Chapter 5 Mini-Case: Letting Go of Lehman Brothers
Lehman Brothers filed for bankruptcy on September 15, 2008 and its failing is heralded as
the trigger for the global credit crisis. Some of the most debated topics regarding the
failing of the U.S. financial system in 2008 are; the government’s non-uniform treatment
of financial institutions, moral hazard created by bailouts, and whether or not the U.S.
government should have let Lehman Brothers fail.
The U.S. Government treated some financial institutions differently during the crisis. The
Federal Reserve extended AIG an $85 billion dollar bailout loan two days after Lehman
Brothers filed for bankruptcy and months before had arranged the sale of Bear Stearns to
J.P. Morgan Chase by covering $29 billion in losses. The Federal Reserve deliberately
chose to pursue a systemic solution instead of issuing individual bailouts each time an
institutional crisis occurred. They chose to let Lehman Brothers fail and I don’t believe
that was appropriate because the Federal Reserve is charged with the duty of maintaining
the stability and viability of the U.S. financial system. It is not appropriate to pursue a
systemic solution at the expense of the system. Without a doubt a larger scale solution was
called for. However, the way the U.S. government let Lehman Brothers fail exacerbated
the financial crisis, which is contrary to their purpose.
In How to Repair a Broken Financial World by Michael Lewis and David Einhorn contend
that “If a failing firm is deemed “too big” for that honor, then it should be explicitly
