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What we learned from the Lehman collapse Add to ...

Blinder begins the conclusion of his book with Ten Financial Commandments. The first is Thou Shalt Remember That People Forget. This is the reason Geithner gave for rushing to introduce new financial rules after he took office as Barack Obama’s Treasury secretary in January, 2009. Market gurus such as George Soros complained that officials were moving too fast, but the political window to do so is only as wide as voters’ memories.

Geithner and others were right to worry. The bank lobby in Washington not only fought to delay the enactment of Dodd-Frank in January, 2010, but continues to fight through the process of writing and implementing specific rules. A surprising number of Republican lawmakers would happily scrap it even now. The Obama administration’s ability to fight the crisis was also restrained by an already-bloated budget deficit. As surpluses under Bill Clinton turned to deficits under George W. Bush in the early 2000s, politicians forgot that one of the main reasons governments should run surpluses is so they are able to provide shelter when the rains come. Yet Democratic and Republican lawmakers still would rather score political points than balance the books.

In the post-crisis years, it’s become fashionable to reflect on the teachings of Hyman Minksy, an American economist who died in 1996. Minksy believed financial markets were prone to euphoria — and forgetfulness. Stability led to risk, which led to debt. And debt brought everything crashing down. This is the root of Dimon’s fatalism. There is something in the human condition that pulls us to the brink. There will be more crises and new lessons. But that’s not an excuse for allowing history to repeat itself. Bernanke, Carney and others have helped to improve the New Testament theory of business cycles. The challenge now is to commit its lessons to memory.

 

A TIMELINE

March 17, 2008
Shares of the 158-year-old investment bank Lehman Bros. fall by 48% after news that Bear Stearns has been bought by JPMorgan for $2 a share. Dick Fuld, who has been Lehman’s CEO since 1993, makes an appearance on the bank’s trading floor to boost morale — “the only time he did that in the last six months of the firm,” according to one Canadian trader. “It was like seeing Elvis or Madonna, because otherwise, you never saw the guy.” The shares bounce back the next day

Sept. 10
Lehman investment bank posts a $3.9-billion loss in the third quarter, after writing down $5.6 billion in toxic mortgages. Fuld and CFO Erin Callan also announce that the brokerage firm has raised $6-billion in fresh capital. Its share price falls by 10%

Sept. 11
Barclays announces it is considering buying Lehman, joining another potential bidder, Bank of America. Lehman’s shares fall by 13.5%

Sept. 12
Moody’s warns it could downgrade Lehman’s credit rating if the bank doesn’t find a “stronger financial partner”

Sept. 14
Over the weekend, 100 Wall Street bankers, regulators and Treasury officials meet at the New York Fed to discuss Lehman’s future. Treasury refuses to cough up more bailout money. Barclays withdraws its bid for Lehman; Bank of America follows suit within hours. Alan Greenspan warns that if Lehman goes, “we will see other major firms fail.”

Sept. 14
Ten of the biggest investment banks put together a liquidity pool of $70 billion that any of them can tap

Sept. 15, 1 a.m.
Lehman files for Chapter 11 bankruptcy. With $639 billion in assets and $619 billion in debt, it is the largest corporate bankruptcy in U.S. history. Lehman’s 25,000 employees worldwide start packing their boxes

Sept. 15, 8 a.m.
Bank of America announces it will rescue Merrill Lynch in a $50-billion buyout

Sept. 15
The S&P 500 falls 4.7%, its worst showing since the market reopened after the Sept. 11, 2001, attacks. Financial stocks have their worst day ever, down more than 10%

Sept. 16
Barclays swoops in to buy Lehman’s U.S. business for $2-billion

Sept. 17
The Fed announces an $85-billion rescue of AIG, giving taxpayers an 80% stake in the insurer

May 14, 2009
Fuld, whose compensation totalled roughly $500-million between 2000 and 2008, finally leaves the bank with no severance or bonus

 

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