>> this week of special edition examines therest collapse of lehman brothers and its 10-year aftermath. >> a historic day on wall street. >> the bankers, policymakers, the regulators, the investors all faced decisions that shape the future of the global economy. risk, you need a systemic cancer. benefit of hindsight, maybe lehman brothers should have been saying. -- saved. >> we did know what to do about it and we did it. >> the financial system looks earlier, than a decade

but have we learned lessons? that, i becamer more cynical about the global financial system and. >> the downturn will be different than the one in 2008. >> join us for life after lehman brothers. a story still being written. >> there are lessons we must continue to press forward on. it is straight ahead on "bloomberg best." hello and welcome. i'm erik schatzker. december the 15th marks 10 years since the lehman brothers tragedy, a collapse that triggered the financial crisis. the effects are felt around the world by individuals, companies, and two shoes, and governments. in the next hour, many people

who played key roles in the financial system as those events were unfolding. people who helped spearhead the recovery and we will discuss the legacy of the crisis as well as the critical question. could it happen again? first, let's flashback to september 2008 to capture the mood of the meltdown. major financial institutions have teetered on the edge of collapse and some have failed. >> we clearly have an unprecedented crisis in our financial system. >> today, there is unprecedented turmoil in our capital markets. it is very mysterious. not sure what is happening. ,> nobody, including me

anticipated how the problems in the mortgage markets would spread to our credit markets and our banking system. >> two of the leading insurers of mortgage-backed caceres -- securities are freddie may -- freddie mac and fannie mae. fannie mae and freddie mac are so large and so interwoven in our financial system that the failure of either of them would cause great turmoil in the financial markets, here at home and around the globe. we have determined it is necessary to take action. >> we look forward to working closely with congress to resolve this financial crisis and get our economy moving again. >> our economy is in a state of crisis, but you get to keep $480 million. i have a very basic question for you. is this fair? >> at the i am the storm of the

investment banks, leaders who faced critical decision. top executives to find out what they were thinking then and what they think now of the changes that have reshaped the financial landscape. let's start the conversation. in 2008, he was cohead of investment banking at deutsche bank. do you recall the moment when you felt real fear? >> there had been fear all along. when you run markets, fear is a constant companion but perhaps panic might be a better word. me,uld say it is, for lehman. i had gone through a far less systematic or less systemic one.

eric: into a room at the new york fed -- mariano rajoy and we walked out -- ofhu: and we walked out that, no one was petrified. we all felt we had a solution. the monday after didn't feel nearly the same. anshu: the biggest thing that struck me was not the fact that lehman brothers were not going into insolvency, but there was no statement, no agreement, when it came to derivative party risk, there was a whole series of very complex questions that monday morning which no one had the answer to. eric: could or should lehman have been saved? anshu: the decision to keep ahman or not limited around whole set of factors.

every attempt was made. more of an effort perhaps to control the way these issues were going to be addressed. easy to sit in judgment, but i have to say that because i respect the people involved and frankly, they are the ones who created the plan which allows us to sister sokol way talking about it 10 years later. you are asking me as a practitioner when did life change? i would focus in, when the money market funds broke the buck that week. haves the 16th or 17th, we the benefit to be very stable he funded but i knew what that meant. was -- lehman was the full point? even if lehman had been

dealt with perfectly, we would've had a happy state. i am not saying every thing would have gone away. all i am saying is perhaps the reaction time would have been like more generous and maybe the stress would have been less. from one perspective, there were a lot of warning signs, so the year before when we had the money market troubles and the french banks, we had the asset management problem. we had in the summer of 2007 the large mortgage rate at ubs and u.s. 2008, -- was acquired by j.p. morgan and it was soon after that when we started thinking about what be the next shoe to fall. fannie and freddie and aig all happened. in some ways, we should have been prepared but i don't think anyone in the world was prepared

for the devastation that hit the morning after the bankruptcy of lehman brothers and the chaos in the markets. >> this is because people didn't understand the interconnectedness of what banks were lending to each other. do we now fully understand it 10 years on? >> it is absolutely correct we didn't understand completely the interconnectedness. is a better understanding today. banks are safer and sounder, but to say we understand all the complexity of the interconnectedness would probably be a bit optimistic. we felt this is unlikely to happen. at the last minute, the u.s. government would jump in. i was traveling from zurich to frankfurt when i got a phone call from our u.s. head telling me it is over and that was really the worst-case outcome. we hadn't expected that. guy: what was the first thought that went through your head?

