Glad You've Been Dead a Year, Lehman Brothers; Glad You've Been Dead 18 Months, Bear Stearns...

Tim Cavanaugh | September 13, 2009

...just wish Citibank, Wells Fargo, AIG, and GMAC had died with you.

A year ago this weekend the investment bank Lehman Brothers Holdings Inc. went out of business after the Bush Administration, in an isolated incident of courage, refused to bail it out. President Obama will celebrate the anniversary Monday with a speech in the Big Apple, New York, N.Y., the city so nice they named it twice.

The president's speech, I prophesy, will claim that the government's failure to bail out Lehman deepened and worsened the recession. Democrats and Republicans have been trying for a year now to persuade the world of this narrative, but even sources subservient to conventional wisdom continue to doubt it. The Financial Times, for example:

One year ago, the US authorities allowed Lehman Brothers to collapse, unleashing chaos. Capital markets froze, banks stumbled and a cascade of collapses seemed imminent. The financial system was seized with fear. A high-speed repeat of the American banking crisis that underpinned the unique misery of the 1930s threatened.

The US authorities were, however, right to allow Lehman Brothers to fail. They could not know how awful it would prove to be, and, when it comes to saving failing companies, governments should err on the side of inaction. Capitalism relies on the discipline provided by the lure of wealth and the fear of bankruptcy.

More banks should have been allowed to fail. Gigantic overextended consumer banks should have been allowed to fail, and the FDIC should have had to organize networks of 500 and 1,000 smaller banks to chop up their "assets." This is not libertopia I'm describing. This is the stated will, then and now, of the vast majority of Americans. The bailouts didn't need to happen. Never forget.

Comments

Michael Ejercito|9.13.09 @ 10:29PM|#

Indeed.

Opposition to the bailout was based on common sense.

Lester Hunt|9.13.09 @ 11:53PM|#

Ah yes, the death of an enemy, the gift that keeps on giving.

Nipplemancer|9.14.09 @ 12:00AM|#

obama is the messiah. maybe he'll resurrect Lehman to prove his miraculous nature.

|9.14.09 @ 12:01AM|#

The execs at Lehman and Bear Stearns didn't have enough clout with the Bush administration, I guess.

TallDave|9.14.09 @ 12:18AM|#

So, some bakns were too big to fail, and due to bad investments they needed trillions to keep the financial system from collapsing.

The solution? We'll make banks even bigger! Then they won't fail!

Be afraid. Be very afraid.

hmm|9.14.09 @ 12:20AM|#

I'd liked to have seen GS go belly up, but considering how far they are into government that is never going to happen. They took the GE model and ran with it.

It's still amusing that the bailing out was focused mainly on banks and not the commercial paper market that cause the majority of the issues. If the commercial paper issue were addressed then most institutions would have been fine and the worst would have gone under. Of course it would have been nice to have the whole bubble be 1/100th the size it was, but what would government do if it didn't create it's own crisis to save us all from.

hmm|9.14.09 @ 12:24AM|#

TallDave | September 14, 2009, 12:18am | #
So, some bakns were too big to fail, and due to bad investments they needed trillions to keep the financial system from collapsing.

The solution? We'll make banks even bigger! Then they won't fail!

That's what they did to begin with. The farce called the FDIC has to push P&A rather than pay out since they can only secure a small portion of what they are charged with covering. So they fire sale assets and accounts of failing institutions in back room deals to their buddies. The big guys usually get first crack at what they want. So instead of the the accounts being absorbed into the market they are channeled into a few selected banks that can afford them. It's a fucking sham. Then again most of the regulation is nothing more than an illusion and false sense of a reduced risk.

|9.14.09 @ 12:25AM|#

The president's speech, I prophesy, will claim that the government's failure to bail out Lehman deepened and worsened the recession.

That's actually sort of politically dangerous for the President, at least if people pay attention and the press publicizes it. There are still a lot of people who voted for Obama that blame all the bank bailouts on Bush and think that Obama's election means that the era of "too big to fail" is over.

Yeah, they're obviously wrong, but that sentiment is out there.

hmm|9.14.09 @ 12:30AM|#

and the FDIC should have had to organize networks of 500 and 1,000 smaller banks to chop up their "assets."

There's no need for the FDIC to organize networks or stimulate banks or people to purchase "assets" form failing banks. There would have been people lining up. There's hundreds of A.P Giannini's waiting for fire saled "assets" to start their own institutions or strengthen smaller ones. Lower the entry barriers and watch the risk taking financially liberal failures disappear while the more conservative risk averse institutions thrive on the carcasses of those that failed.

Banking is a fucking mess and a joke in this country.

Joe M|9.14.09 @ 12:58AM|#

Two words, baby: moral hazard.

|9.14.09 @ 1:11AM|#

Don't forget Freddy and Fanny.
Some time in the next couple of years, we'll get the chance again. Let's hope we get it right this time.

