♪ >> this week a special edition of "bloomberg best" examines the collapse of lehman brothers and its 10-year aftermath. >> a historic day on wall street. >> this is good defining moment in our history. >> the bankers, policymakers, the regulators, the investors all faced decisions that shape the future of the global economy. >> at that time, i said that this is systemic risk, you need a systemic cancer. >> with the benefit of hindsight, maybe lehman brothers should have been saved. >> i do not even think that if it was dealt with perfectly, the world would have been a happy place. >> we did know what to do about it and we did it.

eric: the financial system looks different than a decade earlier, but have we learned lessons? >> i think after that, i became more cynical about the global financial system. a the system will always have pass from time to time. >> the downturn will be different than the one in 2008. eric: join us for life after lehman brothers. a story still being written. >> there are lessons we must continue to press forward on. eric: it is straight ahead on "bloomberg best." ♪ eric: hello and welcome. i'm erik schatzker. september the 15th marks 10 years since the lehman brothers bankruptcy, a collapse that triggered the worst financial crisis in almost a century. the effects are felt around the world by individuals, companies, institutions 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

that started in the mortgage markets would spread to our credit markets and our banking system. >> two of the leading insurers mortgage backed securities were frannie mae and freddie mac. many believed they were guaranteed by the government. >> 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. >> your company is now bankrupt 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 eye of the storm of the investment banks, leaders faced a critical decision in the wake of lehman 's failure. we spoke with 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. i would say it is, for me, the week post lehman. i had gone through a far less systematic or less systemic one.

>> famously into a room at the new york fed -- anshu: and we walked out of that, no one was petrified. we all felt we had a solution. the monday after didn't feel nearly the same. 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, prime brokerage, there was a whole series of very complex questions that monday morning which no one had the answer to. could lehman have been saved? >> what would it have helped? anshu: the decision to keep lehman or not limited around a 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 calmly and to talk 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. it was the 16th or 17th, we have the benefit to be very stable he but i -- stably funded knew what that meant. erik: was -- lehman was the full point? anshu: even if lehman had been dealt with perfectly, i do not believe that the world would

have been a happy place. i'm not saying to those things would have gone away. all i am saying is perhaps the reaction time would have been slightly 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 in 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, it 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? bob: it is absolutely correct we didn't understand completely the interconnectedness. there 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. we really thought 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? josef: we were 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 time, i thought this is systemic risk and we need a systemic answer. we're criticized where some people 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: who was the next phone call? u.s. spoken to your guy in the u.s. josef: you call immediately the head of investment bank, central trading and the risk management treasurer, and then you reach out to central bankers. you reach out to other bankers. this was a lot of communication going on immediately thereafter. guy: you spoke to trichet very soon afterwards?

josef: yeah, and the head of other banks. i think 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 step in. was there a sense of panic in any of 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 government stepped in and said that things are safe and under control. big programs were announced, and banks were also saying what is really the direct impact of lehman to me and larger impact on the financial system. i think we were all very calm.

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

♪ erik: this is a special edition of "bloomberg best." we are focusing on the 2008 financial crisis and its aftermath. i am erik schatzker. at bloomberg television, we clearly remember the intensity september 10 years ago. here are the highlights from our coverage. >> i think it 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. lehman brothers, 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. >> they must be tired.

that hearing started at 9:30 this morning, almost five hours. that was the democratic head of the senate banking committee wrapping up after questioning the head of federal reserve ben bernanke and the bailout plan for the bank that is being discussed. >> big losses on equities. take a look at the dow. we are down 700 points. well 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. erik: 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 group group -- with nex

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? wasn't something the financial sector, the conversations you were having within the business people thinky, did this was going to be a reality or did everyone think at some someone will step in? point, this can't be let go? michael: it was a suspended reality environment. i remember watching the barclays share price tumble down and genuinely wondering at the time, is it possible that barclays don't survive this?