do you think deutsche bank, the wider system? not completely unprepared. i wasn't so concerned about deutsche bank because we knew we had things under control, but i was very much concerned about the systemic risk and at that systemichought this is risk and we need a systemic cancer. -- answer. say we shouldn't have asked for government support but the problem was so big, i don't think we could have made it without that. guy: was the next phone call? josef: you call immediately the head of investment bank, central trading under the risk management treasurer, and then you reach out to central bankers. you reach out to other bankers. there was a lot of communication going on immediately thereafter. iche veryspoke to tr

quickly after? yeah, and the head of other banks. the bank of england, as well, because they were a key player in the british market. absolutely. guy: in the conversations you had in and around the chapter 11 filing, you were surprised. you didn't think the u.s. would go this far and stepping. panic in those conversations. what was the tone like? josef: pretty well. the media played an important role by calming down. saying all banks are bankrupt within hours, that has not happened. the programs were announced, and what isre also saying really the direct impact of lehman to me and larger impact on the financial system.

i think we were all very calm. aig came admit that and that would have added another problem. aig was a very important message. still ahead on this special edition of "bloomberg best," jean-claude trichet and other central bankers share their insight on the aftermath of the financial crisis. next, 2008 was a frightening moment for investors. recollections from the trading war when we return. >> a lot of business going on because rates were volatile and people had risk to manage. eric: this is bloomberg. ♪

eric: this is a special edition of "bloomberg best." we are focusing on the 2008 financial crisis and its aftermath. at bloomberg television, we clearly remember the intensity of that september years ago. -- 10 years ago. here are the highlights from our coverage. is a very serious situation. we don't know how it will play out this week but here is what we know. one of the most storied firms on wall street is now gone. >> a historic day on wall street. , which survived railroad bankruptcies of the 1800s, the depression of the 1930's and the collapse of long-term capital management a decade ago filed for chapter 11 protection in bankruptcy court. started at 9:30

this morning, almost five hours. head of the democratic the banking committee wrapping up after questioning the head of federal reserve ben bernanke and the bailout plan for the bank is being assessed. >> big losses on equities. take a look at the doubt. we are down 700 points. down through the 10,000 level we came through in 1999. >> today comes on the heels of a global stampede out of equities. western europe, the dow jones 600 index had its biggest drop since 1987. just as many of those faces are still familiar, many of the world's top investors from 2008 are still in the game today, and the pain is still fresh. guy johnson sat down with michael spencer, who remembers

exactly where he was when he heard the news of lehman's demise. i remember saying to a good friend of mine, i am down on paper, 100 million today. wasn't a pleasant experience. guy: surprised you remembered it. were you ready for it? did you see it coming? conversations you were having within the business and externally, did he lent his a this being a reality or did everyone think at some point, someone will step in? this can't be let go? it was a suspended reality environment. i remember watching the barclays share price tumbled down and genuinely wondering at the time, is it possible that barclays doesn't survive this? -- it was ale

proper -- i wasn't there in 1929, but i imagine that was a period where things were just collapsing and people -- confidence was being undermined not necessarily by substandard issues, but seeing a share price collapse. yes, i mostly thought they wouldn't let it go. bear stearns had been effectively saved. other financial institutions have had support and i thought surely, a solution will be found. that with the benefit of hindsight, maybe lehman should have been saved. and womenwere the men working on the floor saying about what the system looked like at that point? michael: it was a bizarre allronment, because although the system seemed to be

crumbling around us, there was a lot of is this going on because rates were volatile and people had risk to manage. what will happen to interest rates? likeest rates came down that and states down. there was a lot of movement in the market. people saying, who can i trade with japan's for my risk to? where credit limit is good with the barclays and the goldmans, because at that moment, pretty much, a significant portion of the financial market looked potentially vulnerable. there were only a handful of banks that looked absolutely rocksolid at that time. bizarre very environment. funny enough, the trading volumes and the subsequent weeks was surprisingly robust but the overall ecosystem was clearly crumbling fairly rapidly. eric: when i sat down this week with ray dalio, founder of bridgewater associates, the weld's largest hedge fund,

