed by world leaders and analysts as larger than expected and a sign that by boosting its own economy, China is helping to stabilize the global economy. News of the announcement of the stimulus package sent markets up across the world. However, Marc Faber January 16 said that China according to him was in recession. In Taiwan, the central bank on September 16, 2008 said it would cut its required reserve ratios for the first time in eight years. The central bank added $3.59 billion into the foreign-currency interbank market the same day. Bank of Japan pumped $29.3 billion into the financial system on September 17, 2008 and the Reserve Bank of Australia added $3.45 billion the same day.[102] In developing and emerging economies, responses to the global crisis mainly consisted in low-rates monetary policy (Asia and the Middle East mainly) coupled with the depreciation of the currency against the dollar. There were also stimulus plans in some Asian countries, in the Middle East and in Argentina. In Asia, plans generally amounted to 1 to 3% of GDP, with the notable exception of China, which announced a plan accounting for 16% of GDP (6% of GDP per year).

European policy responses

Until September 2008, European policy measures were limited to a small number of countries (Spain

and Italy). In both countries, the measures were dedicated to households (tax rebates) reform of the taxation system to support specific sectors such as housing. The European Commission proposed a 200 billion stimulus plan to be implemented at the European level by the countries. At the beginning of 2009, the UK and Spain completed their initial plans, while Germany announced a new plan. On September 29, 2008 the Belgian, Luxembourg and Dutch authorities partially nationalized Fortis. The German government bailed out Hypo Real Estate. On 8 October 2008 the British Government announced a bank rescue package of around 500 billion[103] ($850 billion at the time). The plan comprises three parts. The first 200 billion would be made in regards to the banks in liquidity stack. The second part will consist of the state government increasing the capital market within the banks. Along with this, 50 billion will be made available if the banks needed it, finally the government will write away any eligible lending between the British banks with a limit to 250 billion. In early December German Finance Minister Peer Steinbrck indicated a lack of belief in a "Great Rescue Plan" and reluctance to spend more money addressing the crisis.[104] In March 2009, The European Union Presidency confirmed that the EU was at the time strongly resisting the US pressure to increase European budget deficits.[105]

Global responses

Responses by the UK and US in proportion to their GDPs Most political responses to the economic and financial crisis has been taken, as seen above, by individual nations. Some coordination took place at the European level, but the need to cooperate at the global level has led leaders to activate the G-20 major economies entity. A first summit dedicated to the crisis took place, at the Heads of state level in November 2008 (2008 G-20 Washington summit). The G-20 countries met in a summit held on November 2008 in Washington to address the economic crisis. Apart from proposals on international financial regulation, they pledged to take measures to support their economy and to coordinate them, and refused any resort to protectionism. Another G-20 summit was held in London on April 2009. Finance ministers and central banks leaders of the G-20 met in Horsham on March to prepare the summit, and pledged to restore global growth as soon as possible. They decided to coordinate their actions and to stimulate demand and employment. They also pledged to fight against all forms of protectionism and to maintain trade and foreign investments. They also committed to maintain the supply of credit by providing more liquidity and

recapitalizing the banking system, and to implement rapidly the stimulus plans. As for central bankers, they pledged to maintain low-rates policies as long as necessary. Finally, the leaders decided to help emerging and developing countries, through a strengthening of the IMF.

Countries maintaining growth or technically avoiding recession:

Poland is the only member of the European Union to have avoided a decline in GDP, meaning that in 2009 Poland has created the most GDP growth in the EU. As of December 2009 the Polish economy had not entered recession nor even contracted, while its IMF 2010 GDP growth forecast of 1.9 per cent is expected to be upgraded.[106][107][108] Analysts have identified several causes: Extremely low levels of bank lending and a relatively very small mortgage market; the relatively recent dismantling of EU trade barriers and the resulting surge in demand for Polish goods since 2004; the receipt of direct EU funding since 2004; lack of over-dependence on a single export sector; a tradition of government fiscal responsibility; a relatively large internal market; the free-floating Polish zloty; low labour costs attracting continued foreign direct investment; economic difficulties at the start of the decade which prompted austerity measures in advance of the world crisis. While China, India and Iran have experienced slowing growth, they have not entered recession. South Korea narrowly avoided technical recession in the first quarter of 2009.[109] The International Energy Agency stated in mid September that South Korea could be the only largeOECD country to avoid recession for the whole of 2009.[110] It was the only

developed economy to expand in the first half of 2009. On October 6, Australia became the first G20 country to raise its main interest rate, with the Reserve Bank of Australia deciding to move rates up to 3.25% from 3.00%.[111] Australia has avoided a technical recession after experiencing only one quarter of negative growth in the fourth quarter of 2008, with GDP returning to positive in the first quarter of 2009.[112][113]

Countries in economic recession or depression

Many countries experienced recession in 2008.[114] The countries/territories currently in a technical recession are Estonia, Latvia, Ireland, New Zealand, Japan, Hong Kong, Singapore, Italy, Russia and Germany. Denmark went into recession in the first quarter of 2008, but came out again in the second quarter. [115] Iceland fell into an economic depression in 2008 following the collapse of its banking system. (see Icelandic financial crisis) The following countries went into recession in the second quarter of 2008: Estonia,[116] Latvia, [117] Ireland[118] and New Zealand.[119] The following countries/territories went into recession in the third quarter of 2008: Japan,[120] Sweden, [121] Hong Kong,[122] Singapore,[123] Italy, [124] Turkey[114] and Germany.[125] As a whole the fifteen nations in the European Union that use the euro went into recession in the third quarter,[126] and the United Kingdom. In addition, the European Union, the G7, and the OECD all experienced negative growth in the third quarter.[114]