Who am I kidding.
doom
DoooM
DOOOOM

Mike Laursen|9.14.09 @ 1:30AM|#

Odd fact I happened to stumble across while reading about Teddy Roosevelt, a little before Lehman Brothers' demise: Theodore Roosevelt IV and V were executives there, and endorsed Obama for president. Don't know if other Lehman Brothers executives were also backing Obama, but that might explain why they were appraised as just an eentsy bit short of too big to fail.

Mike Laursen|9.14.09 @ 1:36AM|#

Darn, the actual facts get in the way: Teddy Roosevelt IV endorsed McCain, Teddy Roosevelt V endorsed Obama.

Paul|9.14.09 @ 1:54AM|#

So the Obama administration has what it believes is the Shroud of Lehman. My guess is when they carbon date it, they won't get the results they think they will.

|9.14.09 @ 2:02AM|#

The exquisite irony being that if they had allowed the banks to fail and smaller banks to eat them up, it would have generated the kind of downward social mobility (rich people losing all their cash and going bankrupt), that leftists claim never happens under capitalism.

It's funny how they can have it both ways - when everything stays stable, they bitch about the rich getting richer, but when the rich eat themselves and the upper echelon implodes, they bitch about the instability and the chaos. Creative destruction, baby. You gotta let old companies die to allow new ones to grow. Old money falls. New money rises.

Somehow the left manages to prove it's own thesis correct by intervening on behalf of big money, under the thin excuse that somehow we need these people or the whole economy will collapse.

Pure capitalism is perpetual revolution. You need socialism to keep the establishment in place.

|9.14.09 @ 3:16AM|#

Wells Fargo doesn't belong in that list. They were coerced into taking bailout money and giving up control to Paulson, they didn't ask for it.

-jcr

Jay Dubs|9.14.09 @ 3:41AM|#

So every major banking institution should fail because of over leveraging and sub-prime mortgages? I guess... but does that really make the financial market more efficient? Doesn't that just reset the system for such institutions to grow again and make the same mistakes?

Adam|9.14.09 @ 4:02AM|#

@Jay Dubs 3:41am

Presumably the new institutions would learn from the past, and try to avoid making the same mistakes. Of course, the same fate awaits them if they don't learn from those who failed before them.

Tricky Prickears|9.14.09 @ 6:24AM|#

Wells Fargo doesn't belong in that list. They were coerced into taking bailout money and giving up control to Paulson, they didn't ask for it.

Then why haven't they paid any of it back? Fact is, after they absorbed Wachovia, they realized they did need the money.


that leftists claim never happens under capitalism.

You know, it's funny. The Progressives I know, claim that the bailouts were an attempt to save, or restore Capitalism. They don't see it as Socialism. When in fact, any and all attempts, by the government, to provide "stability" to the system, is socialistic in nature. But then again, I can't even convince them that the Federal Reserve is a Socialist institution.

Some Guy|9.14.09 @ 7:24AM|#

I'd prefer to add, "wish you had died differently, Bear." Giving Citi $30B to take them is no way to let something fail. Just letting them fail is the way to let them fail.

Wells Fargo doesn't belong in that list. They were coerced into taking bailout money and giving up control to Paulson, they didn't ask for it.

I am constantly calling shenanigans on this. I have absolutely no faith in the idea that they couldn't have turned it down. Some nice theater they went through, but I didn't hear any complaining about it being "forced" on them until well after the fact.

Some Guy|9.14.09 @ 7:24AM|#

Sorry, meant JP Morgan...

air jordan shoes|9.14.09 @ 7:45AM|#

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@|9.14.09 @ 7:58AM|#

President Obama will celebrate the anniversary Monday with a speech

Doesn't President Obama celebrate every day with a speech?

Tricky Prickears|9.14.09 @ 8:07AM|#

I'm not sure I would throw AIG into that group. They were a special case because they were primarily an insurance company. I'm sure they underwrite many business insurance policies (general liability and Worker's Comp). Had AIG gone into an unstructured bankruptcy, all of those insurance policies would have become null and void (because they would have lacked the necessary capital backing). This would have left many businesses and insurance agents scrambling to find replacement policies. And due the vast number of policies that would have needed to be replaced, there may have been a lag time involved. Now, it's not a big deal to go without, say, home owners insurance for a few days, but as far as businesses, every day without insurance, is a day that business can not do business.

However, the government could have stepped in, and *temporarily* provided the necessary capital backing to keep those policies active. But I guess no one thought of that.

Rich|9.14.09 @ 8:07AM|#

"People are upset because on Monday we celebrate the anniversary of the Lehman Brothers collapse that caused a financial catastrophe unlike anything we've ever seen," Gibbs said ....

FTFY.

