What If Lehman Brothers Was Saved?

Posted by: Lauren Young on December 9, 2008

Over the past week, I’ve been interviewing investors, economists, and other financial experts for BusinessWeek’s upcoming Investment Outlook issue. Again and again, many of these informed folks bring up the Lehman Brothers bankruptcy as the watershed moment/inflection point in the recent financial crisis. Some even muse how different the world might be if the venerable investment bank had not been left for dead. As we all know now, the ripple effect of Lehman’s bankruptcy on money market funds, the banking sector, you name it, was devastating to the financial world.

I’ve been thinking about this a lot, and then I thought about it some more last night after I read a few of the comments from the recent New York Magazine profile of Lehman CEO Richard Fuld. (If you haven’t read that haunting article by Steve Fishman, do it now. It’s a terrific read.) As Fishman wrote:

Fuld understands the political usefulness of Lehman’s collapse. The resentful public got to witness the devastating consequences of a financial failure. Four days after Lehman’s collapse, the government had to bolster the money markets, once the most secure of investments. Two weeks later, a frightened Congress handed [Treasury Secretary Hank] Paulson $700 billion, part of which he quickly doled out to the country’s largest investment banks at advantageous interest rates. If only he’d had that money before, he might have been able to save Lehman, Paulson told interviewers. To those close to Fuld, Paulson was simply covering his ass, doctoring the story post facto. “They could have found a way to save Lehman,” says a person involved with both the Bear Stearns rescue and the Lehman failure.

The Lehman bankruptcy hits especially close to home because the former Lehman Brothers building is literally across the street from BusinessWeek’s offices. I walk by there a lot. Although I bring lunch to work more often than not these days, my favorite soup takeout restaurant is on the ground floor. In fact, my colleague and I just said hi to the Lehman-cum-Barclay’s security guard who stood vigil at the company’s front doors amid the bankruptcy mayhem. He’s a big guy, but exceptionally polite. Maybe he is an ex-New York cop?

“Glad to see you are still here,” I said. “I’m glad I’m still here, too,” he replied.

But Lehman is not here any more, which begs the question: What would the global markets be like if Lehman Brothers, like Bear Stearns before it, and others after it, was deemed too big to fail? Would my 401(k) plan be in better shape? (Not that I would know. I haven’t checked account balances since August.)

I realize this is a Sliding Doors-type of question, and that we cannot change the past, but it’s still instructive to imagine “What If…?”

Reader Comments

Dr. Wolf

December 10, 2008 4:04 AM

Now, after bailing out nearly everyone and economys turned into recession, i think a refinancing of Lehman Holdings would be the next thing to do. There should be at least some leftover of solidarism between this financial giants. It also should be recognized that companys have secial responsibility now. By getting Lehmans back to business all together, it could be done - followed by stabilistion of the system. They can do it!

G. Wolf, MD

Sean carter

December 10, 2008 4:24 AM

If they saved Lehman, then I'd still be employed. :)

James Mason

December 10, 2008 6:47 AM

Like most of the Bush administration, Paulson is thoroughly incompetent. Let us hope Obama is able to replace him with someone who actually understands financial markets. Should not be difficult to do that at all.

Steve Cids

December 10, 2008 11:16 AM

By getting Lehman back to businnes, it will build a strong trust between new gov. and the public not only in US but over the world. People will believe that our new gov. has an undoubted ability to lead us out of recession - It gives us more time to work out solutions for economic crisis and re-install the confidence of investors next.

Bodz

December 10, 2008 12:07 PM

Bear Stearns was saved. Did that do anything? The credit crisis just kept on proceding. In April, Alan Greenspan said the current credit crisis is the worst in at least 50 years and he should know because he caused it. Do you think that this 50 year flood would have culminated with the Dow bottoming at 11,000 in Sept. when Lehman failed?
And don't forget that along the way Aig,Fannie,Freddie,Citi were bailed and the Tarp passed only to see the Dow tank lower and lower.
The root cause of Lehman failure and of this crisis are forclosures. Letting Lehman fail did not cause this crisis.

