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SEPTEMBER 2008:
THE BANKRUPTCY OF LEHMAN

CONTENTS

“Get more conservatively funded”......................................................................
“This is not sounding good at all”.......................................................................
“Spook the market” ............................................................................................
“Imagination hat” ..............................................................................................
“Heads of family” ...............................................................................................
“Tell those sons of bitches to unwind”.................................................................
“This doesn’t seem like it is going to end pretty”..................................................
“The only alternative was that Lehman had to fail”...........................................
“A calamity” .......................................................................................................

Solvency should be a simple financial concept: if your assets are worth more than
your liabilities, you are solvent; if not, you are in danger of bankruptcy. But on the af-
ternoon of Friday, September , , experts from the country’s biggest commer-
cial and investment banks met at the Wall Street offices of the Federal Reserve to
ponder the fate of Lehman Brothers, and could not agree whether or not the -
year-old firm was solvent.
Only two days earlier, Lehman had reported shareholder equity—the measure of
solvency—of  billion at the end of August. Over the previous nine months, the
bank had lost  billion but raised more than  billion in new capital, leaving it
with more reported equity than it had a year earlier.
But this arithmetic reassured hardly anyone outside the investment bank. Fed offi-
cials had been discussing Lehman’s solvency for months, and the stakes were very
high. To resolve the question, the Fed would not rely on Lehman’s  billion figure,
given questions about whether Lehman was reporting assets at market value. As one
New York Fed official wrote to colleagues in July, “Balance-sheet capital isn’t too rele-

vant if you’re suffering a massive run.” If there is a run, and a firm can only get fire-
sale prices for assets, even large amounts of capital can disappear almost overnight.
The bankers thought Lehman’s real estate assets were overvalued. In light of