Tricky Prickears|9.14.09 @ 8:36AM|#

...and the FDIC should have had to organize networks of 500 and 1,000 smaller banks to chop up their "assets."


Are you kidding? That would have been too much damned work. You can't possibly expect government civil servants to do all of that work!

|9.14.09 @ 8:53AM|#

However, the government could have stepped in, and *temporarily* provided the necessary capital backing to keep those policies active. But I guess no one thought of that.

I recall hearing at the time that AIG's commercial insurance business (general liability and Worker's Comp plus auto and homeowners) was on a fairly solid footing and that in a properly structured bankruptcy could have made its way through. I believe this could have been accomplished with oversight short of the de facto nationalisation that occurred.

There were other problems with AIG, though. Among them was the fact that there had already been a buyer willing to pour cash in. The CEO ant the board had refused the offer. This raises with me serious questions about the whole state of corporate governance and the legal framework that allows corporate officers to act in ways that are not in the interest of the shareholders and often against their express wishes.

However I realize that this legal framework is extremely complex and I try to avoid prescribing solutions to things I have limited knowledge of. I think it's quite possible that the problem (not just the solution) is something entirely different from the one I see.

Tricky Prickears|9.14.09 @ 9:19AM|#

My understanding is that they are in a type of "structured bankruptcy". The company is being wound down, albeit without the courts getting directly involved. Estimates are that it may take 4-5 years (at least that's what the CEO is saying publicly). I was just saying that the federal government should not have been so gun shy to the possibility of an unstructured bankruptcy. They were obviously concerned with all of those policies, and there were remedies to deal with that possibility. I was merely pointing out one of the possible remedies.

|9.14.09 @ 9:23AM|#

Are you kidding?
doom
DoooM
DOOOOM
this legal framework is extremely complex and is something entirely different from the one I see
You can't possibly expect
doom
DoooM
DOOOOM
I recall hearing
doom
DoooM
DOOOOM
every day

Tricky Prickears|9.14.09 @ 9:24AM|#

But see, that's why an insurance company shouldn't be allowed to offer a financial products division, and exactly why groups like the ICBA are concerned.

Tricky Prickears|9.14.09 @ 9:36AM|#

And nothing about AIG was on "solid footing". Not when the stock droped from 1450 to 7.

|9.14.09 @ 9:55AM|#

True.

Tricky, the issues you bring up are precisely why I ended with the discaimer.

As I understand it the casualty insurance side of AIG was sound and well run. I think there was a need for some kind of structure in the dissolution to make sure policies on that side of the business continued to be serviced.

Craig|9.14.09 @ 1:04PM|#

I haven't forgotten the $700 billion crime, or how few of those who voted for it against the will of their constituents were actually voted out of office.

If a million people can march on Washington to protest health care reform and overspending, why weren't we able to stop this? Because the Republicans and Democrats in Congress were pretty much united in pushing it through before anyone could seriously debate it, despite overwhelming opposition back home?

Craig|9.14.09 @ 1:15PM|#

I'm not sure I would throw AIG into that group. They were a special case because they were primarily an insurance company. were the primary counterparty to Goldman Sachs' irresponsible derivatives gambles...

Had AIG gone into an unstructured bankruptcy, all of those insurance policies would have become null and void Goldman Sachs would have lost billions.

Fixed.

|9.14.09 @ 3:40PM|#

There are all sorts of things wrong with the AIG bailout.

They sold a lot of 'naked' credit default swaps. Some guy in the financial services division came up with the notion of selling insurance on mortgage backed securities to people who didn't own them. So when the MBSes tanked, they had to pay off not just the holder of the securities, but a bunch of other players who had bet on them failing. It's also likely that the original prices of these instruments were low, given the skewed ratings assigned to MBSes. There's nothing particularly wrong with credit default swaps or CDOs in principle. But selling them to third parties on securities that turned out to be junk was a disaster.

But by bailing them out, we're basically letting a bunch of people (hedge funds) reap a windfall by collecting on securities they didn't hold. And we're letting the ratings agencies off the hook by paying people back for basically the face value of the MBSes. if this was a free market, the ratings agencies would be bankrupt due to lawsuits over those bad ratings.

|9.14.09 @ 3:46PM|#

Craig,

Aye. Goldman Sashs was the biggest beneficiary of the AIG bailout. In a very real sense the AIG bailout was a backdoor bailout of Goldman Sashs.

That's WHY GS was able to turn a profit and pay back it's original bailout money last quarter. Thereby avoiding the executive pay restrictions.

Unfortunately, taxpayers won't be getting back ANY of the money from AIG. Another reason the AIG bailout sucks. AIG will fold at the end of this, I'm sure. But only after hundreds of billions have been funneled through it to non-refundable payments to others. People who will essentially be getting free money from the US treasury.

It is a collosal injustice taking place.