DHM

December 10, 2008 1:34 PM

As a student of finance, we are instructed that, if working for a financial services company, cash your check the same day, or better yet, have direct deposit, since these are highly leveraged companies. Good advice, in hindsight. However, I find it hard to believe that a firm that earned a few billion dollars in 2007 could file for bankruptcy just a few short months later. Yet, I know its possible. What surprises me is that the overseers, Mr. Paulson at the top of the list, failed to understand that credit drives the economy and if we had to build the worst case scenarios into risk models, one would not get into this busines. Hence, there is need for that hand of God (read Govt. intervention here), when you do hit a worst case scenario. This "hand" did not come through. I am also disappointed that other financial services firms did not come to Lehman's rescue. There is a silent code of conduct that even even your bitter enenmies are your friends when one is down. To come to the point, I believe that we would not be in terrible shape that we are in, if Lehman had been saved. Of this, I have no doubt in my mind. I am a big fan of Dick Fuld even though I suffered greatly from the bankruptcy, and I wish he makes a come back.

CVW

December 11, 2008 6:20 PM

I wish the colleges would teach the truth behind the bankruptcies in the U.S., because the Fed is simply benefiting by having their pick at the Fortune 500 and then getting the tax payer to flip for the bill. What a deal! They did it in 1929 and seazed the assets of the US Government, and now they are raking in huge opportunities on the Fortune 500.

The Fed is a PRIVATE company that is not a Federal Agengency of the US goverment, but it is owned and opperated by bankers and business men, who have even bailed out their own companies...

Hmmm, why would that happen, Citibank?

Common guys, get some guts and talk about this subject.

Ronald W. Knox

December 16, 2008 1:12 PM

In my opinion, Paulson, Bernanke and Geithner are a reincarnation of the "Three Stooges". However, unlike Moe, Larry and Curly, these present day stooges are not actors, just a bunch of incompetent baboons who have their fingers up their "pittards" as Rome burns. Do you mean to tell me that with all the collective brainpower of the present day stooges, these nitwits could not reasonably foresee the horrific financial consequences of allowing Lehman Brothers to fail. I could think of only two reasons why they allowed Lehman to fail as follows: 1) Paulson did not Fuld based on prior dealings as CEO of Goldman and CEO of Lehman, respectively; or 2) the present day stooges held massive short positions in Lehman and benefited financially from Lehman's collapse. Do you think we can file a civil lawsuit against Paulson, Bernanke and Geithner for gross negligence (duty, breach, causation, damages, lack of defenses)? I would like a judge to order restitution for all creditors and shareholders who lost money on Lehman Brothers due to Paulson's, Bernanke's and Geithner's inaction by ordering the sale of their collective assets.

Ronald W. Knox

December 16, 2008 1:47 PM

In my opinion, Paulson, Bernanke and Geithner are a reincarnation of the "Three Stooges". However, unlike Moe, Larry and Curly, these present day stooges are not actors, just a bunch of incompetent baboons who have their fingers up their "pittards" as Rome burns. Do you mean to tell me that with all the collective brainpower of the present day stooges, these nitwits could not reasonably foresee the horrific financial consequences of allowing Lehman Brothers to fail. I could think of only two reasons why they allowed Lehman to fail as follows: 1) Paulson did not like Fuld based on prior dealings as CEO of Goldman and CEO of Lehman, respectively; or 2) the present day stooges held massive short positions in Lehman and benefited financially from Lehman's collapse. Do you think we can file a civil lawsuit against Paulson, Bernanke and Geithner for gross negligence (duty, breach, causation, damages, lack of defenses)? I would like a judge to order restitution for all creditors and shareholders who lost money on Lehman Brothers due to Paulson's, Bernanke's and Geithner's inaction by ordering the sale of their collective assets.

charlt

August 25, 2009 10:56 AM

This may not be of interest any more but apparently Lehman tried to get the British government to bail it out because of the interest in a Barclays deal… http://bit.ly/7wbx2

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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