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CrowdQuery: Greatest Mistake of the Crisis ?

Posted By Barry Ritholtz On September 7, 2010 @ 5:30 pm In Bailout Nation,Bailouts,Financial Press,Really, really bad calls | Comments Disabled

In this morning’s NYT column — Lehman’s Last Hours [1] — Andrew Ross Sorkin wrote:

“But what is clear is that the politics of the moment played a factor — or at least was discussed among senior and junior staff — in the decision not to lend to Lehman Brothers, perhaps the greatest mistake of the crisis.

While there is no question that our leaders at the time worked around the clock to find a private market solution for Lehman — and I have praised them in this column for staving off another depression in the wake of the panic that followed Lehman’s collapse — its failure should go down in history as a gigantic misstep. (In truth, though, no one has yet to offer up another option for the government.)”

Andrew’s book does a good job in describing what happened; but I am more interested in Why this happened.

Hence, I disagree with his conclusion. I suspect that the bailing out of Bear Stearns was the worst mistake of the crisis.

Why? It allowed banks to forestall raising capital; Almost as bad, it affirmed to bankers that they would be rescued by Uncle Sam from the results of their own follies (assuming they could create a big enough systemic risk). The Bear rescue created a huge moral hazard. It is likely why Fuld turned down Buffett’s capital offer.

But this is merely my view. Was Lehman the biggest error? Fannie/Freddie Nationalization?  Something else in entirely?

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Crowd Query: What do you think was the biggest error of the crisis?


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[1] Lehman’s Last Hours: http://www.nytimes.com/2010/09/07/business/07sorkin.html

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