>> this week of special edition bloomberg best 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 answer. >> 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 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. erik: it is straight ahead on "bloomberg best." hello and welcome. i'm erik schatzker. september 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 that started in the mortgage markets would spread to our credit markets and our banking system. >> two of the leading insurers of mortgage-backed securities are 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. 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, lehman. i had gone through a far less systematic or less systemic one. 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? 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 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. erik: lehman was the focal point? anshu: 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. 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? 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. at bloomberg television, we clearly remember the intensity of that 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. >> 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 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 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? 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?

is it possible -- it was a 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. 2007 to 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. 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. 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. 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. 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 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 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 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. 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 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. 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 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 discus the response to the financial crisis and where it has brought us today.

>> we didn't write the 10 commandments in 2010, we wrote a bill. erik: this is bloomberg. ♪

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♪ we are looking back at the collapse of lehman brothers. the 2008 financial meltdown and the mark these events held on the global financial system. let's hear from some of the first responders. the central bankers, political leaders and regulators who had to devise policy and implement reforms on the fly and in real time. we will start with the governor of the bank of england from 20 -- 2000 32013 and he spoke with guy johnson. it was a groep -- it would have ground to a halt. think we would have taken

action as we did take in late 2000 eight and early 2009 to try and offset the consequences. it would have been a much deeper recession than the one we actually experience. it was potentially an enormous point comeut the key we knew exactly what we would have to do to prevent that from enlargeg which is to amounts of money to keep them afloat. it wasn't that we worry facing a tail risk, but we did know what to do and we did it. in many ways it was a straightforward thing to do because what you saw in our case , our decision to lend money against a lot of the assets which they had was the right

thing to do to prevent the british economy grinding to a call -- grinding to a halt. we got all the money back. but that action did help to prevent what would otherwise be anbang immediate collapse. immediate collapse. the thing that brought to an end was trying to deal with the underlying weakness of the banking system which was they had not issued enough equity capital to give confidence to the market. it was all very well for the central bank to lend banks, while we had to do was take steps to ensure everybody else had confidence in the banking system and that meant recapitalization of the banking system. and public money was put into the banks to make sure they can absorb losses without imposing risk to the various people who had led the banks

themselves. the: the decision -- >> decision to let lehman go which completely surprise the markets and surprised everyone because they all thought the u.s. government was on top of this, they would -- they'd save bear stearns, surely they would save lehman. we knew immediately we were in trouble and the following week bradley.n our case we had to close that down, you had ubs come your german banks. it was literally in days you could see the confidence was ebbing out of the system. >> was it important for markets in some ways to allow lehman to that you've show got to deal with the

repercussions of the risk you take in order to put a stop tomorrow hazard in some way? >> know i think it was a disastrous mistake. yes you can argue afterwards that it was impossible to step , that actuallym it was better in the long term, but i think you could see in the month or two after the failure of lehman, even after the successful rescue operation for the rest the banking sector, the whole world economy took a huge step downward. that was the precipitating factor. of course there were political reasons for that. it was very difficult for the u.s. government to step in again to bailout and use taxpayer money to bail out wall street, i understand that. in that sense it may been unavoidable. in so far as it was a decision, it was a mistake. youou went to treasury and

as a workout guy tried to sort out a really hard one. the largest bailout history. tell us what you face? >> you had a company facing an indoor miss liquidity crisis and the various extraordinary loans the fed made stabilized its liquidity, but ultimately it needed a significant restructuring, risk management had failed. part of this is the corporate governance crisis. this is a company too big to manage and so it was one as with the auto companies, aig was one of the few institutions that we did a restructuring of. by the time we were done, the taxpayers were fully replayed for the entire investment. erik: do you think it could

