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My Sunday Washington Post Business Section column is out. This morning, we look at the role of Lehman Brothers within the broader collapse, Lehman’s thud signaled an enduring trauma. It didn’t cause it.

As we have noted many times before, Lehman fell due to the same factors that drove Bear, Citi, AIG, BoA, etc. down: Too much junk paper, too much leverage, too little capital and zero risk controls.

Here’s an excerpt from the column:

“Guess what happened to serious risk-taking? It was embraced by management, which no longer worried quite so much about reckless colleagues. This dramatically changed the incentives and risks for bank management. Indeed, bankers embraced risk with a reckless abandon. The five largest U.S. investment banks lobbied the Securities and Exchange Commission — and won — a waiver of their “net capital” rules, which had kept their total leverage to a 12-to-1 ratio of assets versus liabilities. This was called the “Bear Stearns exemption.” Soon after their leverage ramped up to 20-, 30-, even 40-to-1.

This was the backdrop for a terrific storm. Bear Stearns was the first to go down. Fannie Mae and Freddie Mac were next, seized by the government in a dramatic intervention. Lehman was merely the next bank in the financial trailer park to be ravaged by the tornado.”

The full column is worth a read.

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Source:
Lehman’s thud signaled an enduring trauma. It didn’t cause it.
Barry Ritholtz
Washington Post, September 22, 2013 
http://www.washingtonpost.com/business/lehman-didnt-cause-the-financial-crisis-no-matter-what-the-partisans-say/2013/09/20/de931b32-1eec-11e3-8459-657e0c72fec8_story.html

Category: Apprenticed Investor, Bailouts, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

4 Responses to “Lehman’s Thud Signaled an Enduring Trauma. It Didn’t Cause It.”

  1. Expat says:

    Wall Street + Neutron Bomb = cheaper apartments for all the truly useful people in New York.

  2. RW says:

    A longitudinal measure of risk that, extended backwards, supports the assertion Lehman was only the tip of the corporate insolvency iceberg.

    Lehman Was Not Alone – Measuring System Risk in the 2008 Crisis (ht MT)

    Was Lehman at the top of the list in 2008? No. In fact, it was Number 11. The top of the list was Citigroup, which was estimated to need $139 billion. Following Citi, in order, were JPMorgan Chase, Bank of America, Morgan Stanley, Merrill Lynch, Freddie Mac, AIG, Fannie Mae, Goldman Sachs, and Wachovia.

  3. cbatchelor says:

    BW is mixing it up with those posting comments on the Washington Post site. Don’t miss it. He’s doing great.
    He says at one point in the comments:
    “As to sending people to jail — that’s an upcoming column where I name names (no, not “all of Wall Street” — but 100s of execs for sure).”

    Read the column. BW uses the word “fraud” unqualified.

    http://i.imgur.com/k7AbKqH.jpg

  4. Blur says:

    Great article, Barry. You nailed it.