>> this week of special edition of bloomberg rest examines the 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. >> systemic risk, you need a systemic cancer. >> with the benefit of hindsight, maybe lehman brothers should have been saved. >> we did know what to do about it and we did it. >> the financial system looks much different than a decade earlier, but have we learned lessons?

>> i think after that, i became more cynical about the global financial system. >> 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. september 15 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 by 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 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 of the storm was the investment banks leaders who , faced critical decision. 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. he is now president in 2008, he . it 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, lehman. i will tell you why. i had gone through a far less systematic or less systemic one.

the regulators pulled all of us in. erik: 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. 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. erik: could or should lehman have been saved? should something else have been done? 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 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. it was the 16th or 17th, we have the benefit to be very stable he funded but i knew what that meant. >> lehman was the full point? anshu: even if lehman had been dealt with perfectly, we would've had a happy state. we had all kinds of issues. 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. in easter of 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. 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 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?

>> 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. 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? you have spoken to your guy in the u.s.. 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. guy: you spoke to trichet very quickly after? josef: 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 step in. any sense of 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 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. i have to admit that aig came

and that would have added another problem. 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 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. 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'm erik schatzker. at bloomberg television, we clearly remember the intensity of that september years ago. -- 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. >> that hearing started at 9:30

this morning, almost five hours. that was the democratic head of 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. -- 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. as 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 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? was it something the 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? michael: 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. 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 all 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? interest rates came down like 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. it was a very bizarre environment. funny enough, the trading volumes and 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 to the 1935, 1940. let me explain that in a minute. 1929 to 1932, we had a debt crisis and interest rates at zero. 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 though whose -- 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

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. erik: coming up, a trader's tale. mark cudmore has some thoughts. mark: i thought there was no chance lehman brothers would be allowed to fall. erik: this is bloomberg. ♪ erik: 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. here is his story. mark: late 2007, it became clear we were heading towards some 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. 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. i was flying to budapest.

there were other juniors from lehman brothers and i remember assuring them saturday night, look, it is absolutely time. worst -- fine. the worst case scenario is we get taken over by bank of amerika. there was no idea that monday, we have no employer and no way out. on sunday, i flew from budapest to istanbul. 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. 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 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. regulators are focused on that. will we get another financial crisis? yes. 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 grade. as long as humans, nate 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 didn't write 10 commandments in 2010, we wrote a bill. erik: this is bloomberg. ♪

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lehman brothers. click here to some of the first responders. they had to devise policies on doing real-time. he was governor of the bank of england from 2003 to 2013. he spoke with guy johnson. >> we could have gone back to this repetition of the great

depression. i think we would have taken action. we would not have done it all together. it was in that sets potentially and a morris -- enormous risk. we knew exactly what we would have to do to prevent that happening. facing a that we were calamity, we didn't know what to do about it. we did it. in many ways, it was a straightforward thing to do. , our decision to do that was the right thing to do

to prevent the british economy grinding to a halt. we got all the money back. to prevent did help what would otherwise be an immediate collapse. , it wasey difference not just lending money to stave off disaster. it was trying to look at the underlying weakness of the banking system. they didn't have enough equity capital to give confidence to the market. what we had to do was take steps to ensure everyone else at confidence in the banking system. became known as the recapitalization of the banking system in which public money was put into the banks to ensure they could absorb losses without imposing a risk to the people who had lent to the banks

themselves. >> the decision to let lehman brothers go surprised us. it completely surprised the market. we all thought the u.s. government was on top of this. they would say fannie and freddie, shortly they would save lehman. we knew immediately we were in trouble. in the following week, you saw under so wethen go had to close that down. banks. ubs and german it was literally in days. you can see the confidence and running out of the system. for them toportant , tow lehman to collapse show that you have to deal with

the repercussions of the risk a stope in order to put to it in some ways? i think it was a disastrous mistake. you can argue that it was impossible to step in to help them. it was better in the long run. see in the month or two after lehman, after the successful operation for the rest of the banking sector. economy took world a huge step. that was a participating factor. there were political reasons for that. it was difficult for the u.s. government to step in again to bailout. to use taxpayer money to bail out wall street. been,ence it may have insofar as it was a decision that was a mistake.