happen again in this sense? there was a huge downturn the trigger both of these, but that old parable about what the tide goes out you see his wearing bathing suits or not. other companies today that don't place tosystems in protect themselves? i think we will only find when the tide goes out who is failing to protect themselves. risk management practices have improved. tohing like a good crisis scare management into improving their system. you are in charge of the compensation. in the midst of it. i want to get your take on banking pay now because it's still among the highest in corporate america. do you think incentives have

been realigned to the top to ensure that people a recompense for the right sort of risks to be taken? >> no i don't. pay is stillcial too high. i think the lessons we try to 2008 and after 20 -- 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 burden i think some of the basic concepts that we attempted to advance a treasury during that window following lehman i think have largely been ignored by the private sector and the private banking institutions. on the other hand i really don't think it's the role of government to sort of insinuate itself into the private

boardroom and may compensation decisions. my situation was very unique as you know following lehman. adoubt it is much of precedent for anything. >> i'm curious as to whether you think another crisis is happening anytime soon. >> there could be. there are always the dangers of that. i think the next crisis is more likely to be about debts and student loans. debt on the national level. on the state and local level as well. unmet obligations are growing and various political entities are going to have to address that. that's a danger i see. i don't see any immediate danger in the financial services sector. first with the tarp legislation, would stabilized financial institutions and provided a

vehicle to the providing equity to the large financial banks. for stability to occur in the year have literally passed financial reform bill. i think we are in good shape when it comes to financial services. if am looking over the horizon, i think debt is an issue that loom large. in thisu see any threat current administration's tendency towards deregulation? >> i do a bit and they have made efforts to do so. the dodd frank bill is basically intact. of it,t like every piece but overall it was rather immoderate effort to make some changes to the bill and candidly of always said we didn't write the 10 commandments in 2010, we wrote a bill and their amendments i took and agreed to. clearly changes in the benefit of 10 years we can look and see

where we moderate that to some degree and make it work better. fundamentally we provide the tools necessary in this environment to minimize the of a major financial collapse such as we saw in 2008. lessons from the fall. what we learn from a financial crisis and what do we still have to fear. this is bloomberg. ♪

erik: you are watching a special life after lehman addition of bloomberg best. so much has changed in global finance since 2008. much of it in response to the collapse of lehman brothers and the crisis of ignited. some problems remain unresolved

and other issues are the unintentional consequences of solutions in post 10 years ago. the crisis is a longtail and we talked about it with policymakers, economists and investors. the former ecb president took notify u.s. banks have gained a competitive advantage over the european counterparts. there is a big domination of the investment banking in new york and in the u.s. in particular. which is very paradoxical. at the epicenter the crisis which was as grave as the 29, 30's and the 20th century. it was born in the u.s.. but you have to get in mind is there is a big structural difference between the u.s. and europe. in the u.s. at the moment of the crisis, the final thing of the

u.s. economy was banks with only 25% of the final scene and markets with 75%. it was exactly the reverse in europe. market, 75% of the final for the banks. that is the first explanation. it was much more costly in terms that was the case in the united states of america. there are many reasons for those differences. one important reason is the existence of freddie mac and fannie mae which we mentioned previously on your screen. that explains why a fairly large part of the final thing comes out of the public institution and not through the banks. of courseeing said

the europeans have a lot of hard work to do. structural reforms have been decided, including the single supervision authority with the ultimate decision taken by the central banks. they have this to sit -- disadvantage in terms of the u.s.. i'm very much on the side of the optimism that was expressed by the previous speaker. >> the concern of the time when lehman collapsed is that market participants, overall regulators and even central bankers did not realize the interconnectedness of the banking system. what do we know about the banking system now. is there a danger we could go back to that financial crisis? >> what we know is that we have decided to reinforce the resilience of the banks at a global level and appropriate

institutions with the backing of the g20. a lot has been done to reinforce decisions. suggest that not if we had a big new shop we wouldn't have -- there is no question was done constructive things since 2008. i think the dangers are that we are complacent about their full sufficiency and that we are starting to chip away at that regulation. we are declaring institutions are used to be systemic now not to be systemic. we are reducing the regulation on large but not immense with ations with capital

