On Sept. 15, 2008, Lehman Brothers, a well-known and respected investment bank, filed for bankruptcy protection after the Bush Administration’s Treasury Secretary, Hank Paulson, refused to grant them a bailout.12 While there had been market volatility during the preceding months, the fall of Lehman Brothers marks what many consider the beginning of a global financial crisis.
After the Dow Jones Industrial Average closed down 504 points—roughly 4.4%—and the Nasdaq lost 3.6% in response to the Lehman bankruptcy, policymakers reversed their stance on bailouts and initiated a $700 billion program to stabilize financial markets.34 Companies deemed “too big to fail” received cash infusions in exchange for stock, commercial bank status, and access to discounted loans from the Federal Reserve.
So, what were the financial companies that received help from the government, and 13 years later, where are they?
- The financial crisis started with Bear Stearns and Lehman brothers. The U.S. government did not bailout Lehman and the institution filed for bankruptcy and eventually closed. Bear Stearns was picked up by JP Morgan and no longer exists.
- As the financial crisis got worse, the U.S. government approved a $700 billion program to bailout institutions that were considered “too big to fail.” Some analysts put the real number at $12.8 trillion.
- AIG, which received the biggest bailout in history at $180 billion continues to operate today, though is a shell of its former self that is struggling in today’s marketplace.
- Other large banks that received some sort of government benefit are continuing to do well, including JP Morgan, Bank of America, Morgan Stanley, and Goldman Sachs.
Bear Stearns: The Harbinger of Too Big to Fail That Failed
The first “too big to fail” moment occurred months before the Lehman Brothers failure. The Bear Stearns deal was meant to shore up financial markets and promote stability in a system increasingly recognized as unstable since the middle of 2007.
In March 2008, the Federal Reserve agreed to lend up to $30 billion to JPMorgan Chase so they could buy Bear Stearns. JPMorgan did so; paying only $10 a share for the ailing investment bank. Rather than stopping the panic, the deal did little to allay fears, and ultimately more bailouts followed.5
Seven years later, in 2015, JPMorgan Chase CEO Jamie Dimon said he regretted the decision to buy Bear Stearns, even at the discounted price. “No, we would not do something like Bear Stearns again,” he wrote in a shareholder letter, citing billions in losses and legal bills stemming from crisis-era acquisitions Bear Stearns and Washington Mutual.6
JPMorgan isn’t suffering too much, though. It is the largest bank in the U.S. in terms of assets at the end of 2020, with just over three trillion dollars in assets.7
AIG: The Biggest Bailout in History
Just after letting Lehman Brothers fail, the government stepped in when it became clear that American International Group (AIG) would fail due to its heavy investments in credit default swaps and potentially bring down the entire financial system. With AIG, the infusions came in multiple stages, including a low-cost loan, preferred share purchases, and mortgage-backed securities. In the end, the government poured more than $180 billion into AIG.
However, because the government took on a stake of nearly 80% of the company, the money spent was recovered by 2012, with a net profit to U.S. taxpayers.8
Today, after a few years of profits, AIG is once again struggling. In 2020, the company had $730 million in losses related to the Covid pandemic.9 The company used to have a triple A credit rating and now its senior debt has a BBB+ rating.10 Even before the pandemic, the company was having a tough time. In 2016, investing legends Carl Ichan and John Paulson called for its breakup. Since 2016, its profit margins have been either flat or negative, without any real growth.11 It’s revenues in 2019 were only a 5% increase from 2018.1213The company is chugging along.