Comments on: How miscommunication caused Lehman’s collapse

By: jonathan

jonathan — Fri, 04 Sep 2009 20:47:31 +0000

Have you not read the papers – academic, not press – which showed the governments were unaware of certain crucial factors because London’s light-touch regulatory regime was designed to attract capital flows by allowing secrecy. It’s been demonstrated that Euro banks were much more dependent on short-term dollar financing than anyone understood, certainly much more than Treasure and the Fed thought. This financing flowed through London – hidden information flows come back to bite – and relied on the US money markets. Remember that Lehman was a huge money market instrument provider so when it collapsed the money markets needed every available dollar so they yanked what they could and that caused an instantaneous cascade in the linked markets in which Euro banks suddenly found they had no dollars and thus no short-term funding. The Fed recognized this immediately and made something like $600B available to the ECB – repaid, btw – but the absolute lack of dollars caused the system to lock up like an engine with no oil. That lack of knowledge of capital flows, a classic information sink, was the basic precipitating cause of the credit lock-up. I would say if Treasury and the Fed knew what the heck was going on with the Euro banking demands for short US money, they would have acted differently, maybe allowing Lehman to fail but with money safeguards in place beforehand.

These papers are not exactly a secret.

By: reader

reader — Fri, 04 Sep 2009 14:03:49 +0000

Felix,
You wrote:

“An explanation has been given, repeatedly: that Treasury had no legal authority to provide such funds. It’s just that nobody really believes it.”

At this point, shouldn’t you or someone name the specific authority that Treasury could have used? It’s not enough to say “we don’t believe it, you could have done something.” What was the available authority?

As you know, the TARP legislati9on that authorized Treasury to buy assets and equity was not passed until October, following Lehman’s bankruptcy.

By: Charles R. Williams

Charles R. Williams — Fri, 04 Sep 2009 10:31:52 +0000

The fundamental error was bailing out Bear Stearns, Fannie Mae, and Freddie Mac. It would have been far better for the government to have pushed them all under rather than to have bailed them out. But the very worst thing was for the Treasury to act in inconsistent and unpredictable ways and to generate hysteria in the financial markets.

This “too big to fail” fallacy is setting the stage for the next financial crisis. And the losses will be too big to dump on the taxpayer.

By: harry

harry — Fri, 04 Sep 2009 09:24:49 +0000

I’m I the only one amused by Felix Salmon’s September morning quarterbacking? Salmon was one of the leading cheerleaders for letting Lehman fail and I’m sure if the government had done something to prop them up he would have been the lead tut-tutter.

Instead we get a blog post a year later saying how easy it would have been to solve the problem. Pretty easy to solve the world’s problems from behind a keyboard a year after the fact.

By: Dan

Dan — Fri, 04 Sep 2009 02:50:21 +0000

Indeed an orderly process would have been much better.

Still, the way the financial system was gummed up through and through with bad debt, nasty delevering was on the way, Lehman or no Lehman. Our present troubles are primarily due to years of malinvestment in the distorted environment of the bubble.

By: samba

samba — Thu, 03 Sep 2009 23:09:41 +0000

Guys dont forget the Uk had its hands full with RBS and Bradford and Bingley,

Also i doubt that the US couldnt handle the situation and needed the UK’s help

And Barclays were pretty damn close to bankrupcy at the beginning of this year, owning lehmann’s book would have made its situation even worse

By: Griff

Griff — Thu, 03 Sep 2009 22:57:45 +0000

I disagree in that global costs were entirely avoidable. The systemic risk was lurking even if Lehman had been either saved or Ch.11 was staved off. Lehman’s collapse just brought everything to the fore with an immediate urgency.

“Was Lehman the cause or was it the manifestation”

It was the manifestation of Richard Fuld’s failed strategy, holding onto the last lifeboat while his Titanic slowly sank under. LEH also had access to short-term collateralized borrowing via different FED facilities, and they chose not to use them accordingly.