Two Years Since the Collapse of Lehman Brothers
It was two years ago today, September 15, 2008, when Lehman Brothers filed for bankruptcy. The housing bubble had already burst, with the derivative mess sloshing its way through most financial institutions. But the Lehman collapse sparked even more institutional fear and panic, leading to a worldwide credit crunch.
Lehman’s story is not over, as the bankruptcy is not yet complete. Speculation continues to revolve around whether or not any senior executives will be criminally charged for their roles in the once revered investment bank’s demise. Did they know that the firm would not survive even while they raised new 11th hour capital?
Debate continues whether the government had the legal power to prevent the collapse. There are good arguments on both sides of the issue, and it’s hard to say if anyone knows the real answer. If the consequences of the collapse had been fully appreciated, would it still have been allowed to fail?
What is clear is that after September 15th, no other large institutions failed. This may indicate that the government had seen enough. Playing the part of referee in a brutal boxing match, it stopped the action rather than watch any more.
For more information, look up Lawrence McDonald’s book on the subject “A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers”.
The book gives one trader’s view on the events leading up to the company’s collapse, and most of the overlapping points are consistent with Hank Paulson’s “On the Brink: The Race to Stop the Collapse of the Global Financial System”. The key difference between both accounts is the government’s power (or lack thereof) to intervene, and whether it truly appreciated the extent of the resulting fallout.