Vincent Reinhart gets the Lehman collapse precisely right at The American (a Journal of the American Enterprise Institute).

Regular readers know I often disagree with the ideologically pre-determiend conclusions from AEI, but in this case, Reinhart is dead on. “We have inverted a morality tale about individual recklessness” into something entirely different “about collective culpability through inaction.”

Excerpt:

This month marks the second anniversary of a colossal failure that has shaped financial officials’ response to the ongoing global crisis, legislators’ attitudes toward reform, and the public’s perception of fairness. The failure is the fundamental misunderstanding of the events surrounding the bankruptcy of Lehman Brothers. We have inverted a morality tale about individual recklessness to become one about collective culpability through inaction.

Lehman failed as it should have failed. That we have ex post made it the fulcrum of the financial crisis misrepresents events in three material ways.” (emphasis added).

I am reminded of the words of the English philosopher Herbert Spencer, who said: “The ultimate result of shielding men from the effects of folly is to fill the world with fools.

>

Source:
Getting Lehman Profoundly Wrong
Vincent R. Reinhart
The American, September 21, 2010
http://www.american.com/archive/2010/september/getting-lehman-profoundly-wrong

Category: Bailouts

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17 Responses to “Getting Lehman Profoundly Wrong (Right)”

  1. call me ahab says:

    “The ultimate result of shielding men from the effects of folly is to fill the world with fools.”

    no doubt-

    this whole “if only they wouldn’t have let Lehman fail” canard seems to be gaining traction, vigilance against that lie is required to keep revisionist history from becoming accepted fact

  2. Chief Tomahawk says:

    Can’t we just get some sympathetic older American (preferably female) to take Dick Fuld on “Judge Judy”?

  3. Tarkus says:

    To recast the phrase in Spencer’s terms:

    They have privatized the shielding, and socialized their folly, and the world is made a fool.

  4. Robespierre says:

    Enough of this. I think it is time for Fuld to: “suck it in and cope.”

  5. louis says:

    “In unusual and exigent circumstances” I guess they didn’t meet the criteria.

  6. d4winds says:

    Reinhart’s entire essay is outstanding & well worth the very short read. He is among the seeming few pundits (BR is another) to correctly see the 2008 financial crisis as one of solvency not of liquidity. As he notes, the bail-out process started before Bear Stearns’ well-cushioned fall with the Fed opening the discount window to investment banks (& subsequently with the dodgiest of “collateral”) and continued with FDIC full/partial guarantees to bondholders of Wachovia/WaMU. He justly eviscerates Bernanke for his contradictory (ergo, mendacious) ex post justifications for the same events. It’s a good read.

  7. Petey Wheatstraw says:

    “We have inverted a morality tale about individual recklessness” into something entirely different “about collective culpability through inaction.”
    __________

    Yeah, there’s that, if you want to keep it shallow by framing it as an issue of morality and shared culpability.

    It’s not a morality tale. It’s a complete and total acceptance of institutionalized moral turpitude of the highest degree and most dangerous form: Organized crime.

    In reality, it should read like this: We have abandoned the rule of law, and allowed individuals (natural and corporate “persons”) continue to profit from their massive, ongoing, and blatant criminality. While we, the general public, aren’t culpable for the crimes directly, we never raised a hand to stop them from victimizing us (we’re strong enough, but alas, too stupid), and, in that sense, we get what we deserve.

    Most of what ails us is, always has been, and will continue to be, situations best dealt with by law enforcement. Too bad we don’t have anyone enforcing the law. Who is running the FBI nowadays? That used to be a high-profile position. Treasury and Justice Depts. and their agents/lawyers have already been captured by the Corporatists.

    There is no such thing as individual recklessness when you can hide behind a corporate shield.

  8. AHodge says:

    he also bit of oddball over there, the only one i know of there with a sensible view of accounting.
    i remember being over there in 2008. Talking about mark-to-market.
    and hearing three dfferent guys including Pollock and Makin callin it “like cutting off your you-know-what” and the biggest source of the problems. what losers!
    vince saw pretty well what was coming and was helpful to me then.

  9. Petey,

    nice point, though, remember, no matter how “Big” the “Picture, there are, always, Frames..
    ~~

    and, here: “Reinhart’s entire essay is outstanding & well worth the very short read. He is among the seeming few pundits (BR is another) to correctly see the 2008 financial crisis as one of solvency not of liquidity. As he notes, the bail-out process started before Bear Stearns’ well-cushioned fall with the Fed opening the discount window to investment banks (& subsequently with the dodgiest of “collateral”) and continued with FDIC full/partial guarantees to bondholders of Wachovia/WaMU. He justly eviscerates Bernanke for his contradictory (ergo, mendacious) ex post justifications for the same events. It’s a good read.”–d4winds

    some things should be re-read..