you went to treasury and you try to set -- sort out a hard one. tell us what you faced when you went in. that wasd a company facing a liquidity crisis. risk management had failed at aig. this is a company that was too big to manage. it was one as with the auto companies, aig was one of the few financial institutions during the crisis that we did a comprehensive restructuring on. done, thee we were taxpayers were fully repaid for the entire investment but the company was half the size that it was coming into the crisis. lesson, andarn

since of the huge downturn the trigger both of these but the old parable about when the tide goes out to see his wearing breathing suits are not. we saw that aig was not wearing a bathing suit. other companies today who don't have the systems in place to protect themselves? we will only find when the tide goes out who is failing to protect themselves. risk management practices have improved. nothing like a good crisis to scare management and boards into improving their systems. if you were in charge of the conversation that was allocated post the financial crisis and in the midst of it, i want to get your take on baking pan out. it is still among the highest paying in corporate america.

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

private boardroom. and to make compensation decisions. my position was unique as you know following lehman. i got that is much of a precedent for anything. i am curious as to whether you think another crisis is in the offing any time soon. >> there could be. the next crisis is more likely to be about deaths and student loans. level,state and local there unmet obligations that are growing. i don't see any immediate danger in the financial services sector . legislation,tarp

then it provided a vehicle through providing equity in the large financial banks rather than buying toxic assets that would allow for stability to occur than a year and half later will impact the financial reform bill. i think we're in good shape when it comes to financial services area the economy is strong, but as i look over the horizon i think that is an issue that will loom very large for us. stress in theany current administration tendency toward deregulation? they have madend efforts to do so. the dodd-frank bill is basically intact. a very good member of the banking committee today tasked with of wrestlers in. i didn't like every piece of it but it was rather a moderate effort to make changes to the bill. i have always said we didn't write the 10 commandments in 2010. we wrote a bill. there are amendments that i took and agreed to. i wasn't overly enthusiastic about. with thechanges

benefit of 10 years we can see where we can make it work better. i believe fundamentally, we provided the tools necessary in this environment to minimize the danger of a major financial collapse such as we saw in 2008. still to come, lessons from the fall. what we learned from the financial crisis and what do we still have to fear. this is bloomberg. ♪ you're watching the life after

lehman edition of bloomberg best. much of it in response to the collapse of lehman brothers and of course, the crisis is ignited.

unresolvedms remain and other issues are the unintentional consequences of solutions imposed 10 years ago. crisis has a long tail and we talked about it with policymakers economists and investors. -- u.s. thankst again gain competitive advantage over their european counterparts. >> it was a big domination of investment banking and banks in new york in the u.s. and -- thelar which is crisis was born and wall street. crisiscenter of the big 29 andas is grave as the 30 in the 20th century. ist you have to get in mind that there is a big structural difference between the u.s. and europe. in the u.s. at the moment of the burst of the crisis, the

financing of the u.s. economy of major banks with only 25% the financing. the market is 75%. it was exactly the reverse in europe. 25 for the markets and 75 for the banks. that is the first explanation because the recapitalization of banks in europe was much more costly in terms of percentage of gdp. that it the case in the united states of america. is theortant reason existence of fannie mae and freddie mac. that explains why a very large part of the financing of the out of publicomes institution and not through the banks. that being said, of course the

europeans have a lot of hard work to do. structural reforms are of first importance. they have been decided including the single supervision operating with the ultimate decision taken by the banks. disadvantage i would say in terms of structural difference with the u.s., they took a number of decisions and i am on the side of the optimism that was expressed by the previous speaker. >> they did not realize the interconnectedness of the banking system. what do we know about the banking system now? couldre a danger that we go back to the 08 financial crisis? is that we have decided to reinforce, the resilience of the banks and

through appropriate institutions with backing of the g20. a lot has been done to reinforce resilience. suggest that if we had a big new shock, we wouldn't have -- question that we have done constructive things since 2008. i think the dangers are that we are too complacent about their. efficiency and that we are starting to chip away at that regulation. we are declaring institutions that used to be systemic now not to be systemic. regulationcing the on large but not immense theitutions with capital in

