Believe it or not, there are still legal cases from the infamous Lehman Brothers bankruptcy in 2008.

The date was September 15, 2008…

And those watching will never forget the image: Hundreds of employees leaving the bank’s offices one by one with boxes in their hands.

Many simply watched in disbelief.

At its collapse, 150-year-old Lehman was the fourth-largest investment bank in the United States, with 25,000 employees worldwide.

So it had survived the railroad bankruptcies of the 1800s…

It survived the Great Depression and two World Wars…

And it survived the Long-Term Capital Management collapse, the 1998 Russian debt default, and the Internet bubble.

But this time, instead of surviving, Lehman went bankrupt and became the symbol of the Great Financial Crisis.

So, how did it all go wrong? And what can it teach us about the crypto markets today?

Let me explain…

Lessons from the Great Financial Crisis

Lehman took its first steps toward collapse when it branched into mortgage-backed securities (MBSes) and collateral debt obligations (CDOs) in the early 2000s.

This put Lehman into more complicated products and corporate structures. It also significantly increased its risk profile.

Then, in 2003 and 2004, it acquired five mortgage lenders and two loan servicers… companies specializing in borrowers without full documentation.

So, it not only increased its risk profile, it concentrated investment in those risky assets as well.

Then in 2006, Lehman took this a step further and adopted a real-estate-focused business strategy…

Many questioned this decision because they felt the housing market was at or near its peak… Nevertheless, it cemented Lehman’s risk-taking culture.

By 2007 Lehman was a leading underwriter and market-maker in residential

and commercial MBSes. And it was active in all areas related to secured lending, structured finance, and securitized products.

That same year, home delinquencies rose, and the credit crisis erupted… all while Lehman underwrote more mortgage-backed securities than any other firm that year – an $85 billion portfolio.

Making it worse was Lehman’s high leverage ratio of 31… A ratio that had increased 30% since 2004.

So by the end of its 2007 fiscal year, Lehman Brothers held $111 billion in commercial or residential real-estate-related assets and securities.

That was more than double the $52 billion it held at the end of 2006… And it was more than four times its equity.

Lehman had adopted a high-leverage, high-risk business model. And once housing prices started to fall, it all collapsed.

On June 7, 2008, Lehman announced a second-quarter loss of $2.8 billion, its first loss in over 20 years.

Other institutions stopped accepting Lehman’s assets as collateral. Its credit costs went up. And many firms simply withdrew from Lehman.

This collapsed Lehman’s stock and debt… and despite a last-ditch effort by Barclays and Bank of America to facilitate a takeover… they were ultimately unsuccessful.

Of course, this was just the beginning of the Great Financial Crisis… The S&P 500, already 20% off its peak, fell another 45% before bottoming out.

Lehman Brothers teaches us many lessons. Poor risk management and imprudent use of leverage were its key failures.

But it’s also important to understand that while this was a failure of Lehman Brothers and others, it was not a failure of the housing market.

The same insight is important to understand in the crypto markets today.

The Lehman Brothers of the Crypto Crisis

As you probably know, the crypto markets have been falling since last November…

But things went from bad to worse in May when UST, the stablecoin of the Terra ecosystem, collapsed.

The contagion quickly spread to the entire crypto sector… And crypto hedge fund Three Arrows Capital (3AC) emerged as this crisis’s “Lehman Brothers.”

3AC was one of the most innovative funds in the crypto world… And it had over $10 billion in crypto assets under management at its height.

But in June, it filed for Chapter 15 Bankruptcy… and as I write, the media is reporting that its founders have “gone missing.”

Just like Lehman Brothers, a series of risky leveraged positions and poor risk management led to 3AC’s undoing…

One was an investment in the aforementioned Terra (LUNA) blockchain and its algorithmic stablecoin UST.

3AC made an initial investment of $200 million… But the UST collapse led to a loss of $500 million.

It also owns a significant amount of the Grayscale Bitcoin Trust (GBTC), a digital currency investment product for bitcoin… GBTC is unique in that it’s a vehicle allowing individual investors to own, buy, and sell BTC in their everyday brokerage accounts.

Unlike an ETF, though, it doesn’t always trade at its net asset value or “NAV.” That means it can trade at a premium or a discount. With GBTC’s discount hovering around 30% today… it’s worth much less than 3AC’s initial GBTC investment amount.

So it’s a double whammy for 3AC. Not only has the price of bitcoin fallen, but 3AC uses GBTC as collateral for its loans… so its collateral is now worth much less than the debt it was put against.

3AC also owned a significant amount of stETH, the liquid staking derivative for ETH. But due to market volatility, stETH trades at a 6–7% discount to ETH… and 3AC had to sell at those prices.

Further, 3AC invested in several altcoins that suffered drawdowns during the Crypto Winter… And they took on even more debt to deal with the Terra collapse.

Like Lehman, 3AC employed a high-leverage, high-risk business model… And it imploded when the market went south.

Also, like Lehman, the contagion fueling its collapse has spread…

  • Crypto loan company Celsius suspended all activity on its platform and hired restructuring consultants in preparation for a potential bankruptcy filing…

  • Crypto trading platform Voyager Digital suspended trades and withdrawals and filed for bankruptcy…

  • Crypto lender BlockFi inked a deal with FTX for a $250 million credit facility…

  • And crypto exchange platform announced it might lose the $270 million it lent 3AC.

And it’s likely not over.

So, as crypto investors, where do we go from here?

Key Takeaways from the Crypto Crisis

First, it’s important to understand that crypto and blockchains are just fine… The sell-off has nothing to do with the validity of blockchain protocols.

Like 2008, this is a liquidity-driven crisis. And as you can see from the names mentioned, the problem lies in centralized crypto services, not crypto itself.

Second, even though this collapse is painful, it’s a long-term positive for the industry…

The contagion gets rid of the bad actors, educates the market on what business models work, and eliminates the weakest projects.

We likely haven’t seen the last of these blowups… so I expect there will be more pain and more liquidations.

Today, the best thing to do is simply ride out the volatility. The contagion, while painful, is setting us up for a healthier, stronger crypto market.



Greg Wilson
Analyst, Palm Beach Daily

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