is it possible -- it was a proper, old -- 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. it is arguable that with the benefit of hindsight, maybe lehman should have been saved. guy: what were the men and women working on the floor saying about what the system looked like at that point? michael: it was a bizarre environment, because although the system seemed to be crumbling around us, there was a

law of business going on because rates were volatile and people had risk to manage. what will happen to interest rates? interest rates came down like that and stayed down. there was a lot of movement in the market. people saying, who can i trade with to transfer 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. it was a very bizarre environment. funny enough, the trading volumes we did in the subsequent weeks was surprisingly robust but the overall ecosystem was clearly crumbling fairly rapidly. erik: when i sat down this week with ray dalio, founder of bridgewater associates, the world's largest hedge fund, we 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? ray: 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 iod.he 1935, 1940 per let me explain that in a minute. 1929 to 1932, we had a debt crisis and interest rates at zero. 2007, 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. they print money, buy financial

assets and puts liquidity in and contributes to a greater wealth gap because those who own financial assets benefit. in both periods of time in the wealth gap and the economy not improving for large segment of the population, we have populism. the last time we 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. we 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. central 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 like, the downturn i think will be very different than the one in 2008. they will be one in which the 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

will not 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 to these various reasons. erik: coming up, a trader's tale. bloomberg's mark cudmore has some thoughts. mark: i thought there was no chance lehman brothers would be allowed to fall. erik: this is bloomberg. ♪

>> what we have is a crisis of

confidence in the international markets. ♪ you are watching "bloomberg best." i am erik schatzker. mark cudmore is now a colleague of ours, a macro strategist who runs our live blogging function. 10 years ago, he was a trader at lehman brothers in london. mark: late 2007, it became clear we were heading towards some sort 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. i thought it was a great place to work. the atmosphere was very good. in the summer of 2008, there started to become this idea that the reality was different to what management were possibly presenting to us and the situation was much more dire. was flyinghe 12th,

to budapest for a work conference in hungary. there were other juniors from lehman brothers and i remember assuring them saturday night, look, it is absolutely fine. worst case scenario is we get taken over by bank of amerika. there was no idea that monday, we would have no employer and no way out. sunday, i flew from budapest to istanbul. i remember arriving in and i see on the tv screens lehman , brothers filed for bankruptcy and i got all these messages from ex colleagues in new york going, it has been great working with you. see you on the other side. i think i just lost my job. 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 my collections 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. no. will we get another financial crisis? yes. yes, i think probably. every other crisis before, people didn't think a crash could come. it is like 1929, it was the roaring 20's and people didn't understand the downside and everyone got caught up in the greed. as long as humans dominate financial markets which they , still do, not for much longer, we will get financial crises. erik: much more to come as "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. >> we did not write the 10

commandments in 2010, we wrote a bill. erik: this is bloomberg. ♪ to rent a movie?

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♪ is "bloomberg best." we are looking back at the collapse of lehman brothers, the collapse, and the mark the historic events left on the financial system. from the first responders, central bankers, political leaders, and regulators who had to implement reforms all in real time. we are going to start with he was governor of the bank of england and he spoke with our guy johnson. the economy would have grounded to a holt and we could've gone back to a great

repetition of the 1930's. i think we would have taken action as we did take to try to that, the consequences of but we would not have prevented it all together and it would have been a much deeper recession than the one we experienced. was, in that sense, potentially an enormous tail risk. but we know exactly what we would have to do to prevent that from happening. it was to lend large amounts of money to keep the banks afloat. facing at that we were risk of that was a calamity, but we did know know how -- what to do about it and we did it. unable to get to the end of the day, our decision to lend money against a lot of the assets, it was the right

thing to do to prevent the british economy from grinding to a halt. the money was repaid and we got all of the money back. that action did help to prevent what would otherwise be an the keye collapse, but policy difference, 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 actually dealing with the underlying weakness of the banking system. they had not issued enough equity capital. was all very well for the central bank to lend to banks, we have the take steps to make sure everyone else had confidence in the system, and that meant what became known as the recapitalization of the either system in which private money or public money was put into the banks to ensure they could absorb losses without imposing a risk to the various people who had lent to the banks

themselves. >> the decision to let the go, which surprised everyone, because we all thought the u.s. government was on top of this. and would save fannie freddie, and lehman, and the just let it drop. we knew immediately we were in trouble. to close that down, you nks, and german ba literally in days, you could see the confidence was just ebbing out of the system. >> was important for markets to allow lehman to collapse to deal withhave got to

the repercussions of the risks you take in order to put a stop to moral hazard in some ways? no, it was a disastrous mistake. you can argue afterwards it was impossible to step in and help them, better in a long-term, but i think you could see in the month or two after the ofcessful rescue operation the rest of the banking sector, the whole world economy took a step downwards. that was the precipitating factor. of course, their political reasons for that. it was very difficult for the u.s. government to step in again to bail out wall street, i understand that. in that sense, it may have been unavoidable, but it was the decision that was a mistake. you want to treasury and you

as a workout guide tried to sort out a really hard one, aig, the largest bailout in history. >> i had a company that was facing under enormous liquidity crisis, and the fed and is troy terry loans -- the madeordinary loans the fed stabilize liquidity but ultimately needed a major restructuring. part of this was the corporate governance crisis, this was a company that was too big to manage. wasith auto companies, aig one of the few financial institutions during the crisis that we did a comprehensive restructuring of. by the time we were done, taxpayers were fully repaid for the investment, but the company was half the size coming into the crisis. david: did we learn a lesson?