The following countries/territories went into technical recession in the fourth quarter of 2008: United States, Switzerland,[127] Spain,[128] and Taiwan.[129] South Korea "miraculously" avoided recession with GDP returning positive at a 0.1% expansion in the first quarter of 2009.[130] Of the seven largest economies in the world by GDP, only China and France avoided a recession in 2008. France experienced a 0.3% contraction in Q2 and 0.1% growth in Q3 of 2008. In the year to the third quarter of 2008 China grew by 9%. This is interesting as China has until recently considered 8% GDP growth to be required simply to create enough jobs for rural people moving to urban centres.[131] This figure may more accurately be considered to be 57% now that the main growth in working population is receding. Growth of between 5%8% could well have the type of effect in China that a recession has elsewhere. Ukraine went into technical depression in January 2009 with a nominal annualized GDP growth of 20%.
[132]

The recession in Japan intensified in the fourth quarter of 2008 with a nominal annualized GDP growth of 12.7%,[133] and deepened further in the first quarter of 2009 with a nominal annualized GDP growth of 15.2%.[134] Major economies affected by the recession.[135]

Country Poland Australia Israel Argentina South Africa Cyprus Switzerland Canada Malta Norway New Zealand Portugal France Chile United States Belgium Korea, South Spain Czech Republic Netherlands Austria Brazil United Kingdom

Total GDP Recession length (number loss of quarters) -0.40% -1.00% -1.21% -1.69% -2.65% -2.85% -3.25% -3.36% -3.37% -3.44% -3.45% -3.68% -3.87% -4.11% -4.14% -4.23% -4.58% -4.89% -4.94% -5.29% -5.44% -6.14% -6.15% 1 1 2 2 3 4 4 6 4 11 5 4 4 4 6 3 2 7 3 5 4 2 6

Germany Italy Bulgaria Croatia Sweden Slovakia Denmark Hungary Luxembourg Mexico Greece Slovenia Finland Romania Russia Ireland Turkey Iceland Lithuania Estonia Latvia

-6.62% -6.76% -7.05% -7.41% -7.43% -7.62% -8.06% -8.32% -8.34% -8.47% -8.95% -9.71% -9.96% -10.00% -10.86% -12.24% -12.82% -15.07% -16.95% -20.33% -25.14%

4 7 5 8 7 1 6 6 5 4 9 3 4 9 4 13 4 11 6 7
8

Comparisons with the Great Depression

On April 17, 2009, head of the IMF Dominique Strauss-Kahn said that there was a chance that certain countries may not implement the proper policies to avoid feedback mechanisms that could eventually turn the recession into a depression. "The free-fall in the global economy may be starting to

abate, with a recovery emerging in 2010, but this depends crucially on the right policies being adopted today." The IMF pointed out that unlike the Great Depression, this recession was synchronized by global integration of markets. Such synchronized recessions were explained to last longer than typical economic downturns and have slower recoveries.[146] The chief economist of the IMF, Dr. Olivier Blanchard, stated that the percentage of workers laid off for long stints has been rising with each downturn for decades but the figures have surged this time. "Long-term unemployment is alarmingly high: in the US, half the unemployed have been out of work for over six months, something we have not seen since the Great Depression." The IMF also stated that a link between rising inequality within Western economies and deflating demand may exist. The last time that the wealth gap reached such skewed extremes was in 1928-1929.[147]

In the United States:

Dow Jones Industrial Average figures for percentage lost in 1937-1943 vs 2008-2011 (based on initial 1937 and 2008 DJIA month end amount, respectively) Although some casual comparisons between the late2000s recession and the Great Depression have been

made, there remain large differences between the two events.[148][149][150] The consensus among economists in March 2009 was that a depression was not likely to occur.[151] UCLA Anderson Forecast director Edward Leamer said on March 25, 2009 that there had not been any major predictions at that time which resembled a second Great Depression: "We've frightened consumers to the point where they imagine there is a good prospect of a Great Depression. That certainly is not in the prospect. No reputable forecaster is producing anything like a Great Depression."[152] Differences explicitly pointed out between the recession and the Great Depression include the facts that over the 79 years between 1929 and 2008, great changes occurred in economic philosophy and policy, [153] the stock market had not fallen as far as it did in 1932 or 1982, the 10-year price-to-earnings ratio of stocks was not as low as in the '30s or '80s, inflationadjusted U.S. housing prices in March 2009 were higher than any time since 1890 (including the housing booms of the 1970s and '80s),[154] the recession of the early '30s lasted over three-and-ahalf years,[153] and during the 1930s the supply of money (currency plus demand deposits) fell by 25% (where as in 2008 and 2009 the Fed "has taken an ultraloose credit stance").[155]Furthermore, the unemployment rate in 2008 and early 2009 and the rate at which it rose was comparable to most of the recessions occurring after World War II, and was dwarfed by the 25% unemployment rate peak of the Great Depression.[153] Nobel Prize winning economist Paul Krugman predicted a series of depressions in his Return to Depression Economics (2000), based on