$250 billion range. we are redefining aspects of the of capital to make the standards less onerous. have a it is fine to paradigm based on capital. stress tests are a good thing. 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. matters like badly in the rest of the world. conservative more on the health of u.s. banks, what must you think of european banks? look at a brisk as opposed to the global financial work? i think you would have some potentially very serious issues sellinge when banks are

at half of their book value or less. telling you something about the underlying health of those institutions. that indon't recognize assessing their soundness, we make a serious mistake. be risk ofnues to --t years ago was called where banks are holders of they gett debt and called into question that reduces demand for the government debt which raises its yield which makes the bank situation must healthy which makes the government debt harder to rollover. i don't think we have taken those milks -- risks off the table.

today isk the legacy in part one of more caution particularly among consumers. secondly, you have seen much better risk management in the regulated banks and the banking system is certainly more stable. i don't think fundamentally, the problems of the economy that were building in the precrisis. have been adequately addressed. the problems of productivity and income inequality growth and racial inequality. in a sense, the legacy of the crisis has been an amplification and extension of a secular set we need to which confront and which regrettably we are not confronting right now. describeproblems you your outside the purview of the federal reserve. the sound much more like issues for political institutions to

address. wrong oregulation goes when monetary policy goes wrong, you exacerbate whatever problems may have existed beforehand. when you allow people to pour their wealth into a home and then they lose the home and are under for five or six or seven that is aears, mistake which creates more problems. monetary policy does have a role to play in the constant inflation onween one of her and desk monetary policy does not serve all things. the financial crisis was not solely a failure of financial regulation. it was innocent, 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 e-gov the crisis? i hope not. that is a very good question and when the policymakers have to continue to its themselves. trying to learn the lessons of 2008 and 2009. . i think there is more capital there today but we must continue to press forward. to think about what vulnerabilities are in the economy today. how we thinkrail about the forward motion of the u.s. economy. will see that is very much a part of the discussion. it was a premium on making sure our financial system have high levels of capital that they are able to sustain whatever shock because we are not likely to know when it will come from. it is how you see efforts to stress the capital banks to

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. i think that dodd-frank and related things have done more than they are given credit for. the financial institutions are stronger than they were. every crisis almost by definition comes from a direction you are not expecting. have, system will always will come from the same cause.

dodd-frank did one thing to make a deal with a certain kind of panic. the power of the fed to act in a now hasd say this land been diminished. i think that was a mistake. ♪

our guest worries that policy makers may not have enough authority to cope. here's what he told me. >> i do know that the regulations don't provide the

freedom to deal with those things well. we're trying to write the laws in such a precise way for some things that don't have -- are unknown. be ank there should powers economic act in , the head ofsident the federal reserve, and the representative of two houses of congress all agree that the circumstances are not properly anticipated in the law, that havecould with agreement special powers to do what is necessary. look at china.

and the debt issues that they will have. i am much less worried because their debt is in their own currency and they have the flexibility's to do the things that are necessary. in the last turnaround, it was very chancy as to whether those wouldcourageous men always have to push the envelope of exactly what they were doing with the various crises that they had. 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 the weeklong examination of life after lehman. analysis,overage and you can visit bloomberg.com or you will also find all the latest business news and information 24 hours a day. thank you for watching bloomberg

best area this is bloomberg. ♪

david: why did your parents come to the united states? dr. kim: my father was a refugee from north korea. david: did you feel discrimination because you are korean? dr. kim: the people were literally screaming at us. david: you met at harvard medical school paul farmer. dr. kim: we began talking about what is the nature of your responsibility to the rest of the world. david: you lead a protest against the world bank and said it should be shut down. do you have any regrets? dr. kim: i want to say to everyone here i am very glad we lost that argument. [laughter] >> would you fix your tie, please? david: well, people wouldn't recognize me if my tie was fixed, but ok. just leave it this way. alright. ♪