  10. b_thunder says:

    Vincent Reinhart says that he still doesn’t know why Bear Sterns was saved by the Fed.

    So, since we’ve figured out that Lehman’s (disorderly) liquidation was the right thing to do, what about Bear? Or was it *really* about saving Bear, or about saving JPM????
    And isn’t it a fact that unlike Bear/JPM, Lehman’s collapse only removed another competitor of GS?

  11. obsvr-1 says:

    Petey Wheatstraw Says:

    … Most of what ails us is, always has been, and will continue to be, situations best dealt with by law enforcement. Too bad we don’t have anyone enforcing the law. Who is running the FBI nowadays? That used to be a high-profile position. Treasury and Justice Depts. and their agents/lawyers have already been captured by the Corporatists.

    – Reply

    They have been moved into DHS to catch the terrorists — so, we need to classify the illegal and fraudulent activity as “economic terrorism” and “corporatoligarchy” as organized crime and unleash the enforcers using the RICO and Patriot Act tools of investigation and punishment. OK that may be too strong, but at the very least white collar crime resources need to be increased, with the amount of money we are talk about being fleeced the staff/budgets should be quadrupled. And enough of the plea bargaining by the SEC, the punishment should match the level of crime, whether civil or criminal, and directed at the individuals responsible; not a fine slapped on the corporation which is passed to either the consumers or shareholders.

  12. peter north says:

    Thanks BR. Especially loved the Spencer quote.

  13. NormanB says:

    What should have happened in the meltdown is that the businesses should have been saved but all of the stock market equity and bond holder assets should have been wiped out, a lesson for taking too much risk and not paying attention.

    Thus, all of the Goldman Sachs’s (and of BAC, GE, etc) employees/directors/insiders would have been zeroed out. Then new corporate structures should have put into place with whomever the government decided could still perform their functions.

    It would have been a little messy but the lesson would have certainly have been learned and we would have had very little need of the monstrous financial regulation package which certainly will be loop-holed to death. If you think not, remember the notatial value of derivitives is now higher than post-Lehman and you can still think you are buying, for instance, guarantees against the default of Greek bonds.

    A potential repeat of personal asset wipe out would have brought all of the cuprits in line, for at least a decade or two. Proof of this is that the wipe out of Arthur Anderson accomplished not by laws but by their clients fleeing them got all of the other accounting/auditing firms in line.

  14. ToNYC says:

    We get the democracy we paid for; exchanging our work products for our choices, lubed by the currency and whose size being an adequate representation of that collective work product. We brokered these social contracts through elected representatives while the majority worked for a corporation and thought the deal was great with the “I got mine, Jack!” attitude. Face it; we phooked up.
    Maybe we can imagine craving and paying up for some thing more sustainable than the next greatest twitter machine.

  15. BigD173 says:

    BR,

    Love your quote from Herbert Spencer (“The ultimate result of shielding men from the effects of folly is to fill the world with fools”) — but isn’t your recent proposal to write down the principal on underwater mortgages likely to create quite a number of fools? Please consider:

    5) Mortgage Principal Write Down Plan: Buyers paid too much, banks lent too much against residences at the top of the RE cycle. To get the sector healthy again requires prices to normalize, which is now occurring thru Foreclosure. An alternative is a voluntary principal write-down, where both the borrower and lender split the losses. An underwater home is refinanced at its 2011 appraisal value, with the mortgage shortfall rolled into a 10 year interest free balloon payment. Banks cut the balloon loan in half in year 10, rolling it into the existing mortgage (assuming the owner stays current on mortgage).

  16. ToNYC says:

    @ BigD173 Says:

    You would fund your retirement from a strctured finacial product ( hedged of course with the imaginary fairie CDS backup (BRK.A style puts) the balloon so created…or would you rather keep your USTs?
    Sold to you if the former.

  17. wunsacon says:

    >> this whole “if only they wouldn’t have let Lehman fail” canard seems to be gaining traction

    I suspect a Wall Street campaign behind this. Or, at least, a push or funding from non-objective parties.

    Think about it. If they can “sell” that to people, it supports the “don’t return to the old-school regulation” argument. Or, at least, it distracts from discussing that issue.