On February 11, Hamilton alumnus George Mack ’92, a managing director at Barclay’s Capital graciously made himself available for students in the New York City Program. The class was curious as to the origins of the great recession.
Fortunately, Mr. Mack was in a unique position to answer the class’s questions given his former position at Lehman Brothers, a firm integral to the collapse of the banking system. Mack explained that Lehman was highly leveraged, meaning that a significant portion of the firm’s financing was derived from counterparty loans issued on a daily basis in the overnight-repo market. Like most investment banks at that time, Lehman was highly involved in the lucrative business of buying real estate mortgages and repackaging them as mortgage-backed securities to be sold to investors.
As real estate values began to drop, investors began to question the underlying value of these mortgage-backed securities, the majority of which had been pledged as collateral to secure the necessary funding and liquidity for Lehman to operate on a daily basis.
Subsequently, Lehman’s investors began to question the underlying values of Lehman’s assets. Ultimately, lenders’ reluctance to accept Lehman’s assets as collateral for their cash, combined with Wall Street’s speculation of the firm’s failure, caused Lehman’s liquidity pool to evaporate. Eventually, Lehman was forced to file for bankruptcy.
Mack then assisted the class in relating Lehman’s collapse to the great recession itself. He made clear that high demand for mortgage assets, which historically offered favorable risk/return characteristics, drove banks’ willingness to supply investors with mortgage-backed assets. Mack suggested that bankers were simply doing their jobs. Therefore, he felt that bankers’ bad reputations were not justified because bankers never forced mortgage assets upon any of their counterparties.
The New York City Program’s meeting with George Mack was both incredibly interesting and fruitful. The class would like to thank Mr. Mack for taking the time to share his wealth of knowledge regarding both Lehman Brothers and the great recession.
Student author Brendan Letarte '11 is a graduate of The Taft School.
Fortunately, Mr. Mack was in a unique position to answer the class’s questions given his former position at Lehman Brothers, a firm integral to the collapse of the banking system. Mack explained that Lehman was highly leveraged, meaning that a significant portion of the firm’s financing was derived from counterparty loans issued on a daily basis in the overnight-repo market. Like most investment banks at that time, Lehman was highly involved in the lucrative business of buying real estate mortgages and repackaging them as mortgage-backed securities to be sold to investors.
As real estate values began to drop, investors began to question the underlying value of these mortgage-backed securities, the majority of which had been pledged as collateral to secure the necessary funding and liquidity for Lehman to operate on a daily basis.
Subsequently, Lehman’s investors began to question the underlying values of Lehman’s assets. Ultimately, lenders’ reluctance to accept Lehman’s assets as collateral for their cash, combined with Wall Street’s speculation of the firm’s failure, caused Lehman’s liquidity pool to evaporate. Eventually, Lehman was forced to file for bankruptcy.
Mack then assisted the class in relating Lehman’s collapse to the great recession itself. He made clear that high demand for mortgage assets, which historically offered favorable risk/return characteristics, drove banks’ willingness to supply investors with mortgage-backed assets. Mack suggested that bankers were simply doing their jobs. Therefore, he felt that bankers’ bad reputations were not justified because bankers never forced mortgage assets upon any of their counterparties.
The New York City Program’s meeting with George Mack was both incredibly interesting and fruitful. The class would like to thank Mr. Mack for taking the time to share his wealth of knowledge regarding both Lehman Brothers and the great recession.
Student author Brendan Letarte '11 is a graduate of The Taft School.
