Maurizio – Omnologos

Where no subject is left unturned

Why Lehman’s Failure Was The Right Move

with 3 comments

Millions of gallons of ink must have been consumed in the neverending discussions about the “disaster” represented by the US Government’s decision to let Lehman Brothers fail and disappear. Andrew Ross Sorkin on today’s IHT agrees:

With hindsight, many in the financial industry blame a deepening of the global financial crisis on the government’s decision to let Lehman crumble

I disagree with that analysis, for two very simple reasons. When Lehman was allowed to go bankrupt, a signal was sent to all, saying that not everybody will be rescued. This was in direct contrast with the Japanese Government’s decadal efforts to prop up every financial institution under its watch (that’s why those efforts lasted for a decade or even more).

More importantly, the failure of Lehman Brothers showed everybody what the failure of “just a bank” may mean, with innumerable, overwhelmingly negative consequences propping up even in unlikely places. And this was good: because it is in the human nature to seriously question people advising that something bad may be happening in the near future, and to need a direct experience of that “something bad” before properly reacting.

You can spend every last molecule of your breath explaining a child that eating too many sweets can be painful. But there is nothing like going through a “tummy ache” that will convince the child of changing their way.

And you could transfer yourself back to January 1939 and explain all the reasons for the upcoming Nazi continent-wide monstruosity, but I am sure nobody in the UK or France (or the USA) will agree to go to war until forced to by the pain of circumstance.

And so, had Lehman Brothers been rescued alongside the other relatively large institutions, we would still be discussing the pro’s and con’s of rescue packages. And we would have never known that it takes just a bank to fail, to see a run on money-market funds.

Hindsight will fuel further commentaries on now-defunct Lehman Brothers: and hindsight can be useful to make sense of the world, but only works when there is something to look back at…

Written by omnologos

2008/Nov/26 at 23:53:26

3 Responses

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  1. With all your respect but your analysis is wrong. Assuming that Lehman’s fall was a positive thing does not make sense. So it is good that LEH fell because now the government will need even more money than before to save the other financial institutions? There was no clear message from Paulson & Co and that is what cause the uncertainty in the market. The rationale for saving Bear, AIG, Fanie and Freddie and not LEH was not understood. The whole thing was understood as a decision that was made out of Paulson wim rather than rationale. Where is the logic behind that? They knew ahead of time the risks associated with the fall of a I-bank like Lehman because Bear and LEH were very similar. They knew that LEH had trading positions and was interwined with the financial system. They had the information on hand and they decided otherwise. Even CNN informed that LEH was not allowed to take advantage of the rescue package.

    Why was LEH let go? A lot of questions and no answers!!!

    The Believer

    2008/Dec/18 at 22:44:07

  2. thank you The Believer. I do not think anybody understood at the time ALL the consequences of letting Lehman Brothers disappear.

    Actually, you’re talking about the reasons behind that decision. I am talking about the rightfulness (or otherwise) of that decision. One can always make the right decision for the wrong reason, and vice-versa.


    2008/Dec/20 at 22:40:48

  3. I saw Andrew Sorkin on Charlie Rose last night. I think he is weening himself off being a Wall St apologist as he too has come to realize the bankers’ folly (presumptuousness) in fighting attempts to regulate the industry so the crisis of 2008 doesn’t happen again. In case you are interested, I have just posted a piece based on his discussion.


    2009/Oct/20 at 17:03:55

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