>> 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 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 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.

-- 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 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 -- mariano rajoy and we walked out -- 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 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 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. erik: was -- lehman was the full 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 cancer. -- 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 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. 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. 2070 2009, we have a debt crisis that hit zero. in both of those cases, there is one thing for central banks to do and that is print money and buy financial asset. 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 tort of -- type of financial crisis. i was naive to think that lehman brothers was one of the safer banks. i was brainwashed at lehman brothers and i really enjoyed it. the atmosphere was very good. 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 ituation was much more dire

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. 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. sunday, i flew from budapest to a stumble and i remember -- 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 collection out for me. i wasn't one of the people carrying boxes out. i never got to do that. 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 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 50 -- 10 commandments in 2010, we wrote a

bill. erik: this is bloomberg. ♪ erik: 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 2003 to 2013. it he spoke with >> it would have ground to a halt.

i think we would have taken action as we did take in late 2008 and early 2009 to try and offset the consequences. we would not have prevented it altogether. it would have been a much deeper recession than the one we actually experience. it was potentially an enormous tail risk, but the key point come we knew exactly what we would have to do to prevent that from happening which is to enlarge 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. we did know what to do about it 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 the money was replayed -- repaid two or three months later. we got all the money back. but that action did help to prevent what would otherwise be anbang 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, what 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. private 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 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'd save bear stearns, surely they would save lehman. they just let it drop. we knew immediately we were in trouble and the following week you saw in our case bradley. 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 collapse, to show that you've got to deal with the repercussions of the risk you take in order to put a stop

two moral hazard in some way? >> know i think it was a disastrous mistake. yes you can argue afterwards that it was impossible to step in and help them, that actually 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. >> you went to treasury and you

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 and enormous 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. the company was half the size it was coming into the crisis.

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 have the systems in place to protect themselves? >> i think 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 into improving their system. >> you are in charge of the compensation. 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. i think financial pay is still too high. i think the lessons we try to implement after 20 -- 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 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. i doubt it is much of a 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. the economy is strong. if am looking over the horizon, i think debt is an issue that loom large. >> do you see any threat in this 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. mike crapo passed a piece of legislation. i didn't like every piece of it, but overall it was rather moderate 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. i believe fundamentally we provide the tools necessary in this environment to minimize the danger of a major financial collapse such as we saw in 2008. erik: 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. it was born 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. 25 for the market, 75% of the final for the banks. that is the first explanation. it was much more costly in terms of gdp 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 financing of the economy comes out of the public institution and not through the banks. but that being said of course 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. but that does not suggest that if we had a big new shop we we wouldn't have contagion. >> 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 institutions with capital with a

$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. >> that goes to my next question. 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 less that is telling you , something about the underlying health of those institutions. when we don't recognize that in assessing their soundness, i think we make a serious mistake. i think there continues to be risk of what years ago was called a doom loop in europe where 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. in a sense, the legacy or the dna of the crisis has been an 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, regulation goes when monetary policy goes wrong, you certainly exacerbate whatever problems made existed beforehand. when you allow people to pour into a home and then they lose the home and are underwater for five, 6, 7 or eight years, that is a mistake which creates more problems. i would also say monetary policy 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 crisis was not solely a failure of financial regulation or management by the bank. it was in defense of a broader you are set of structural issues. >> are we more vulnerable today

than we were on the eve of the crisis? >> i hope not. i think it's very good question. 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 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. >> i believe the financial system is less honorable than it -- vulnerable than it was. i think dodd-frank and related things have done more than they are given credit for. that financial institutions are in fact stronger than they were, but every crisis almost by definition comes from a direction you weren't expecting. >> these system will always have a panic from time to time. dodd-frank did one thing that stood out that probably would

make it more difficult to deal with a certain kind of panic because it's the power of the fed to act in a panic when we 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. i think there should be and bank 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 properly anticipated in the law, 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 to do the things necessary. 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. ♪

>> weigela parents come to the united states? >> my father was a refugee from north korea. >> did you feel discrimination? >> people were screaming racial epithets. >> in harvard medical school, paul farmer? >> we began talking about the nature of responsibility to the rest of the world. >> you let a protest against the world bank. you guys said the world bank should be shut down. do you have any regrets? >> i'm very glad we lost that argument. >> take your time. >> people would not recognize me