explored a different angle on the aftermath of 2008. i asked if having just lived through a once-in-a-lifetime debt crisis, do we find ourselves in the midst of another bubble? no, i don't think we are in the midst right now of another bubble. let me maybe clarify. when you hit zero interest rates, you have a different kind of debt crisis. you are more likely to have a depression. the period we are in is similar to the 1935, 1940. . let me explain that in a minute. to 1932, we had a debt crisis and interest rates at zero. 2070 2009, we have a debt crisis that hit zero. in both of those cases, there is one thing for central banks to do and that is print money and buy financial asset. buy print money,

putscial assets and liquidity in and contributes to a greater wealth gap because though whose -- those who own financial assets benefit. of time in the wealth gap and the economy not improving for large segment of the population, we have populism. would say, when was populism popular, it would be in that period of time. that populism issue is an important issue. as we look forward and we say, when the next downturn comes, which will happen probably in a couple of years, we are going to have a different type of downturn very similar to the one that happened in 1937 to the 1940 period. you are in the part of the cycle now that the central banks are beginning to tighten monetary policy.

asset prices are sensitive to monetary policy because the duration of those assets has lengthened. banks have to be very careful not to raise interest rates much faster than is built into the curve, but with that populism, we have an issue. if we think about what the next downturn will be light, the downturn i think will be very different than the one in 2008. in which theone social and political problems will be great because of that wealth gap and populism. there will be more conflict. right now, times are good and we are sort of at each other's throats and that. i also worry about the effectiveness in monetary policy in reversing that because monetary policy has interest rates and we can't lower interest rates as much, and it has quantitative easing. the purchases of financial assets to push other financial assets out and get liquidity into the system.

that is at its maximum. when we have a downturn, it won't be as effective. i also think the downturn in our form of debt crisis won't just be debts. it will also be pension obligations, health care obligations, unfunded obligations. one more thing, i think it will be about us having to sell a lot of treasury bonds to the rest of the world and i think that will also be an issue about two years out. i would say two years out is when i am worried about and i would think that for these various reasons. coming up, a trader's ta le. mark cudmore has some thoughts. mark: i thought there was no chance lehman brothers would be allowed to fall. eric: this is bloomberg. ♪

eric: you are watching "bloomberg best." i am erik schatzker. mark cudmore is now a colleague of ours, a macro strategist who function.ive blogging 10 years ago, he was a trader at lehman brothers in london. mark: late 2007, it became clear we were heading towards some tort of -- type of financial crisis. i was naive to think that lehman brothers was one of the safer banks. i was brainwashed at lehman brothers and i really enjoyed it. the atmosphere was very good. 2008, therer of started to become this idea that the reality was different to what management were possibly presenting to us and the situation was mark dyer. -- more dire.

. was flying to budapest other juniors from lehman brothers and i remember assuring them saturday night, look, it is absolutely time. worst -- fine. worst case scenario is we get taken over by bank of america. there was no idea that monday, we have no employer and no way out. sunday, i flew from budapest to a stumble and i remember -- in stanbul. i saw lehman brothers filed for bankruptcy and i got all these messages from ex colleagues in new york say it has been great working with you. see you on the other side. leaving lehman brothers wasn't my choice. i really thought there was no chance lehman brothers would be allowed to fall and after that, i became more cynical about the global financial system. i never got back into the lehman brothers office after september

12. it was actually a colleague who had to bring my box of collection out for me. i wasn't one of the people carrying boxes out. history rhymes, it doesn't repeat. do i think we will get another lehman brothers, not a systemically important bank. will we get another financial crisis? yes. every other crisis before, people didn't think a crash could come. was theke 1929, it roaring 20's and people didn't understand the downside and everyone got caught up in the grade. as long as humans, nate financial markets, which they still do, not for much longer, we will get financial crises. asc: much more to come "bloomberg best" examines life after lehman. leaders in policy and politics discussed the response to the financial crisis and where it has brought us today.

