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A look back at Lehman
Reflections on the collapse
From 2004, I led the PwC real estate industry practice in the UK. The PwC / ULI "Emerging Trends in Real Estate" report 2017, published at the end of 2016, opened, "if the real estate cycle is a clock, we are at five or ten minutes to twelve". At PwC, we regarded the sale of the HSBC Tower for £1.09 billion on 30th April 2007 as the peak of the UK property market. When we called the top of the market, I remember receiving emails from agents accusing us of talking down the market.
Our quarterly PwC real estate newsletter in June 2007 included at article by my then colleague Barry Gilbertson considering the possible impact on the UK real estate market of a liquidity crisis. Once again I received emails from agents accusing us of talking down the market.
By the time of the next quarterly newsletter in September 2007, the UK was in the middle of a very real liquidity crisis. A year before the collapse of Lehman, Northern Rock, a UK bank created by the demutualisation of the Northern Rock Building Society a decade earlier, had to take a liquidity support facility from the Bank of England. This news triggered the first run on a UK bank for 150 years. The impact on UK real estate was immediate. Open-ended property funds saw a dramatic increase in redemptions. In the rest of the market, high levels of debt had been driving the market, and this had almost entirely dried up.
Although the UK had already had a year of liquidity crisis, the collapse of Lehman was still a shock. However, my enduring memory is the frenetic level of activity by PwC over a very short time in dealing with the European business. The PwC business recovery team were approached by Lehman in London on the Saturday as the crisis talks in the United States continued. I remember being called by one of the PwC banking partners on the Sunday morning during the process of clearing any potential conflicts of interest.
Just before midnight on Sunday 14th September, Lehman Brothers in the US announced that it would be seeking Chapter 11 bankruptcy protection. PwC and Linklaters teams in London had been working through the night to prepare for the European business to enter administration before the markets opened at 8am. At 7.56am, four minutes before the markets opened, the court appointed four PwC partners as joint administrators of Lehman Brothers International (Europe).
By mid-morning on the 15th, there was a huge PwC team assembling at Canary Wharf. Over the next few weeks, this was expanded to cover a huge range of areas of expertise, including many from the real estate practice. Although the administration of LBIE was the largest and most complex in history, ultimately the creditors have been paid in full and there is a surplus for distribution. Ten years after the adminsitration commenced, my former colleagues at PwC are still working on the case.
In all the articles currently appearing on the tenth anniversary of the Lehman administration, very few comment on how different the outcome could have been if a major global accounting firm had not been able to mobilise a huge team across different skill areas, departments and countries in twenty four hours. Whilst there was, and still is in the retrospectives, quite rightly a focus on banks becoming "too big to fail", in respect of the successful response it is also important to remember that this was down to an organisation that was not "too small to succeed".