"failures on the demand side of the economy." On January 5, 2009, he wrote that "preventing depressions isn't that easy after all" and that "the economy is still in free fall."[156] In March 2009, Krugman explained that a major difference in this situation is that the causes of this financial crisis were from the shadow banking system. "The crisis hasn't involved problems with deregulated institutions that took new risks... Instead, it involved risks taken by institutions that were never regulated in the first place."[157] On November 15, 2008, author and Southern Methodist University economics professor Ravi Batra said he is "afraid the global financial debacle will turn into a steep recession and be the worst since the Great Depression, even worse than the painful slump of 19801982 that afflicted the whole world". [158] In 1978, Batra's book The Downfall of Capitalism and Communismwas published. His first major prediction came true with the collapse of Soviet Communism in 1990. His second major prediction for a financial crisis to engulf the capitalist systemseems to be unfolding since 2007 with increasing attention being paid to his work.[159][160][161] On February 22, 2009, NYU economics professor Nouriel Roubini said that the crisis was the worst since the Great Depression, and that without cooperation between political parties and foreign countries, and if poor fiscal policy decisions (such as support of zombie banks) are pursued, the situation "could become as bad as the Great Depression."[162] On April 27, 2009, Roubini expressed a more upbeat assessment by noting that "the bottom of the economy [will be seen] toward the beginning or middle of next year."[163]

On April 6, 2009 Vernon L. Smith and Steven Gjerstad offered the hypothesis "that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we're witnessing the second great consumer debt crash, the end of a massive consumption binge."[164] In his final press conference as president, George W. Bush claimed that in September 2008 his chief economic advisors had said that the economic situation could at some point become worse than the Great Depression.[165] A tent city in Sacramento, California was described as "images, hauntingly reminiscent of the iconic photos of the 1930s and the Great Depression" and "evocative Depression-era images."[166] In the United Kingdom On 22 August 2008, the Office for National Statistics reported that the economy had reached a standstill, with 0% growth, during the second quarter of that year.[167]On 24 October, statistics for the third quarter of the year showed the first contraction in the national economy for 16 years.[168]With further contraction in the final quarter of 2008, the recession was officially declared on 23 January 2009.[169] On 10 February 2009, Ed Balls, Secretary of State for Children, Schools and Families of the United Kingdom, said that "I think that this is a financial crisis more extreme and more serious than that of the 1930s and we all remember how the politics of that era were shaped by the economy."[170] On 24 January 2009, Edmund Conway, Economics Editor for The Daily Telegraph, had written that "The plight facing Britain

is uncannily similar to the 1930s, since prices of many assets from shares to house prices are falling at record rates [in Britain], but the value of the debt against which they are held remains unchanged."[171] On 23 October 2009, it was reported that the British economy had contracted for six successive quarters the longest run of contraction since quarterly figures were first recorded in 1955.[172]The end of the recession was declared on 26 January 2010, when it was reported that the economy had grown by 0.1% in the final quarter of 2009.[173] Fears of a double-dip recession were sparked on 25 January 2011 when it was reported that the economy had contracted by 0.5% during the final quarter of 2010 following a full year of growth, although this was largely blamed on the severe weather which affected the nation in late November and almost all of December.[174]These fears were eased on 27 April 2011 when it was reported that the economy had grown by 0.5% in the first quarter of 2011,[175]and then on 26 July 2011 when 0.2% growth was reported for the second quarter of the year.[176] In Ireland Ireland entered into an economic depression in 2009. [177] The ESRI (Economic and Social Research Institute) predict an economic contraction of 14% by 2010, [178] however this number may have already been exceeded with GDP dropping 7.1% quarter on quarter during the fourth quarter of 2008,[179] and a possible greater contraction in the first quarter of 2009 with the fall in all OECD countries with the exception of France exceeding the drop of the previous quarter. [180] Unemployment is up 8.75%[181] to 11.4%.[182][183] [184] Government borrowing and the financial bailout

and Nationalisation of one of Ireland's banks[185] which were loaded with debt due to the Irish property bubble.

Job losses and unemployment rates:

Many jobs have been lost worldwide following the onset of a recession in 2007. So far, the job losses have been demonstrably less than during the Great Depression of the 1930s, when US unemployment peaked at 25% of the labour force.[186] The United States entered into recession in December 2007[187] when job losses began. Unemployment increased drastically starting in September 2008 following the bankruptcy of Lehman Brothers.[188] In March 2009, U-3 unemployment had risen to 8.5%. [189] In March 2009, statistician[190] John Williams "argue[d] that measurement changes implemented over the years make it impossible to compare the current unemployment rate with that seen during the Great Depression".[190] By December 2010, the official U.S. unemployment rate had increased to 9.8%. Economics & Investing: Risks of a 2008 style crisis are rising With the European economies weakening fast, left and centre, its capital markets suffering from wave after wave of panic selling, any one of the following threats could set off a 2008-style crisis. Triple A European economies weakening Supposedly strong Triple A European countries such as Germany and France have so far pledged tens of billions of Euros in aid to their weaker Euro partners Portugal, Ireland, Greece and Spain. However, they could be called on to spend

even more to support Belgium, Cyprus, and the potential biggest crises candidate of all so far, at least Italy. But there is a bit of a problem. As I mentioned earlier last week, these once-strong economies are now also sinking fast. In fact, German GDP grew just 0.1 per cent in the second quarter, much worse that its 0.8 per cent growth in the first quarter. France's economy did even worse, flat-lining in the most recent quarter. In the last few days, a possible downgrade in France's AAA ratings, as well as several of its largest banks, due to their immense Greek bond holdings, has spooked the markets. If this were to happen, France may well need to decide to back out from any additional massive bailouts of some of the other even weaker European countries if and when required. Both France and Italy may well decide to sell off part of ther gold holdings, as well as embark on additonal rounds of austerity cut backs. Whether President Sarkozy's target of approximately $17bn in budget cuts to get his countrys deficit under control will be enough if and when it loses its Triple A rating is doubtful. Greek bailout plan under threat Greece managed to secure a Euro 109 bn bail-out program out of its European neighbours in July. But, the implementation of this plan is still in serious jeopardy with Finland wanting Greek national assets as collateral for its contribution to the bail-out package. Meanwhile, the bail-out is also contingent on 90 per cent of Greek bond investors agreeing to a debt swap to lower the countrys financing costs. Many creditors are baulking to sign up to this. However, if not more creditors agree to this haircut, it could sabotage the entire Greek bail-out. With potential dire consequences for other bail-out programs for Portugal and Ireland.

