Economy In Recession: The Cost Of Allowing Lehman Brothers to Fail

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The failure of Lehman Brothers is seen as the last straw that broke the credit market. The financial markets have been in a state of complete disarray ever since the U.S. Government allowed Lehman Brothers to file for bankruptcy on September 15th 2008 instead of intervening to save it, as it did with Bear Sterns and later with the insurance company, American International Group.

Many have questioned U.S. Treasury Secretary Hank Paulson’s decision to let Lehman Brothers fail. Christine Lagarde, French finance minister, claimed that the decision was “horrendous.” This has been echoed by many other European policy makers and investors who blame the decision on ideology, claiming that Paulson refused to offer aid to avoid accusations of moral hazard.

The truth is that Paulson’s decision appears to have had a domino effect in spiraling the world economy deep into a global credit crisis and now towards recession.

We’re still licking the wounds of Lehman,” Jochen Sanio, president of the German Federal Financial Supervisory Authority, told Reuters at an international banking conference. “It caused international damage of $300 billion outside the U.S.”

By now, virtually every major sector of the economy has been hit by the financial shock,” said Janet Yellen, President of the Federal Reserve Bank of San Francisco.The economy was weaker than expected in the third quarter, probably showing essentially no growth at all. Growth in the fourth quarter appears to be weaker yet, with an outright contraction quite likely.

Global Credit Crisis – A Timeline

  • 9/14: Lehman Brothers files for bankruptcy; Merrill Lynch is taken over by Bank of America
  • 9/16: Fed bails out AIG for $85billion in return for a 79.9% equity stake
  • 9/18: Lloyds TSB buys HBOS, Britain’s biggest home loan lender in an all share deal
  • 9/20: Barclays buys Lehman’s U.S. broker-dealer operation; Bush administration presents $700 billion bailout bill to Congress
  • 9/21: Morgan Stanley and Goldman Sachs are given approval to become bank holding companies regulated by the Fed; the investment banking era is over
  • 9/22: Nomura Holdings buys Lehman Asia; later it buys Lehman Europe too
  • 9/26: WaMu is closed by the U.S. Government; its assets are sold to J.P.Morgan chase for $1.9 billion
  • 9/29: European governments scramble to shore up banks; House of Representatives rejects $700 billion bailout bill; global financial markets plummet
  • 10/3: House of Representatives approves a revised bailout bill two days after the Senate approves it; Wells Fargo agrees to buy Wachovia for $16 billion
  • 10/6: Dow Jones sinks below 10,000 for the first time in four years fearing a global recession
  • 10/7: Iceland borrows 4 billion Euros from Russia to avoid national bankruptcy
  • 10/8: Britain to inject 50 billion pounds into top banks following dramatic falls in the share prices of HBOS and Royal Bank of Scotland; Central banks around the world cut interest rates
  • 10/10: Stocks fall 10% in Tokyo and 9% in London; Dow is 1.5% down after a day of record volatility
  • 10/13: European governments pledge $1.3 trillion to banks sending stocks soaring once again
  • 10/14: U.S. Treasury to inject $250 billion into banks in exchange for preferred shares; nine banks agree

And we have not seen the end of it yet.

Did Paulson make a huge mistake by allowing Lehman to fail? What is your opinion?

You might also enjoy reading:

From Mortgage to Bailout: How Did The Problem Arise?

Death of Wall Street, Rise of Main Street

To Bailout or Not to Bailout: Is Free Market Economics Sustainable?

Bailout Rejected: Will Free Market Economics Sustain Us After All?

Taxpayer Bailouts : The Lie You Need To Know

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5 thoughts on “Economy In Recession: The Cost Of Allowing Lehman Brothers to Fail”

  1. i think fall of lehman brothers is a economic conspiracy of america.sice bric countries r advancing very fast and china,india,russia r major players today america played its game.due to high growth rate of these countries new world economy would have been domonated by eastern part of the world all this was done by america to reatain its position

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