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♪ >> this is "bloomberg best." i'm erik schatzker. we are looking back at the collapse of lehman brothers, the 2008 financial meltdown, and the indelible mark those events left on the global financial system. now let's hear from some of the first responders, the central bankers, political leaders, and regulators who had to devise policy and implement reforms, all on the fly, all in real-time. we are going to start with mervyn king, governor of the bank of england from 2003-2013, and he spoke with guy johnson. ♪ the economy could have ground to a halt. we could have gone back to the

great depression of the 1930's. i think we would have taken action, as we did take, in late 2000 and eight and 2009 -- 2008 and 2009 to offset the consequences, but we wouldn't have prevented it altogether. they would have been a much deeper recession than the one we experienced. it was, in that sense, and enormous tail risk. but, and i think this is the key point, we knew exactly what we would have to do to prevent that happening, which was to lend large amounts of money against collateral and security provided by the banks, to keep them afloat. it wasn't that we were facing a calamity that we didn't know what to do about. we didn't know what to do about it, and we did it. in many ways, it was a rather straightforward thing to do. once you saw the royal bank of scotland getting to the end of the day, the decision to lend money to it against a lot of the assets which they had was the

right thing to do to prevent the british economy from grinding to a halt. the money was repaid two or three months later. help preventon did what would otherwise be in immediate collapse. difference,policy the thing that really brought the banking collapse to an end, was not just initially lending money to stave off an imminent disaster, it was doing the underlying weakness, that they had not issued enough equity capital to give confidence to the market. it was all very well for the central bank to lead and what we had to do was to take steps to ensure everyone else had confidence in the banking system, and that meant the recapitalization of the banking system in which private or public money was put into the banks to make sure they could absorb losses without imposing a risk to the various people.

♪ >> the decision to let lehman brothers go, which surprised us, it completely surprised the market, surprised everyone, they all thought, we all thought, the u.s. government was on top of it. they had saved bear stearns, fannie and freddie, surely they would sa save lehman. but in the following week we saw under,d and bingley go so we had to close that down. -- you ubs, german banks could see the confidence was in the system. >> was it important, do you think, for markets in some ways to allow lehman to collapse, to show that you have got to deal with the repercussions of the risk you take in order to put a

stop to hazards? no, i think it was a disastrous mistake. you can argue afterwards that it was impossible to step in and that was better in the long term, but i think you could see in the month or two after the failure, even after the successful rescue operations in the risk of the banking sector, the whole world economy took a huge step downwards. that was the precipitating factor. there were political reasons for that, it was difficult for the u.s. government to step in again and use taxpayer money to bail out wall street. in that sense it may have been unavoidable. ♪ treasury, and you

as a workout guy tried to sort out a really hard one. tell us what you faced. company with the liquidity crisis. the fed in the treasury department, the various extraordinary loans they made, stabilized the liquidity, but it ultimately needed a significant restructuring. risk management had failed in part of it was a corporate governance crisis, a company that was too big to manage. aig was one of the few financial is to two shins during the crisis that did a comprehensive restructuring. by the time we were done the taxes were fully repaid for the entire investment but the company was about half the size it was coming into the crisis. >> did we learn a lesson when it comes to corporate governance?do

you think it could happen again ? there was a huge downturn that triggered both of these, but you say when the tide goes out the who's wearing bathing suits. aig was not. are there companies who don't have the systems in place to protect themselves? out think we will only find who is failing to protect themselves. risk management practices in the financial industry has improved. nothing like a good crisis to scare management to improve their systems. ♪ charge of the commendation that was allocated to certain banks and imposed after the financial crisis. i want to get your tank on -- your take on banking now. do you think that incentives have been realigned at the top

banking firms to ensure people are recompensed for the risks they take? >> no, i don't. i think financial pay is still too high. i think that the lessons that we tried to implement after 2008, 2009 have largely been pushed aside. time, compensation passages, long-term success. very little in the way of short-term risk reward. very little in the way of bonuses, short-term. basick some of the concepts that we attempted to advance the treasury during that window i think have largely been ignored by the private sector and the private banking institutions. then again i really don't think it's the role of government to insinuate itself into the and makeoardroom

