Understanding the Financial Fallout from Lehman Brothers
Seventeen Years Later, the Financial Fallout of Lehman Brothers and the Economic Shock That Shaped a Generation
By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).
Updated on October 4, 2025.
Key Points:
- Lehman Brothers filed for Chapter 11 on September 15, 2008, triggering the largest bankruptcy in U.S. history and accelerating the Great Recession.
- The financial fallout exposed the risk tied to subprime mortgage-backed securities and toxic debt bundles sold across global markets.
- Subprime mortgage lending practices at the time included 100–125% loan-to-value ratios, interest-only payments, and adjustable-rate mortgages that reset dramatically.
- Credit markets froze post-Lehman, leading to mass defaults, job losses, and a cascade of credit limit reductions that damaged credit scores, including my own.
- The financial fallout extended to municipalities and foreign governments that had invested in toxic mortgage securities.
- The experience reshaped attitudes toward homeownership, especially among younger generations who witnessed or experienced the stress of foreclosure firsthand.
I’ve always said bankruptcy isn’t sexy. As a professor and author who has published on Consumer Bankruptcy Law, I can tell you: you won’t find the major news networks showing a bankruptcy trial. And yet, who would have thought that one bankruptcy case could have shaped a generation?
Yesterday marked the 17th anniversary of the Lehman Brothers bankruptcy, an event that didn’t just rattle Wall Street but also reshaped the global financial landscape. On September 15, 2008, Lehman filed for Chapter 11 bankruptcy, listing over $600 billion in assets. It remains the largest bankruptcy in U.S. history. Now the Great Recession was real.
The Mortgage Madness: The Illusion of Wealth
Now, being in the bankruptcy business and realizing the subprime mortgage foreclosure crisis was shaping up, there was money to be made, and to be honest, I did well during that time period, but the economic anxiety didn’t disappear like a summer breeze in Miami.
The fact is, leading up to that point, my practice was suffering as well as every lawyer I knew. People were using their home equity as an unlimited ATM, so bankruptcy filings were down as well as divorce cases. But I learned long ago that everything in life is temporary, and once the subprime mortgage foreclosure crisis hit and Miami was basically Ground Zero, I voluntarily let my home go into foreclosure. It wasn’t worth keeping it, especially when I was using savings to make up the losses. But the debt-equity math and having an underwater mortgage did not make sense considering my background.
But there lie the long-term effects. From then on, I was anti-home ownership. I didn’t want to go through that again, and the younger generation living through that experience of losing their home, guess what, they are anti-home ownership as well. The fact that I had sustained major hurricane damage from Katrina and Wilma a few years earlier only convinced me I was right, especially since the insurance company didn’t want to pay out.
What Caused the Housing Crisis in 2008
Lehman’s financial fallout was the result of years of overexposure to subprime mortgage-backed securities. Being in the bankruptcy business, I knew plenty of mortgage brokers, and they all said the same thing: “If you have a pulse, I can qualify you for a mortgage.”
If you were young at the time and don’t know the specifics of the Great Recession, please look into it. I reviewed an excellent documentary titled “Inside Job,” which was narrated by Matt Damon, and of course, watch “The Big Short.”
When the housing bubble burst, Lehman was left holding billions in toxic mortgages. And unlike Bear Stearns or AIG, Lehman was allowed to fail. So the term “too big to fail” only applied to a select few. How this happened was simple enough.
Why Rent When You Can Buy?
Why rent when you can buy is a question we all face, but coming up with 30% deposits is never easy. For those self-employed, proving income is an issue. I’m not the only person to apply for a mortgage where the monthly payments are far less than rent, and still have issues qualifying.
A few years ago, after paying rent for $1,550, always on time, even during COVID, the bank was giving me a hard time for a mortgage of less than $600. They said if I paid off my vehicles, they would qualify me for the mortgage. No thanks. I even faced this issue last month.
Looking to relocate cross-country, I found a home where I would put as a down payment 48% and my mortgage would be $1,000 less per month, plus I was going to get rid of $500 per month in debt. It was still an issue for the bank (730+ credit score), so time to stay put, especially because we are “job-hugging.”
But during that time period, qualifying was easy. It was even common to have 100% mortgages, meaning buying a house with no money down! If rent requires first, last, and security, it only made sense to buy. But imagine financing 110-125%, meaning getting a mortgage for more than the value of the home! You can buy new furniture, remodel the bathroom! It only made sense to buy!
As I mentioned, everyone qualified for a mortgage, and you seemed like a fool not to buy. It was the wild west. To qualify homeowners, these mortgages were known as “interest-only mortgages,” meaning you only paid the interest on the mortgage for a set time, say three to five years. Of course, that also meant your monthly payments were far less than your rent, half or more. So now you owned a home and paid half of your rent with no money down!
After that, these adjustable-rate mortgages required the full amount of principal and interest to be paid, so the monthly payments would increase by two to three times more. When that happens with hundreds of thousands of mortgages at the same time, well, you have a problem.
But it wasn’t just those with interest-only mortgages. They were people like me with regular mortgages. When you wake up and your house loses all its equity overnight, and now I have an underwater mortgage, you have to analyze your situation and ask yourself if you still want to stay in a house with negative equity. For me, the answer was simple: no! So I walked away.
The Financial Fallout and Economic Hangover
The consequences were immediate and brutal. One day, the Dow Jones plunged 500 points. The credit markets froze, paralyzing lending. I had my creditors calling me to say “to protect me,” they were lowering the lines of credit, but I still had to pay them. “F- that!”
What happened was if I owed $10k and had a $15k line of credit, the credit card company lowered my credit to the balance amount. So there was no available credit limit and I was always maxed out. This destroyed my credit score! Once one creditor did it, the other did it, and so on. How that affects your credit and your credit utilization ratio is explained in the blog post link below.
Global stock markets lost an estimated $10 trillion in value. Why? Because Wall Street sold those “toxic mortgages” as bundles to offset losses as a selling point. For example, if they sell one batch of 1,000 mortgages and 100 of them are losses, well, there are still 900 good ones, so the investment is safe. But when most of the mortgages are toxic, that’s not the case.
Unfortunately, there are endless stories of small towns and governments in the U.S. and abroad that invested in these toxic mortgages, and they also went bankrupt. Millions of jobs vanished, homes were foreclosed, and retirement accounts were gutted. I even remember reading stories of towns that couldn’t afford to leave on all night the street lights! Now you know why I feel anxious about today’s economy. I would be lying if I said there wasn’t financial PTSD!
The term anniversary is usually tied to a positive event, but not always. Sometimes an anniversary needs to be used as a gut check, a recalibration. The U.S. is facing a recession, major financial cuts at the federal level that affect states and local governments, and AI seems to be hunting for our jobs.
If you lived through 2008, what changed for you? And if you didn’t, what lessons are you taking forward?” Lehman’s ghost reminds us it might be time for that gut check. Time to recalibrate. The last thing we need is another financial fallout, especially since the core lessons about eligibility and regulation remain vital to prevent the next crisis.
Professor Hernandez is an attorney specializing in consumer finance and debt relief. He is the published author of Consumer Bankruptcy Law (Routledge Publishing) and teaches law and finance courses in both English and Spanish for an international university.
Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.
You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.
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