Are they chasing the wrong problem?

European officials appear to continue to treat the banking problems as a liquidity crisis short-term cash squeeze. However, many analysts outside of government claim what we have here is a solvency crisis. They claim the banks simply do not have enough capital to absorb losses on the European sovereign bonds they are holding. Either they will have to raise a lot more money or some banks may face outright failure. Lone ranger newly appointed IMF managing director Lagarde confirms that the need to recapitalise [the banks] is urgent and that we could easily see the further spread of economic weakness to core [European] countries, or even a debilitating liquidity crisis. Many regard the idea of issuing Euro bonds bonds backed by all the Euro zone countries as one of the last best hopes for a pan-European solution to their spreading credit crisis. The idea behind this is to put the balance sheets of every single Euro-zone country at risk to support the weaker Euro countries. But Germany is having none of it. Not only has Chancellor Merkel all but ruled out increasing the $635bn European Financial Stability Facility, she also remains vigorously against the idea of issuing Euro bonds. The outcome of several forthcoming regional elections in Germany may well lead to a change of policy. Nevertheless, Germany has every reason to be worried about the issue of Euro bonds. If Germany put their balance sheet at risk just to support Greece, Portugal and Ireland, it could drive up German borrowing costs by dozens of billions. What if some of the other European states follow thereafter . . .

LEHMAN BROTHERS:

Lehman Brothers Holdings Inc. (former NYSE ticker symbol LEH) was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA (behind Goldman Sachs, Morgan Stanley, and Merrill Lynch), doing business in investment banking, equity and fixed-income sales and trading (especially U.S. Treasury securities), research,investment management, private equity, and private banking. On September 15, 2008, the firm filed for Chapter 11 bankruptcy protection following the massive exodus of most of its clients, drastic losses in its stock, and devaluation of its assets by credit rating agencies. The filing marked the largest bankruptcy in U.S. history,[4] and is thought to have played a major role in the unfolding of the late-2000s global financial crisis. The following day, Barclays announced its agreement to purchase, subject to regulatory approval, Lehman's North American investmentbanking and trading divisions along with its New York headquarters building.[5][6] On September 20, 2008, a revised version of that agreement was approved by US Bankruptcy CourtJudge James M. Peck.[7] The next week, Nomura Holdings announced that it would acquire Lehman Brothers' franchise in the Asia-Pacific region, including Japan, Hong Kong and Australia,[8] as well as Lehman Brothers' investment banking and equities businesses in Europe and the Middle East. The deal became effective on October 13, 2008.[9] History [edit]Under the Lehman family (18501969)

Emanuel and Mayer Lehman In 1844, 23-year-old Henry Lehman,[10] the son of a cattle merchant, emigrated to the United States from Rimpar, Bavaria.[11] He settled inMontgomery, Alabama,[10] where he opened a dry-goods store, "H. Lehman".[12] In 1847, following the arrival of his brother Emanuel Lehman, the firm became "H. Lehman and Bro."[13] With the arrival of their youngest brother, Mayer Lehman, in 1850, the firm changed its name again and "Lehman Brothers" was founded.[12][14] During the 1850s, cotton was one of the most important crops in the United States. Capitalizing on cotton's high market value, the three brothers began to routinely accept raw cotton from customers as payment for merchandise, eventually beginning a second business trading in cotton. Within a few years this business grew to become the most significant part of their operation. Following Henry's death from yellow fever in 1855,[12][15] the remaining brothers continued to focus on their commoditiestrading/brokerage operations. By 1858, the center of cotton trading had shifted from the South to New York City, where factors and commission houses were based. Lehman opened its first branch office in New York City's Manhattan borough at 119 Liberty Street, [15] and 32-year-old Emanuel relocated there to run

the office.[12] In 1862, facing difficulties as a result of the Civil War, the firm teamed up with a cotton merchant named John Durr to form Lehman, Durr & Co.[16][17]Following the war the company helped finance Alabama's reconstruction. The firm's headquarters were eventually moved to New York City, where it helped found the New York Cotton Exchange in 1870;[15][18] Emanuel sat on the Board of Governors until 1884. The firm also dealt in the emerging market for railroad bonds and entered the financial-advisory business.

Herbert H. Lehman Official U.S. Senate Photo Lehman became a member of the Coffee Exchange as early as 1883 and finally the New York Stock Exchange in 1887.[15][18] In 1899, it underwrote its first public offering, the preferred and common stock of the International Steam Pump Company. Despite the offering of International Steam, the firm's real shift from being a commodities house to a house of issue did not begin until 1906. In that year, under Philip Lehman, the firm partnered with Goldman, Sachs & Co.,[19][20] to bring the General Cigar Co. to market,[21] followed closely by Sears,

Roebuck and Company.[21] During the following two decades, almost one hundred new issues were underwritten by Lehman, many times in conjunction with Goldman, Sachs. Among these were F.W. Woolworth Company,[21][22] May Department Stores Company, Gimbel Brothers, Inc.,[23] R.H. Macy & Company,[23] The Studebaker Corporation,[22] the B.F. Goodrich Co. and Endicott Johnson Corporation. Following Philip Lehman's retirement in 1925, his son Robert "Bobbie" Lehman took over as head of the firm. During Bobbie's tenure, the company weathered the capital crisis of the Great Depression by focusing on venture capital while the equities market recovered. Traditionally, a family-only partnership, in 1924 John M. Hancock became the first non-family member to join the firm,[19][24] followed by Monroe C. Gutman and Paul Mazur in 1927. By 1928, the firm moved to its now famous One William Street location.

