Hank Paulson is not Gavrilo Princip, Lehman is not the Archduke Franz Ferdinand
Was letting Lehman go down the biggest mistake of the crisis? Many, including George Soros in the Financial Times, have argued that letting Lehman go down sowed panic to markets, consumers and businesses.
Not so fast, says Harvard historian Niall Ferguson, in an interview in Davos:
“My position is this is a typical error of historical understanding in which a single event is blamed for much more than it can possibly have caused. You can say ‘Hank Paulson is to blame for my troubles’ and if you can change one thing in the story it would have a happy ending.
It’s like saying if only Princip had not shot the Archduke Franz Ferdinand in 1914 there wouldn’t have been a First World War.
If you go through the events of September of last year you will find it incredibly hard to produce a counterfactual scenario in which it could have been possible to save both Merrill Lynch and Lehman. There is one bank which could be bought by Bank of America but there couldn’t have been two.
This is a crisis of too much bank leverage which began in August of 2007 and indeed had it roots far before. A bank leveraged 25-1 only needs a 4 percent decline in their assets to have their equity wiped out. And the notion that saving one investment bank could somehow have prevented or mitigated the crisis is a fantasy. The problem would have happened at some point somewhere else. There is a fundamental problem of bank solvency.”
Ferguson argues that without another buyer for one of the two, one would have needed to have been taken into a kind of Treasury conservatorship, as Fannie Mae and Freddie Mac were. But those were already quasi-government and such a move would have required Congressional approval, which given that Congress turned down the first version of the TARP, was not likely.
“Historical arguments need to be based on a credible counterfactual, ” Ferguson said. “Nobody has been able to tell me a credible story about how both Lehman and Merrill could have been saved. It wasn’t possible.”
My view is that the “Oh no, they killed Lehman” meme is just part of the denial phase of grieving. Few in financial circles wanted, or indeed want, to believe that things have changed fundamentally and that the good days won’t be coming back any time soon. Blaming mom and dad is the last first refuge of the adolescent.
Jim Saft is a Reuters columnist. Any views expressed are his own.