Tuesday, September 15, 2009

Looking Back in Incomprehension

It is the anniversary of Lehman’s demise and everyone is looking back for “lessons learned”. The passage of time has not helped. The usual nonsense about greed, bad management, etc. is being regurgitated, with a new spin making the rounds: that Lehman’s demise prevented even bigger collapses. Goldman’s Blankfein was first to float this nonsense.
“A bailout of Lehman Brothers might have provoked a public backlash, causing the government “to let the next institution fail” instead, Blankfein said ... “It might have been a much bigger one with much more dire consequences.”
Joe Nocera of the New York Times picked up the same theme in a front page article claiming that if Lehman had been saved, a much bigger firm such as Merrill might have collapsed.

The claim can be neither proved nor refuted. It is an idle conjecture. Nocera’s Merrill example shows how little he knows about the markets. Merrill was bigger in terms of assets. But Lehman was a far more “connected” – systemically important, if you will – firm. It was one of the largest issuers of commercial paper. It was the freezing of the CP market, after Lehman had filed for bankruptcy, that triggered the crisis.

The spin tries to make the boys who let Lehman down look less bad. Nice try, gentlemen.

The how of Lehman’s collapse is a technical matter involving the business model of a highly leveraged broker-dealer. I described it in detail in the Credit Woes series, especially parts 9 and 10.

The why of Lehman collapse – why Geithner, Paulson and Bernanke allowed it to happen – cannot be known without a full confession from the said individuals. But I doubt that malice, in the sense of involving calculations and plot, played any role. That would be giving these men credit for what had to be a complicated chess move.

The truth is more banal. I think I came close to it when I described why Lehman was allowed to fail. Read it here and judge for yourself.

Looking back, I also think that I grasped the significance of the event better than others. Read it and judge for yourself.