Pete Peterson In the 1950s, Lehman underwrote the IPO of Digital Equipment Corporation. In the 1930s, Lehman underwrote the initial public offering of the first television manufacturer, DuMont, and helped fund the Radio Corporation of America (RCA).[25] It also helped finance the rapidly

growing oil industry, including the companies Halliburton and Kerr-McGee. Later, it arranged the acquisition of Digital by Compaq. [edit]An evolving partnership (19691984) Robert Lehman died in 1969 after forty-four years as the patriarch of the firm, leaving no member of the Lehman family actively involved with the partnership. [26] Robert's death, coupled with a lack of a clear successor from within the Lehman family left a void in the company. At the same time, Lehman was facing strong headwinds amidst the difficult economic environment of the early 1970s. By 1972, the firm was facing hard times and in 1973,Pete Peterson, Chairman and Chief Executive Officer of the Bell & Howell Corporation, was brought in to save the firm.
[26]

Under Peterson's leadership as Chairman and CEO, the firm acquired Abraham & Co. in 1975, and two years later merged with the venerable, but struggling, Kuhn, Loeb & Co.,[26] to form Lehman Brothers, Kuhn, Loeb Inc., the country's fourth-largest investment bank, behind Salomon Brothers,Goldman Sachs and First Boston.[27] Peterson led the firm from significant operating losses to five consecutive years of record profits with a return on equity among the highest in the investment-banking industry. By the early 1980s, hostilities between the firm's investment bankers and traders (who were driving most of the firm's profits) prompted Peterson to promote Lewis Glucksman, the firm's President, COO and former trader, to be his co-CEO in May 1983. Glucksman introduced a number of changes that had the effect of increasing tensions, which when coupled with Glucksmans management style and a downturn

in the markets, resulted in a power struggle that ousted Peterson and left Glucksman as the sole CEO.
[28]

Upset bankers who had soured over the power struggle, left the company. Steve Schwarzman, chairman of the firm's M&A committee, recalled in a February 2003 interview with Private Equity International that "Lehman Brothers had an extremely competitive internal environment, which ultimately became dysfunctional." The company suffered under the disintegration, and Glucksman was pressured into selling the firm. [edit]Merger with American Express (19841994)

Shearson Lehman/American Express Logo Main article: Shearson Lehman Hutton Shearson/American Express, an American Expressowned securities company focused on brokerage rather than investment banking, acquired Lehman in 1984, for $360 million. On May 11, the combined firms became Shearson Lehman/American Express.[28] In 1988, Shearson Lehman/American Express and E.F. Hutton & Co. merged as Shearson Lehman Hutton Inc.
[29]

From 1983 to 1990, Peter A. Cohen was CEO and Chairman of Shearson Lehman Brothers,[30] where he led the one billion dollar purchase of E.F. Hutton to

form Shearson Lehman Hutton.[31] During this period, Shearson Lehman was aggressive in building its leveraged finance business in the model of rival Drexel Burnham Lambert. In 1989, Shearson backed F. Ross Johnson's management team in its attempted management buyout of RJR Nabisco but were ultimately outbid by private equity firm Kohlberg Kravis Roberts, who was backed by Drexel. [edit]Divestment and independence (19942008) In 1993, under newly appointed CEO, Harvey Golub, American Express began to divest itself of its banking and brokerage operations. It sold its retail brokerage and asset management operations to Primerica[32] and in 1994 it spun off Lehman Brothers Kuhn Loeb in an initial public offering, as Lehman Brothers Holdings, Inc.[33] Despite rumors that it would be acquired again, Lehman performed quite well under Chairman and CEO Richard S. Fuld, Jr.. By 2008, Fuld had been with the company for 30 years, and would be the longesttenured CEO on Wall Street. Fuld had steered Lehman through the 1997 Asian Financial Crisis, a period where the firm's share price dropped to $22 USD in 1998, but he was said to have underestimated the downturn in the US housing market and its effect on Lehman's mortgage bond underwriting business. Fuld kept his job as the subprime mortgage crisis took hold, while CEOs of rivals like Bear Stearns, Merrill Lynch, and Citigroup were forced to resign.[34] In addition, Lehman's board of directors, which includes retired CEOs like Vodafone's Christopher Gent and IBM's John Akers were reluctant to challenge Fuld as the firm's share price spiraled lower. [34]

