It was well after 10 o’clock on the night of Monday September 15th, 2008, when Kevin Rudd left a cabinet meeting to take an urgent call.
He returned with word from New York that the fourth-largest US investment bank was filing for bankruptcy.
With $US691 billion in assets — nearly a trillion Australian dollars at current exchange rates — and 25,000 employees worldwide, Lehman Brothers remains the biggest corporate collapse in American history.
Mr Rudd admits to being “pretty stunned” given that the US administration had previously intervened in the cases of Bear Stearns and Freddie Mac and Fannie Mae.
“I knew from my own experience just how big Lehmans was in the scheme of things so I couldn’t quite believe that they’d let this one go,” Mr Rudd said.
“I remember speaking with Ken Henry, the secretary of the Treasury at the time, and said we have a mother of all problems on our hands because this is just going to reverberate through markets.”
Lehman was one of many major financial firms which were at that point teetering on the edge of oblivion.
US authorities had stepped in to save insurance giant AIG with a $100 billion loan. While the world’s largest retail stockbroker Merrill Lynch was saved via takeover by the Bank of America.
But, the authorities had decided that Lehman Brothers wasn’t too big to fail.
As Lindsay Tanner recalls it, Mr Rudd announced to his colleagues, “we’re in uncharted waters”.
A slow-moving train wreck
Ten years ago, Mr Tanner was the country’s minister for finance and deregulation.
He had been in the Parliament for 15 years, but nothing prepared him for the horrors of the days, weeks and months ahead as the dominoes continued to fall.
“I wasn’t shocked. The unravelling of those mortgage-backed securities had been a slow-moving train wreck. It was a bracing experience,” he said.
First had come Northern Rock, exactly 12 months earlier.
Television images beamed across the world showed queues massing outside Britain’s fifth-biggest mortgage lender.
In 2007 few knew they were watching the opening march of a global funeral cortege to farewell blind faith in financial markets. Economics and politics would never be played the same again.
Just five months before the decision not to bail out Lehman Brothers, the US Federal Reserve provided an emergency loan to investment bank Bear Stearns after its shares fell from $133 to $2 within a year.
Mistakes by other countries cost Australia billions
That night in the cabinet room, Mr Tanner recalled, it dawned on everyone just how inextricably linked the world had become and the extent to which Australia was hostage to global forces.
“These were mistakes made in and by other countries. The cost to Australia was considerable”, he mused.
“Government debt was zero at the start of the GFC.”
Once it was decided the government would borrow $52 billion to keep the financial arteries of the economy flowing, it took the cabinet two full days of frenzied debate to determine the nature of the spend.
Lindsay Tanner explains that he, treasurer Wayne Swan and prime minister Rudd had decided they had to act with some speed to inoculate the Australian financial system from the worst of the panic that had already spread to other parts of the world.
He says he’s still proud of the steps his government took to guarantee bank debts, mail $900 cheques to pensioners and construct school halls and fences.
Mr Swan said the quick decision to guarantee bank deposits and assist institutions to raise money was essential to avoid an Australian Lehman moment.
“When we intervened to provide the guarantees through the claim scheme, we understood that if one institution went over, all were threatened,” he said.
“The truth was that the cabinet acted because we understood that we couldn’t let one institution go over.
“That is what actually happened in the United States with Lehman Brothers. There had been an expectation with Bear Stearns that the Americans would intervene and protect Lehman Brothers. When they didn’t, what we saw was basically the banking system in that country imploded.”
Did Australia spend too much in stimulus?
Australia was among just four developed countries that avoided a recession in 2009 along with Israel, Poland and South Korea.
A decade after British and US banks began to crumble under the weight of bad mortgages, argument still rages as to whether the mining boom could have carried Australia through without the need for the government’s stimulus measures and attendant debt.
Mr Rudd rejects the government spent too much and compares the situation here to what was experienced overseas.
“People can haggle about the details but given the information we had the time I think we acted completely appropriately,” Mr Rudd said.
“We never had the footage of people queuing outside banks worried whether they could get their deposits out, that’s the footage we had in banking institutions right around the western world.
“We avoided that, therefore I stand absolutely 100 per cent by the decisions we took at the time”.
Mr Tanner disagrees with Mr Swan, who last year said Australia’s economic resilience had “nothing to do with the mining boom”.
“Continuing Chinese demand for our minerals was crucial, but there were two factors that were even more important — compulsory superannuation and immigration,” he explained.
“With huge downward pressures on investment and consumption these two factors ensured that there was a constant flow of new investment capital and consumer demand.”
Mr Tanner does credit his government’s decisive actions with keeping Australians in their jobs.
He insists it is no accident that the unemployment rate hovered around a narrow band of 5 to 5.5 per cent throughout the Labor years.
This was in stark contrast to countries such as Greece, Spain and Italy that were hit hardest by the panic on global financial markets, and have struggled to recover under the burden of unemployment rates that are still 21 per cent, 16 per cent and 11 per cent respectively.
“People treat it as a given that we didn’t experience radical unemployment in the double digits like the rest of the world,” Mr Tanner observed, scoffing at those who criticise the scale of the spending.
“Whether we could have got through without that level of investment in the economy is a question that is impossible to answer.
“Those who say we overdid it just reflect their own ideological preferences. They’re peddling their bias.”
The former treasurer agrees that history has cast a positive light on the government’s stimulus program.
“We did polling on this recently because there has been a lot of controversy — conservatives in Australia that have attempted to vilify and to denigrate the stimulus packages that we put forward to combat the recession,” Mr Swan responded.
“That shows again that Australians recognised the need to support the economy and avert recession.”
In hindsight though, Mr Tanner does regret some caution sacrificed in the pursuit of speed when allocating $2.8 billion under the Home Insulation Program “with indirect tragic consequences”.
“We should have handled that differently but, apart from that, I maintain the belief that we acted correctly,” he concluded.
Is it Australia’s turn for a financial crisis?
Many analysts are worried that Australia survived the global financial crisis by going on its own household and public debt binge.
But Australia’s former treasurer remains sanguine about the risks.
“A lot of work has been done internationally to ensure that financial institutions have adequate liquidity, and adequate capital,” Mr Swan said.
“I am confident that all of our financial institutions pass those essential tests of stability and adequacy.”
Mr Swan still sees the main threat to the Australian housing market being rising unemployment, of which there are no signs of currently.
“What we have seen is action from our regulators in those areas, particularly in the area of investor housing. They have come down hard on lending in those areas,” he said.
“I see that as being evidence of good regulatory activity, they were aware these problems were rising, the regulators have been active and effective.”
When Mr Tanner was asked about whether the financial markets had learnt the lessons of the past, the former finance minister was coy. As a director on the Suncorp board and a special adviser to financial advice firm Lazard, he is conflicted.
He steers the discussion back to September 15, 2008.
Unshackling the banks
Since the election of US President Donald Trump in 2016, his administration with the support of the Republican controlled house and senate have looked to deregulate the banking system once again.
Investors have applauded the moves, sending US bank share prices skyrocketing.
But Mr Rudd says investors in financial markets have little interest in financial stability or the “public good” and so the endorsement should be viewed sceptically.
“You have an investment community pushing hard and pushing a new administration United States to dismantle the protections we put in place for the G20 financial stability board process post 2008/2009,” the former prime minister said.
He warns “that spells danger for us all”.
Ten years on, he worries the lessons of the Great Recession have already been forgotten.