$250 billion range. we are redefining aspects of the measurement of capital to make the standards less onerous. i think it's 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 we are ahead in the united states. -- laggeds liar badly. >> if you are more conservative on the health of u.s. banks, what must you think of european banks and what kind of risk with that pose for the global financial world? i think you have some potentially very serious issues in europe when banks are selling

at half of their book value or lasts, that is telling you something about the underlying health of those institutions. that indon't recognize assessing their soundness, i think we make a serious mistake. i think there continues to be risk of what years ago was where a -- in europe banks or holders of government debt and if the banks get called into question, that reduces demand for the government debt which raises its yield and makes the bank situation less healthy which makes the government debt harder to rollover. i don't think we've taken those off the table. i think legacy today is in

part one of more caution. less on the part of corporations with their borrowing practices. secondly you have seen much better risk management in the regulated banks in the banking system is certainly more stable. but i don't think fundamentally the problems of the economy that were building in the precrisis period haven't been addressed. legacy or thee dna of the crisis has been application of a secular set of problems which we do need to confront and which we are not confronting right now. >> those problems you describe a really outside the purview of the regulators aren't they? they sound like issues for political institutions. wrong --egulation goes

what monetary policy goes wrong, you certainly exacerbate whatever problems made existed beforehand. when you allow people to pour their wealth into a home in an they lose the home and are underwater for five, 6, 7 or eight years, that is a mistake which creates more problems. policy also say monetary does have a role to play in that constant trade-off between price stability or inflation concerns. you are right. monetary policy does not solve all things. my point really is the financial failureas not solely a of financial regulation or management by the bank. it was in defense of a broader set of structural issues. are we more vulnerable today

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

stress the capital of banks and understand where our vulnerabilities might be. believe the financial system is less honorable than it was. dodd-frank and related than theye done more are given credit for. that financial institutions are in fact stronger than they were, every crisis almost by definition comes from a direction you weren't expecting. haveese system will always a panic from time to time. dodd-frank did one thing that that probably would

make it more difficult to deal with a certain kind of panic because it's the power of the when wect in a panic say this will end now has been diminished and i think that was a mistake. ♪

erik: i'm erik schatzker. earlier this week a spoke with bridgewater associates founder ray dalio. he has concerns about shadow banking as a potential catalyst for the next financial crisis. and worry that policy makers may not have enough authority to cope with it. here is what he told me. i do know the regulations don't provide the freedom to

deal with those things well. >> the regulations that we have today. >> because we are trying to write the laws in such a precise way for some things that don't have -- that are unknown. be and banke should -- an emergency economic powers act in which the president, the head of the federal reserve and probably the representatives of two houses of congress all agree that the circumstances are not law,rly anticipated in the that they could with agreement have special powers to do the things that are necessary. i think that's a big risk. when i look at countries like china and i look at the debt issues they will have, i am much

less worried because their debt is denominated in their own currency and they have the flexibility's to do the things necessary. the last -- in the last turnaround it was very chancey as to whether those three courageous men, ben bernanke, hank paulson -- and timothy geithner what it was push the envelope of what they were doing in dealing with the various crises they had been so i think it is important that those types of flexibilities under unique circumstances be made available. that wraps of our special edition of bloomberg best. highlights on bloomberg television's weeklong examination of life after lehman. for more coverage and analysis of this topic, you can visit bloomberg.com where you will find the latest business news and information. thanks for watching.

this is bloomberg. ♪

>> from new york city, i'm jonathan with 30 minutes dedicated to fixed income. ♪ >> coming up, treasury gearing up the higher ranks. emerging-market central banks policy russia, the latest high grade. and 10 years since lehman collapse in the post crisis market. with the big issue, a story of the virgins becoming a story of convergence. >> it has been a year of divergence. >> it's been the u.s. and eth