One year after the bankruptcy of Lehman
Brothers,Bob McDowall at TowerGroupreviews the
United States government's decision not to provide financial
assistance toLehman Brothersin its fight against
bankruptcy.
The United States government was right in principle not to save
Lehman Brothers from bankruptcy but it acted too late. It
should have forced the industry to address the financial pressures
that were simmering for over a year before the
Lehman Brothers crisis, through legal and taxation pressures if
necessary. By the time of the Lehman Brothers crisis the industry
participants were concerned exclusively in safeguarding the future
of their own businesses.
The industry had anticipated that the United States government
would play a significant role in saving
Lehman Brothers from bankruptcy for the sake of the broader
financial stability of the national and global financial system.
Credit and money markets froze in reaction to the bankruptcy.
During the next month, the financial stability of banks and
national banking systems suffered from a loss in investors'
confidence. Central banks, national governments and financial
regulators were obliged to intervene to stabilise the financial
systems for the sake of the broader national and global economies
by recapitalisation of banks and injection of liquidity into the
banking system.
The industry lamentably failed to address, on a collective
industry basis, the financial pressure that led to the bankruptcy
of Lehman Brothers without regulatory or legislative interference,
though it had at least a year to do so. Globally, the securities
industry globally was aware of the market and financial pressures
that led to the bankruptcy of Lehman Brothers. The financial
pressures were evident for over a year before Lehman Brothers'
bankruptcy, yet the industry did little collectively to address the
pressures situation.
The pressures publicly manifested themselves in August 2007,
when the industry reacted to the over-inflated pricing of the US
residential property through withdrawal from the highly liquid,
mortgage-backed securities market, in effect freezing that market.
Smaller, but historically significant reactions followed in Europe
in September and October 2007, for example the major United Kingdom
mortgage bank,
Northern Rock, that significantly relied on and was financially
exposede to the mortgage-backed securities market, was supplied
with emergency funding by the UK government, though ultimately
succumbed to nationalisation.
The industry put itself on a phoney war footing for the next
year but it did not attempt to address the issue on a collective
basis, anticipating that financial regulators, central banks and
national governments would take steps to address any crisis that
affected the stability of the financial system. National
governments, financial regulators and central banks reacted with
market and fiscal intervention, which, they believed, would
alleviate the financial pressures.
All parties, industry and public authorities hoped and prayed
the crisis would be "over by Christmas [2007]". The forced sale of
Bears Stearns was but one of the significant events that indicated
the financial pressures were increasing. Those pressures continued
until the volcano erupted with the inability of Lehman Brothers to
meet its financial obligations.
Ironically, a year after the bankruptcy of Lehman Brothers,
governments and financial services are inextricably bound together
through state shareholdings in banking institutions and the
multiplicity of additional regulatory obligations being placed in
the industry. If the industry had placed its community of interest
ahead of competition to manage itself out of the simmering crisis
in 2006/2007, it would not have been burdened with the current
scale of government intrusion.
This article is based on research by the Bob McDowall at
TowerGroup, a leading research and advisory services firm focused
exclusively on the global financial services industry. He can be
reached at BMcDowall@towergroup.com.