Lehman Brothers: the scapegoat?

At 14 years old when the banking crisis took place and still today I struggled to understand the amount of money lost in the crisis and how an industry as important as this was allowed to fail.

The last days of Lehman Brothers gives an understanding of some of the things that took place within the banking crisis including bankruptcies and bailouts. Before discussing Lehman Brother’s case it seems ludicrous to me that it was even possible for the banks to get into this crisis where the governments where bailing out billions of dollars and people’s lives were getting ruined. Did the banks just not realise the mess they were in until it was too late? Or did the think they were unbeatable?

The root cause of this problem starting with the banks giving mortgages to people that couldn’t afford to pay it back. Everyone was ruled by greed; the CEO’s wanted more money, bankers wanted bigger bonus and people wanted bigger and bigger houses. This went on for years; now the main concern is have the governments regulated this industry to stop a repeat like this occurring.

After watching the documentary about the collapse of Lehman, I was left with two questions how was the world’s largest bankruptcy of $691 billion allowed to happen? And why was Lehman Brothers the only major US bank that wasn’t saved by the US government?

Six months before Lehman’s collapse Bear Stearns found themselves in a similar situation to which the Fed intervened by assuming $29 billion of losses. Two days after Lehman’s bankruptcy the US government bailed out AIG with a package costing $182 billion!!!!!  Showing the Fed possessed the funds to aid Lehman’s survival. I acknowledge that the failure of AIG would have had a greater global effect damaging economies not only in North America but Europe and Asia. But still why not aid for Lehman?

The Fed have never provided evidence for their decision that Lehman was insolvent stating there was “no time” that weekend for a written analysis. However the main reason given by others for the failure of Lehman is the mess they had put themselves into through risky real estate investments and over estimation of assets; this left them with $25 million of bad debts as stated in the documentary. This debt was the main reason both the Bank of America and Barclays acquisitions of Lehman fell through.

Through research the main factual difference I can find between Lehman and the other two banks is their problem was a short term cash issue which once it was cleared they could carry on operating; as Lehman’s had a long term debt issues. However I don’t believe this was the main reason they received no fed funding.

Alan S. Blinder and many others have stated that the decision to not save Lehman Brothers and thus their demise was the cataclysmic event to the entire crisis. I believe Lehman was left to fail; to be made an example of for the rest of the financial industry on how not to do business so recklessly. Thus in that respect it worked as 8 years on people are still debating ‘The Weekend That Wall Street Died’.  The one question we will never know the answer to is if Paulson (US treasury secretary) knew the extent that the aftermath of Lehman’s bankruptcy had on the world economy; would he have stopped Lehman Brothers collapsing?

I would love to hear anyone else’s opinion for why the US Federal Reserve left Lehman to fail?