do you think it could happen again in that sense? there is a huge downturn that these, but weh of found out that aig was not wearing a bathing suit. companies-- are there out there today that did not have the systems in place to protect themselves? >> i think we will only find when the tie goes out to his failing to protect themselves. risk management protection practices have improved. nothing like a good crisis to into improving systems. >> u.n. charge of the compensation that was allocated post financial crisis and in the midst of it. now.t to get your take

do you think that incentives have been realigned at the top banking firms to ensure that people are recompensed? >> no, i don't. i think financial pay is still too high. the lessons we tried it to implement after 2008, 2009 have largely been pushed aside. packagompensation es to long-term his success in the company very little in the way of short-term risk reward, bonuses, short-term. some of the basic concepts that we attempted to advance the treasury during that window following lehman i think had largely been ignored by the private sector and private banking institutions. the other hand, i do not think it is the role of government to sort of insinuate itself into the private board

and may compensation decisions. my situation was very, very unique as you know following lehman. i doubt that it is much of a precedent for anything. i am serious as to whether you think another crisis is in the offering anytime soon. >> there could be, but the next crisis is more likely to be student loans at the national level but at the state and local level, as well. obligations that are growing to various political entities that are going to have to address that. i do not see any immediate danger in the financial services sector for a lot of the in 2008 and we took again in 2010. first with the tarp legislation

which is stabilize financial institutions and provided a vehicle of providing equity to large financial banks who had been buying toxic assets, it allows stability to occur and a year later we passed the bill. we are in a good shape when it comes to financial services. but i think debt is an issue that will loom large for us. do you see any stress in the current in administration's tendency towards deregulation? >> i do, a bit. but the dodd-frank bill is basically intact. a pass piece of legislation that i did not like every piece, but it was a moderate effort to make changes to our bill. and we did not write the 10 commandments in 2010, we wrote a bill. there are amendments that i took and agreed to that i was not overly enthusiastic about, so

clearly changes, with the benefit of 10 years, we may look and see how we may moderate to make it work better. we provided tools necessary in this environment's to minimize the danger of a major financial collapse such as 2008. come, lessons from the fall. what we learned from the financial crisis and what do we still have to fear? this is bloomberg. ♪

♪ you are watching a special life after lehman edition of ." oomberg best so much has changed since the collapse of 2008.

but some problems remain unresolved and other issues are the unintentional consequences of solutions imposed 10 years ago. tail.isis has a long former ecb president jean-claude trichet. there is a big domination of the investment bank in new york and the u.s. in particular. after all, the crisis was born crisisepicenter of the was as grave as the 29, 1930's -- it is born in the u.s. there is a big structural difference between the u.s. and europe. thehe u.s. at the moment of

birth of the crisis, the u.s. economy was made it through banks with only 25% of the final. and through markets, 75%. it was exactly the reverse in europe. thefor the markets, 75% for final for the banks. the recapitalization of banks in europe was much more costly in terms of gdp than it was the case in the united states. there are many reasons for those differences. one reason is the existence of freddie mac and fannie mae. --mentioned it previously fullyxplains why of launched part of the u.s. cmi publices out of institution and to not the central banks. had arse, the europeans

lot of hard work to do and a structural reforms have been decided including the single supervision authority with the ultimate decisions taken by the central banks. the european advantage in terms of structural difference with , they are very much on the side of optimism that was expressed by the previous speaker. the concern of the time when lehman collapsed was that market participants, overall regulators, and central bankers did not realize the interconnectedness of the banking system. what we know now? is there a danger that we could go back to the financial crisis? >> what we know is that we have decided to reinforce considerably the resilience of the banks at a global level and

institutionspriate with the backing of the g20. a lot has been done to reinforce resilience, but that does not bigest that if we had a new shock, we would not have contagion. the question that we have done constructive things since 2008. the dangers are that we are too complacent about their full sufficient see. -- sufficiency. and we are starting pitcher chip away at that regulation. we are declaring institutions that use to be systemic now and not to be systemic, we are reducing the regulation on large but not you -- but not immense institutions, we are

