Lehman creditors, you didn’t lose any money

June 18, 2009

You read that right. Peter Wallison, a senior fellow at the American Enterprise Institute, a right-leaning think tank, doesn’t think Lehman’s collapse caused any “substantial losses.”

In an op-ed in The Wall Street Journal, Wallison, in criticizing the Obama administration’s financial regulatory overhaul plan, concludes that the only reason Lehman’s bankruptcy caused so much market turmoil is because no one thought the federal government would allow it to fail.

Now there is some truth to that sentiment. But it’s also true that Lehman’s collapse was such a shock to the market because it revealed just how dangerously interconnected our global banking system is and the inability of regulators to do much about it.

But i don’t really want to critique Wallison’s argument about whether “too big to fail” institutions should be allowed to fail or not. What really got me was his astonishing claim that the losses directly tied to Lehman weren’t substantial. How’s that?

Lehman’s failure itself did not cause any substantial losses, and within two weeks of its bankruptcy filing Lehman’s trustee sold its brokerage, investment banking, and investment management businesses to four different buyers. 

Yeah, those businesses were sold but at substantial discounts to what each of them might have fetched just weeks before the bankruptcy.

And is Wallison really trying tell us that Lehman’s bond holders, derivatives counterparties and trade creditors lost no money. Why is the bankruptcy proceeding still going on then?

Sure, I know, Wallison would probably say that outside of its impact on the markets, the loss of Lehman is no big deal. Again, there’s some truth to that. But don’t go minimizing the losses suffered by real people and institutions, either.

I’d like to see Wallison explain that argument to all those ordinary investors, who purchased nearly $40 billion in Lehman issued structured notes. Many of those investors in Europe and Asia put large chunks of their pension and retirement monies into those now worthless notes, which were billed by Wall Street as a conservative investment strategy.

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