Fuld had a succession of "number twos" under him, usually titled as President and Chief Operating Officer. Chris Pettit was Fuld's second-in-command for two decades until November 26, 1996, when he resigned as President and board member. Pettit lost a power struggle with his deputies ( Steve Lessing, and Joseph M. Gregory) back on March 15 that year that caused him to relinquish its COO title, likely brought about after Pettit had a mistress which violated Fuld's unwritten rules on marriage and social etiquette. Bradley Jack and Joseph M. Gregory were appointed co-COOs in 2002, however Jack was demoted to the Office of the Chairman in May 2004 and departed in June 2005 with a severance package of $80 million, making Gregory the sole COO and President. Gregory was demoted on June 12, 2008 and replaced by Bart McDade, who would see Lehman through bankruptcy. [35][36] In 2001, the firm acquired the private-client services, or "PCS", business of Cowen & Co.[37] and later, in 2003, aggressively re-entered the asset-management business, which it had exited in 1989.[38] Beginning with $2 billion in assets under management, the firm acquired the Crossroads Group, the fixed-income division of Lincoln Capital Management[38] andNeuberger Berman.[39] These businesses, together with the PCS business and Lehman's private-equity business, comprised the Investment Management Division, which generated approximately $3.1 billion in net revenue and almost $800 million in pretax income in 2007. Prior to going bankrupt, the firm had in excess of $275 billion in assets under management. Altogether, since going public in 1994, the firm had increased net revenues over 600% from $2.73 billion to $19.2 billion and had

increased employee headcount over 230% from 8,500 to almost 28,600. At the 2008 ALB China Law Awards,[40] Lehman Brothers was crowned:

Deal of the Year Debt Market Deal of the Year Deal of the Year Equity Market Deal of the Year

[edit]Response to September 11 terrorist attacks

The Former New York City headquarters now owned by Barclays. On September 11, 2001, Lehman occupied three floors of One World Trade Center where one of its employees was killed in the attacks of that day. Its global headquarters in Three World Financial Center were severely damaged and rendered unusable by falling debris, displacing over 6,500 employees. The bank recovered quickly and rebuilt its presence. Trading operations moved across the Hudson River to its Jersey City,New Jersey, facilities, where an impromptu trading floor was built in a hotel and brought online less than forty-eight hours after

the attacks. When stock markets reopened on September 17, 2001, Lehman's sales and trading capabilities were restored. In the ensuing months, the firm fanned out its operations across the New York City metropolitan area in over forty temporary locations. Notably, the investment-banking division converted the first-floor lounges, restaurants, and all 665 guestrooms of the Sheraton Manhattan Hotel into office space. The bank also experimented with flextime (to share office space) and telecommuting via virtual private networking. In October 2001, Lehman purchased a 32story, 1,050,000-square-foot (98,000 m2) office building for a reported sum of $700 million. The building, located at 745 Seventh Avenue, had recently been built, and not yet occupied, by rival Morgan Stanley. With Morgan Stanley's world headquarters located only two blocks away at 1585 Broadway, in the wake of the attacks the firm was re-evaluating its office plans which would have put over 10,000 employees in the Times Square area of New York City. Lehman began moving into the new facility in January and finished in March 2002, a move that significantly boosted morale throughout the firm.[citation needed] The firm was criticized for not moving back to its former headquarters in lower Manhattan. Following the attacks, only Deutsche Bank,Goldman Sachs, and Merrill Lynch of the major firms remained in the downtown area. Lehman, however, points to the facts that it was committed to stay in New York City, that the new headquarters represented an ideal circumstance where the firm was desperate to buy and Morgan Stanley was desperate to sell, that when

the new building was purchased, the structural integrity of Three World Financial Center had not yet been given a clean bill of health, and that in any case, the company could not have waited until May 2002 for repairs to Three World Financial Center to conclude. After the attacks, Lehman's management placed increased emphasis on business continuity planning. Unlike its rivals, the company was unusually concentrated for a bulge-bracketinvestment bank. For example, Morgan Stanley maintains a 750,000square-foot (70,000 m2) trading-and-banking facility in Westchester County, New York. The trading floor of UBS is located in Stamford, Connecticut. Merrill Lynch's asset-management division is located in Plainsboro Township, New Jersey. Aside from its headquarters in Three World Financial Center, Lehman maintained operations-and-backoffice facilities in Jersey City, space that the firm considered leaving prior to 9/11. The space was not only retained, but expanded, including the construction of a backup-trading facility. In addition, telecommuting technology first rolled out in the days following the attacks to allow employees to work from home was expanded and enhanced for general use throughout the firm.[41] [edit]2003 SEC litigation In 2003, the company was one of ten firms which simultaneously entered into a settlement with the U.S. Securities and Exchange Commission (SEC), the Office of the New York State Attorney General and various other securities regulators, regarding undue influence over each firm's research analysts by their investment-banking divisions. Specifically, regulators alleged that the firms had improperly associated analyst compensation with the firms' investment-

banking revenues, and promised favorable, marketmoving research coverage, in exchange for underwriting opportunities. The settlement, known as the global settlement, provided for total financial penalties of $1.4 billion, including $80 million against Lehman, and structural reforms, including a complete separation of investment banking departments from research departments, no analyst compensation, directly or indirectly, from investment-banking revenues, and the provision of free, independent, third-party, research to the firms' clients. [edit]Collapse Main article: Bankruptcy of Lehman Brothers [edit]Causes [edit]Malfeasance A March 2010 report by the court-appointed examiner indicated that Lehman executives regularly used cosmetic accounting gimmicks at the end of each quarter to make its finances appear less shaky than they really were. This practice was a type of repurchase agreement that temporarily removed securities from the company's balance sheet. However, unlike typical repurchase agreements, these deals were described by Lehman as the outright sale of securities and created "a materially misleading picture of the firms financial condition in late 2007 and 2008."[42] [edit]Subprime mortgage crisis In August 2007, the firm closed its subprime lender, BNC Mortgage, eliminating 1,200 positions in 23 locations, and took an after-tax charge of $25 million and a $27 million reduction ingoodwill. Lehman said that poor market conditions in the mortgage space

