Revisiting Lehman's collapse

The collapse of Lehman Brothers “sent the global financial system into outright crisis mode,” said Theo Francis and David Henry in BusinessWeek. A year later, at least one big “what if?” lingers: “What if Lehman had been saved? Wouldn’t we all be better off—and a little less stress-worn—than we are today?”

As a country, yes, said Roy C. Smith in Forbes. The U.S. Treasury and Federal Reserve could have temporarily backstopped Lehman’s trading book for maybe one-five-hundredth of the “several trillion dollars” they committed to cleaning up the post-Lehman mess. The post-Lehman “panic” also spawned an “extensive laundry list” of unwelcome financial reforms. Clearly, “letting Lehman go was a mistake.”

No, the U.S. was “right to allow Lehman Brothers to fail,” said the Financial Times in an editorial. Even if U.S. regulators could have foreseen how “awful” the fallout would be, governments should always “err on the side of inaction” when it comes to failing companies. What we need to fix—yes, through regulation—are the situations in which a bank bankruptcy can cause so much damage.

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The “epic calamity” of the “Lehman shock” hit the U.S. hard, but it was “devastating” overseas, said Daniel Gross in Slate. In the U.S., Lehman’s collapse was the “cathartic culmination” of a series of failures—subprime lenders, then Bear Stearns, Fannie Mae, and Freddie Mac. In the rest of the world, it was the beginning of a shocking freeze of short-term credit, and thus global trade. We’ll see if the U.S. can now lead the great thaw.