redefining aspects of the measurements of capital to make the standards less odorous. i think it is fine to have a paradigm based on capital, but i think we need to bring more market reality into that system if we want to be constant. i also think we are ahead in the united states. matters lagged badly in the rest of the world. >> that goes to the room next of my question -- that goes to the rest of my question. what must you think of european banks and what kind of risk is that post the global financial world? larry: i think you have some potentially very serious issues sellinge when banks are

at half of their book value, somethinglling you about the underlying health of those institutions. inn we do not recognize that assessing their soundness, i think we may gain a serious mistake. there continues to be risk of what years ago was called a doom loop in europe, where banks are holders of government debt. -- calledks get calli into question, that makes the bank situation less healthy which makes the government debt harder to roll over. i do not think we have taken those of risks complete off the table. i think that legacy today is

in part one of more caution, particularly among consumers. seen muchyou have better risk management in the regulated banks and the banking system is certainly more stable. but i do not think fundamentally the problems of the economy that were building in the precrisis period have been adequately addressed. any quality.of the dna of the crisis has been an application and extension of a secular set of problems which we really needed to confront and regrettably, we are not confronting now. those problems are outside of the purview of the federal reserve and the regulators, art --

aren't they? daniel: when regulation or monetary policy goes wrong, you exacerbate any problems that may have existed beforehand. when you allow people to pour into a home and they lose the home and are underwater for 6, 7, 8 years, that is a mistake. policy does have a role to play in the constant trade off between price stability and to maximum employment down the other. but you are right, monetary policy does not solve all things. my point is that the financial crisis was not just of failure of risk management, it was something that came out of a broader set of structural issues in the u.s. economy. are we more vulnerable today

than we were on the eve of the crisis? >> i hope not. it is a very good question. it is one of policymakers have to continue to ask. the federal reserve is trying to learn the lessons of 2008, 2009. as a look at the banking system, there is more capital there today, but there are lessons that we must continue to press forward on. what vulnerabilities could derail the forward motion of the u.s. economy? you will see in the minutes of our last meeting, that is very much a part of the discussion, to understand what vulnerabilities we see. it puts a premium on making sure that our financial system and high levels of capital they are able to sustain whatever shock. we are not likely to know exactly where that will come from and that is why you see

efforts to stress the capital of banks and understand where those vulnerabilities might be. i hope we keep our attention on that. i believe the financial system is less vulnerable than it was. dodd-frank and related things have done more th an they are given credit for. the financial institutions are in fact stronger than they were, every crisis almost by definition comes from a direction that you were not expecting. the system will always have a panic from time to time. it will not come from the same place. dodd-frank did one thing in 2000 pages.

it probably would make it a little more difficult to deal with a certain kind of panic because it is the power of the panic, this will end and now, that has been diminished and that was mistake. ♪

♪ this is "bloomberg best. i am eric schatzker. earlier this week, i spoke with ray dalio. others, he has concerns about shadow banking as the potential catalyst for the next financial crisis and he worries that policy makers may not have authority to cope with it. here is what he told me. ray: i do know the regulations do not provide the freedom to

deal with those things well. erik: the regulations we have today? : right, because we are trying to write the laws in such a precise way for some things that are unknown. i think there should be an -- economicwer powers act in which if the president of united states, the head of the federal reserve, and representatives of two houses of congress all agree that the circumstances are not properly anticipated in the law could, with agreements, have special powers to do the things that are necessary. i think that is a big risk. when i look at countries, countries like china, and the

debt issues that they will have a miami less worried because their debt is denominated in their currency and they have the flexibility to do the things that are necessary. in the last turnaround, it was as to whether the three courageous men, ben bernanke, hank paulson, and the always have would to push the envelope of exactly what they were doing in dealing with the various crises that they had. i think it is important that those flexibilities under unique circumstances, be made available. that wraps up our special edition of "bloomberg best," life after lehman. for more coverage and analysis of this topic, you can visit bloomberg.com where you also find the latest business news and information 24 hours a day. thank you for watching.

i am eric schatzker. this is bloomberg. ♪

♪ >> if there is one defining business story of year, it is the housing crisis that would be noted as the biggest financial story of 2007. >> secretary paulson, if you don't mind, he will sit in this chair and see my face in the camera lens here. >> good. >> i am pleased to announce i will nominate henry paulson to be secretary of the treasury. >> people said your greatest strength would be your potential to handle a major global financial crisis. hank: i hope i do not get an opportunity. i have never seen so many people for int