"necessitated a substantial reduction in its resources and capacity in the subprime space".[43] In 2008, Lehman faced an unprecedented loss to the continuing subprime mortgage crisis. Lehman's loss was a result of having held on to large positions in subprime and other lower-rated mortgage tranches when securing the underlying mortgages; whether Lehman did this because it was simply unable to sell the lower-rated bonds, or made a conscious decision to hold them, is unclear. In any event, huge losses accrued in lower-rated mortgagebacked securities throughout 2008. In the second fiscal quarter, Lehman reported losses of $2.8 billion and was forced to sell off $6 billion in assets.[44] In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten.[44] In August 2008, Lehman reported that it intended to release 6% of its work force, 1,500 people, just ahead of its third-quarter-reporting deadline in September.
[44]

On August 22, 2008, shares in Lehman closed up 5% (16% for the week) on reports that the statecontrolled Korea Development Bank was considering buying the bank.[45] Most of those gains were quickly eroded as news came in that Korea Development Bank was "facing difficulties pleasing regulators and attracting partners for the deal."[46] It culminated on September 9, when Lehman's shares plunged 45% to $7.79, after it was reported that the state-run South Korean firm had put talks on hold.[47] On September 17, 2008 Swiss Re estimated its overall net exposure to Lehman Brothers as approximately CHF 50 million.[48]

Investor confidence continued to erode as Lehman's stock lost roughly half its value and pushed the S&P 500 down 3.4% on September 9. The Dow Jones lost 300 points the same day on investors' concerns about the security of the bank.[49] The U.S. government did not announce any plans to assist with any possible financial crisis that emerged at Lehman.[50] The next day, Lehman announced a loss of $3.9 billion and their intent to sell off a majority stake in their investment-management business, which includes Neuberger Berman.[51][52] The stock slid seven percent that day.[52][53] Lehman, after earlier rejecting questions on the sale of the company, was reportedly searching for a buyer as its stock price dropped another 40 percent on September 11, 2008.[53] Just before the collapse of Lehman Brothers, executives at Neuberger Berman sent e-mail memos suggesting, among other things, that the Lehman Brothers' top people forgo multi-million dollar bonuses to "send a strong message to both employees and investors that management is not shirking accountability for recent performance."[54] Lehman Brothers Investment Management Director George Herbert Walker IV dismissed the proposal, going so far as to actually apologize to other members of the Lehman Brothers executive committee for the idea of bonus reduction having been suggested. He wrote, "Sorry team. I am not sure what's in the water at Neuberger Berman. I'm embarrassed and I apologize."[54] [edit]Short-selling allegations During hearings on the bankruptcy filing by Lehman Brothers and bailout of AIG before the House Committee on Oversight and Government Reform,

[55]

former Lehman Brothers CEO Richard Fuld said a host of factors including a crisis of confidence and naked short-selling attacks followed by false rumors contributed to both the collapse of Bear Stearns and Lehman Brothers. House committee Chairman Henry Waxman said the committee received thousands of pages of internal documents from Lehman and these documents portray a company in which there was no accountability for failure".[56][57][58] An article by journalist Matt Taibbi in Rolling Stone contended that naked short selling contributed to the demise of both Lehman and Bear Stearns.[59] A study by finance researchers at the University of Oklahoma Price College of Business studied trading in financial stocks, including Lehman Brothers and Bear Stearns, and found "no evidence that stock price declines were caused by naked short selling".[60] [edit]Bankruptcy On Saturday, September 13, 2008, Timothy F. Geithner, the president of the Federal Reserve Bank of New York called a meeting on the future of Lehman, which included the possibility of an emergency liquidation of its assets.[61] Lehman reported that it had been in talks with Bank of America and Barclays for the company's possible sale. However, both Barclays and Bank of America ultimately declined to purchase the entire company.
[61][62]

The next day, Sunday, September 14, the International Swaps and Derivatives Association (ISDA) offered an exceptional trading session to allow market participants to offset positions in various derivatives on the condition of a Lehman bankruptcy later that day.[63][64] Although the

bankruptcy filing missed the deadline, many dealers honored the trades they made in the special session.
[65]

Lehman Brothers headquarters in New York City on September 15, 2008 Shortly before 1 am Monday morning (New York time), Lehman Brothers Holdings announced it would file for Chapter 11 bankruptcy protection[66] citing bank debt of $613 billion, $155 billion in bond debt, and assets worth $639 billion.[67] It further announced that its subsidiaries would continue to operate as normal.[68] A group of Wall Street firms agreed to provide capital and financial assistance for the bank's orderly liquidation and the Federal Reserve, in turn, agreed to a swap of lower-quality assets in exchange for loans and other assistance from the government. [69] The morning witnessed scenes of Lehman employees removing files, items with the company logo, and other belongings from the world headquarters at 745 Seventh Avenue. The spectacle continued throughout the day and into the following day. Later that day, the Australian Securities Exchange (ASX) suspended Lehman's Australian subsidiary as a market participant after clearinghouses terminated their contracts with the firm. [70] Lehman shares tumbled over 90% on September