compensation decisions. my situation was very unique following lehman, and i doubt it is much of a problem. ♪ >> i'm curious as to whether you've inc. another crisis is coming up anytime soon. >> there is always a danger of crisist i think the next is likely to be about student loans. there are unmet obligations that are growing and very political -- in various political enemies. that is a danger. i don't see any immediate danger in the financial services sector for a lot of the reasons we took in 2008 and 2010. first, we had legislation that stabilized financial

institutions and provided a vehicle for providing equity with large financial banks that allowed for stability to occur. a year and a half later when we half the financial reform bill. the economy is strong but if i am looking over the horizon, debt is an issue that will loom large. any threat in the current administration's tendency toward deregulation ? ? i d>> i do a bit. dodd-frank is basically intact, the senate banking committee today passed a piece of legislation -- i didn't like every piece of it, but overall it was a moderate effort to make changes to the bill. candidly, i've always said we didn't write the 10 commandments, we wrote a bill. the amendments i took him agreed to, i wasn't overly enthusiastic about. clearly changes -- we can look

and see where we made it moderate. but i believe, fundamentally, we provided the tools necessary to minimize the danger of a major financial collapse such as we saw in 2008. ♪ come, lessons from the fall. what have we learned from the financial crisis, and what do we still have to fear? this is bloomberg. ♪

♪ specialre watching a life after lehman edition of "bloomberg best." i'm erik schatzker. so much has changed in global finance since 2008, much of it in response to the collapse of lehman brothers and the crisis it ignited. but some problems remain

unresolved, and other issues are the unintentional consequences of solutions imposed 10 years ago. andcrisis has a long tail, we talked about it with policymakers, economists, and investors. the former ecb president jean-claude trichet took note of how u.s. banks into competitive advantage over their european counterparts. ♪ there is a big domination of the investment bank in europe and banks in the u.s. in particular which is very cyclical. born all, the crisis was -- the epicenter of the crisis, it wasn't as grave as the 29 -- as the 1930's. but what you have to keep in mind is that these are big structural differences between the u.s. and europe. thehe moment in europe

financing of the u.s. economy was made through banks with only 25% of the financing, and through markets it was 75%. it was exactly the reverse in europe. 25 for the markets, 75% for the banks. that, of course, is the fed's explanation. the recapitalization of banks in europe was much more costly in asms of percentage of gdp, was the case in the u.s. there are many reasons for those differences. one important reason is the existence of freddie mac and fannie mae, which were mentioned previously on your screen. that explains why a large part of the financing of the u.s. economy comes out of public said,utions that being europeans have a lot of hard

work to do, and structural reforms are of first importance that have been decided, including the single supervision authority, the ultimate decision. i would say this advantage in terms of structural difference with the u.s., they have a number of decisions and i'm very much on the side of the optimism that was expressed by the previous speaker. trichet, market participants and regulators, even central bankers to some extent, did not realize the interconnectedness of the banking system. what do we know about the banking system now? is there a danger that we could go back to a financial crisis? >> well, what we know is that we have decided to reinforce the banks at a global level and

through appropriate institutions with the backing of the g20, a lot has been done to reinforce resilience but that does not suggest that if we had a big new shock we wouldn't have contagion. ♪ >> i think there's no question that we have done constructive things since 2008. if the dangers are that we are too complacent about their full sufficient see -- full we areency, and that starting to chip away at that regulation. we are declaring institutions that used to be's stomach not to be systemic. we are reducing the regulation on large but not in man's institutions with capital of

