On September 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. 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 four and a half percent – and the Nasdaq lost three and a half percent in response to the Lehman bankruptcy, policymakers reversed their stance on bailouts and initiated a $700 billion program to stabilize financial markets. 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 ten years later, where are they?
Bear Stearns: The Harbinger of Too Big to Fail That Actually Failed
The first "too big to fail" moment actually 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.
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.
JPMorgan isn't suffering too much, though. Its second-quarter profit for 2018 rose to $5.4 billion, a year-over-year increase of 13 percent.
AIG: The Biggest Bailout in History
Just after letting Lehman Brothers fail, the government stepped in when it became clear that American International Group 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.
Today, after a few years of profits, AIG is once again struggling. In August of 2018, AIG reported that its general insurance business had dropped 46% year-over-year and the underwriting income, which logged profits of $149 million a year ago, is now showing an $89 million loss. Claims paid out due to catastrophic losses are on the rise, and net income continues to fall. AIG is trying to turn things around by hiring new executives, and the CEO, Brian Duperreault, insists that underwriting will be profitable by the end of the year.
Morgan Stanley and Goldman Sachs: Becoming Commercial Banks
The bailouts of 2008 weren't just about the government buying shares, but also about changing the face of banking. Investment banks Morgan Stanley and Goldman Sachs couldn't get involved with commercial consumer banking until the financial crisis. At that point, the Federal Reserve allowed them to become commercial banks so they could access funds by borrowing heavily, using the discount window the Fed offers commercial banks, as well as access to other government guarantee programs extended to these types of banks.
Both Morgan Stanley and Goldman Sachs borrowed billions at these low rates to help stabilize their operations. On top of that, becoming commercial banks has allowed them to tap into the consumer market in a way that they were unable to do before.
Today, Morgan Stanley offers a variety of banking services in addition to investment banking. In July 2018, Morgan Stanley reported a year-over-year profit growth of 39%, with its banking assets topping $200 billion for the first time in the second quarter of 2018. The bank reported quarterly profits of more than $10 billion for two consecutive quarters in 2018 – something that hasn't happened since 2007.
For Goldman Sachs, though, the picture isn't quite as rosy. Even though profit surged 40% year-over-year in the second quarter of 2018, Goldman shares have been struggling. After reaching a peak in January of 2018, they have declined 13 percent year-to-date. While Goldman Sachs has retail banking and is pushing into consumer banking with products like its high-yield savings offering Marcus, the institution is still primarily known for its trading and investment banking operations. However, the bank's Q2 profits amounted to $2.57 billion.
Bank of America: Bailed Out to Buy Failing Financial Institutions
Bank of America also received bailout money from the government, including more than $100 billion in guarantees, so that it could buy failing financial companies Countrywide Financial and Merrill Lynch. Bank of America had to take on losses related to those companies, including shouldering legal fees associated with Countrywide's questionable mortgage lending practices.
Even with these costs, though, Bank of America is booming today. It's America's second-largest lender, and its total profits for the second quarter of 2018 came in at $6.8 billion. Revenue sits at $22.6 billion for the second quarter, and Bank of America has been touting its cost-cutting measures. Hugh Son noted on CNBC that the bank's quarterly income tax charge fell from $3 billion to $1.7 billion. At least some of the credit for their positive quarter is due to the Trump tax cuts. The bank expects to continue to see growth resulting from an expected $500 million investment in technology.
Is "Too Big to Fail" Alive and Well?
Ten years after the financial crisis, there's a good chance that, facing a similar situation, the government would pledge money to bail out financial institutions. Even though Congress passed a $700 billion bailout package during the global financial crisis, some estimates indicate that the U.S. actually spent, lent, or guaranteed up to $12.8 trillion to rescue the economy. While that much money might not have been spent directly, the government essentially offered itself as a backstop to dozens of banks considered essential to the U.S. financial system and economy.
Following the financial crisis, "too big to fail" put additional regulatory requirements on 44 banks with more than $50 billion in assets. Earlier in 2018, Congress changed the definition of "too big to fail" to banks with at least $250 billion in assets, reducing the list to 13 banks. However, if faced with another meltdown, it's doubtful that the government would stop at propping up so few financial institutions.