15, 2008.[71][72] The Dow Jones closed down just over 500 points on September 15, 2008, which was at the time the largest drop in a single day since the days following the attacks on September 11, 2001.[73] In the United Kingdom, the investment bank went into administration with PricewaterhouseCoopers app ointed as administrators.[74] In Japan, the Japanese branch, Lehman Brothers Japan Inc., and its holding company filed for civil reorganization on September 16, 2008, in Tokyo District Court.[75] On September 17, 2008, the New York Stock Exchange delisted Lehman Brothers.[76] On March 16, 2011 some three years after filing for bankruptcy and following a filing in a Manhattan U.S. bankruptcy court, Lehman Brothers Holdings Inc announced it would seek creditor approval of its reorganization plan by October 14 followed by a confirmation hearing to follow on November 17.[77] [edit]Liquidation [edit]Barclays acquisition On Tuesday, September 16, 2008, Barclays plc announced that they would acquire a "stripped clean" portion of Lehman for $1.75 billion, including most of Lehman's North America operations.[5][78] On September 20, this transaction was approved by U.S. Bankruptcy Judge James Peck.[79][80] On September 20, 2008, a revised version of the deal, a $1.35 billion (700 million) plan for Barclays to acquire the core business of Lehman (mainly its $960million headquarters, a 38-story office building[81] in Midtown Manhattan, with responsibility for 9,000 former employees), was approved. Manhattan court bankruptcy Judge James Peck, after a 7-hour hearing, ruled: "I have to approve

this transaction because it is the only available transaction. Lehman Brothers became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets. This is the most momentous bankruptcy hearing I've ever sat through. It can never be deemed precedent for future cases. It's hard for me to imagine a similar emergency."[82] Luc Despins, then a partner at Milbank, Tweed, Hadley & McCloy, the creditors committee counsel, said: "The reason we're not objecting is really based on the lack of a viable alternative. We did not support the transaction because there had not been enough time to properly review it."[citation needed] In the amended agreement, Barclays would absorb $47.4 billion in securities and assume $45.5 billion in trading liabilities. Lehman's attorney Harvey R. Miller of Weil, Gotshal & Manges, said "the purchase price for the real estate components of the deal would be $1.29 billion, including $960 million for Lehman's New York headquarters and $330 million for two New Jersey data centers. Lehman's original estimate valued its headquarters at $1.02 billion but an appraisal from CB Richard Ellis this week valued it at $900 million."[citation needed] Further, Barclays will not acquire Lehman's Eagle Energy unit, but will have entities known as Lehman Brothers Canada Inc, Lehman Brothers Sudamerica, Lehman Brothers Uruguay and its Private Investment Management business for high net-worth individuals. Finally, Lehman will retain $20 billion of securities assets in Lehman Brothers Inc that are not being transferred to Barclays.[83] Barclays acquired a potential liability of $2.5 billion to be paid as severance, if it chooses not to retain some Lehman employees beyond the guaranteed 90 days.[84][85]

[edit]Nomura acquisition Nomura Holdings, Japan's top brokerage firm, agreed to buy the Asian division of Lehman Brothers for $225 million and parts of the European division for a nominal fee of $2.[86][87] It would not take on any trading assets or liabilities in the European units. Nomura negotiated such a low price because it acquired only Lehman's employees in the regions, and not its stocks, bonds or other assets. The last Lehman Brothers Annual Report identified that these non-US subsidiaries of Lehman Brothers were responsible for over 50% of global revenue produced.[88] [edit]Sale of Neuberger Berman On September 29, 2008, Lehman agreed to sell Neuberger Berman, the bulk of its investment management business, to a pair of private-equity firms, Bain Capital Partners and Hellman & Friedman, for $2.15 billion.[89] The transaction was expected to close in early 2009, subject to approval by the U.S. Bankruptcy Court,[90] but a competing bid was entered by the firm's management, who ultimately prevailed in a bankruptcy auction on December 3, 2008. Creditors of Lehman Brothers Holdings Inc. retain a 49% common equity interest in the firm, now known as Neuberger Berman Group LLC.[91] It is the fourth largest private employee-controlled asset management firm globally, behind Fidelity Investments, The Capital Group Companies and Wellington Management Company. [edit]Financial fallout Lehman's bankruptcy was the largest failure of an investment bank since Drexel Burnham Lambert collapsed amid fraud allegations 18 years prior.[69] Immediately following the bankruptcy filing,

an already distressed financial market began a period of extreme volatility, during which the Dow experienced its largest one day point loss, largest intra-day range (more than 1,000 points) and largest daily point gain. What followed was what many have called the perfect storm of economic distress factors and eventually a $700bn bailout package (Troubled Asset Relief Program) prepared by Henry Paulson, Secretary of the Treasury, and approved by Congress. The Dow eventually closed at a new sixyear low of 7,552.29 on November 20, followed by a further drop to 6626 by March of the next year. The fall of Lehman also had a strong effect on small private investors such as bond holders and holders of so-called Minibonds. In Germany structured products, often based on an index, were sold mostly to private investors, elderly, retired persons, students and families. Most of those now worthless derivatives were sold by the German arm of Citigroup, the German Citibank now owned by Crdit Mutuel. [edit]Ongoing litigation On March 11, 2010, Mangal P Pandey, a courtappointed examiner, published the results of its yearlong investigation into the finances of Lehman Brothers.[92] This report revealed that Lehman Brothers used an accounting procedure termed repo 105 to temporarily exchange $50 billion of assets into cash just before publishing its financial statements. [93] The action could be seen to implicate both Ernst & Young, the bank's accountancy firm and Richard S. Fuld, Jr, the former CEO.[94] This could potentially lead to Ernst & Young being found guilty of financial malpractice and Fuld facing time in prison.[95]

According to the Wall Street Journal, in March 2011, the SEC announced that they weren't confident that they could prove that Lehman Brothers violated US laws in its accounting practices.[96]

Conclusion:
We have a painful combination of a lousy economy, collapsing financial stocks, a deepening European debt crisis and, no new credible bail out programs on the horizon. When you put the pieces together, it is very easy to see why the stock market may well retest its 2009 lows before the year is out.