$250 billion. we are redefining asked back of to measurement of capital make the standards less onerous. i think it is fine to have a paradigm based on capital. i think having stress tests are a good thing. i just think we need to bring more market reality into that system if we want to be confident. i also think that we are ahead in the united states. larry, that goes to my next question. if you are more kim's servant is on the health of u.s. banks, what must you think of european banks, and what kind of risk with that posed to the global financial world? have some you potentially very's serious issues in europe win banks are

selling half of their book value , that is telling you something about the underlying health of those institutions. don't recognize that in assessing their soundness, i think we make a serious mistake. i think there continues to be ago was due years mainly in europe, where banks or , thers of government debt banks get called into question and that reduces demand for government debt, which makes the bank situation less healthy, which in turn makes the government debt harder to roll over. i don't think it means taking this risks off the table. ♪ i think that legacy today is

one of caution, particularly among consumers in a lot of areas and less so on the part of corporations. i think secondly, you have seen much better risk management in the regulated banks and that the banking system is certainly more stable. but i don't think, fundamentally, the problems of the economy that we are building in the precrisis period have been adequately addressed. sense, the dna of the crisis has been an amplification and extension of a secular set of problems, which we do need to confront and which regrettably i think we are not confronting. >> the problems as you describe them are out side the purview, aren't they? they seem like political institutions.

wrong, regulation goes when monetary policy goes wrong, you certainly exacerbate whatever problems may have existed beforehand. when you allow people to pour such wealth as they have in they , that is a mistake which creates more problems. i would also say that monetary policy does have a role to play in that constant trade-off. but you are right, monetary policy does not all all rings. the financial crisis was not solely a failure of financial regulation or risk management by the banks. somethingthe sense that came out of a broader set of structural issues in the u.s. economy. ♪ we more vulnerable today

than we were on the eve of the crisis? i hope not. >> i think that's a very good question, one policymakers have to ask themselves. what we do is try to learn the lesson of 2008 and 2009 stop i think as you look at the banking butem there's more capital there are lessons we must continue to press forward on. to think about what phone are in the economy today that could derail how we think about forward motion of the u.s. economy, you will see that it is very much a part of the discussion, to understand the vulnerabilities. premium ont puts a making sure the financial system have high levels of capital that they are able to sustain because we are not likely to know exactly where that will come you willthat is why

see efforts to stress the capital banks and understand where the vulnerabilities might be. ♪ i believe that the financial system is less vulnerable than it was. i think dodd-frank and related than theye done more are given credit for, that the financial institutions are stronger than they were. but every crisis almost by definition comes from a direction you weren't expecting. ♪ the system will always have panic attacks and it won't come from the same place. , it didnk did one thing , and it woulds

probably make it more difficult to deal with a certain kind of panic. the powers of the fed to act in a panic, saying this will end now, and i think that was a mistake. ♪

♪ >> this is "bloomberg best." i'm erik schatzker. earlier this week, i spoke with ray dalio. like many others, he has concerns about shadow banking as a potential catalyst for the next financial crisis, and he worries that policy makers may not have enough already to cope with it. here's what he told me. ♪ i do know that the regulations don't provide the

freedom to deal with those things well. >> the regulations that we have today? >> right. because we are trying to write waylaws in such a precise for some things that are unknown. i think -- ideally i inc. there should be an emergency powers act in which if the president of the united states ahead of the and probably the representatives of the two houses of congress all agree that the circumstances are not and the lawicipated could have special powers to do the things that are necessary, i think that is a big risk. when i look at countries like and i look atay,

the debt issues that they have, i am much less worried because their debt is denominated in their own currency, and they have the flexibility to do the things that are necessary. in the last turnaround, it was very chancy as to whether or not those three courageous men, i would say, ben bernanke, also made, tim geithner, would always have to push the envelope of exactly what they were doing with the various crises they had. i think it is important that those types of flexibilities under unique circumstances be made available. ♪ that wraps up our special edition of "bloomberg best," highlights of our weeklong examination of life after lehman. of course, for more coverage and analysis of this topic, you can bloomberg.com, where you will also find all the latest business news and information 24 hours a day. thanks for watching "bloomberg

best" this week. i'm erik schatzker. this is bloomberg. ♪

♪ >> i'm selina wang in san francisco, in for emily chang. this is "bloomberg technology." coming up in the next hour, just bezos stands up for press freedom and the washington post owner said leaders should welcome robust criticism. plus california governor jerry brown continues his push back on the trump administration's rollback plan for the environment. we hear from him from the global climate summit. and another tiny tech company is listed in new york. fir