Lehman Brothers Collapses and a Financial Crisis Spreads

On September 15, 2008, the prominent Wall Street firm Lehman Brothers sought bankruptcy protection after failing to secure a commercial buyer or emergency federal assistance. The filing was the largest in United States history and marked the culmination of a deteriorating credit landscape. What began as a decline in domestic housing values rapidly developed into a systemic breakdown that paralyzed credit markets, destabilized major financial institutions across multiple continents, and deepened the Great Recession, a downturn that in the United States had begun in December 2007.

Analysts have traced the turmoil in part to the preceding decade of financial deregulation and lending expansion. Legislative changes in the late 1990s repealed components of the 1933 Glass-Steagall Act, enabling financial firms to combine conventional commercial banking and insurance operations with higher-risk investment banking. In 2004, a voluntary Securities and Exchange Commission program for the largest investment banks lifted earlier limits on their debt relative to capital, allowing them to accumulate significant debt. During the same period, low interest rates, which some economists argue the Federal Reserve kept too low for too long, helped fuel rapid growth in subprime mortgage origination, in which institutions issued high-risk adjustable-rate loans with relaxed documentation standards.