Tuesday, 15 September 2009

Was it right to let Lehman's die?

We were worried this time last year that failing to bail out Lehman's might cause a financial collapse; well we were right. We also said the UK would be in deep trouble in short order because of HBOS and RBS - yup spot on.

We also said Lehman's should have been allowed to go under as Northern Rock should have been. One year on, I still think on balance this is correct. I wanted AIG to go too, but did not understand that if it had done it would have taken several banks and countries with it; good on Paulson for saving them.

Although allowing Lehmans to go was a terrible experience, it was cathartic, people faced up to the true enormity of the crisis and Government's reacted. Without it we would have soldiered on into a prolonged down patch which may have lasted for years and years. Instead we got a short, sharp shock. Plus the unwind from Lehmans is not the end of the world either that many had made it out to be. In fact, it encourages me to think it would still have been right to let Northern Wreck sink; that business is going to cost the taxpayers billions instead of the bondholders and shareholders.

A failure like Lehmans won't happen again though and that is also a good thing; lessons have been learned the hard way. Better than not at all.

9 comments:

AntiCitizenOne said...

Nope you're right initially about AIG.

The reasonable counter-parties could've been bailed out instead.

Now we have a zombie insurer and an even murkier financial system with even more moral hazard.

Mark Wadsworth said...

Yes.

And what AC1 says about AIG.

CityUnslicker said...

AIG would have cost £400 billion in losses to banks at the time, mainly European banks too, as well as BOA, Goldmans and JP Morgan.

It would have been carnage. Allowing AIG to do what it did was criminal; no way to allow it to go under though.

But your right about moral hazard; now that banks can't fail where is it?

Blue Eyes said...

This is surely a tale of two timescales. In the long run we can't have a situation where the financial sector is backed to the hilt by the taxpayer. In the short term we can't afford to prove that there is no moral hazard by letting banks collapse.

I think what we have to do is start with a clean regulatory slate which says here are the rules about publishing your capital adequacy levels, insuring your deposits, etc. and from now on you are on your own.

Budgie said...

Although I have not visited China, I have seen India. I know that there a man on a fraction of Western pay has a comparable standard of living to me. I understand it is the same in China.

A global economic system can only work properly either with a global currency (shudder!) or with an honest and free movement between national currencies. This is not the case at the moment.

BRIC have 'third world' currencies but exports to compare with Western goods, therefore at a fraction of Western costs. This is not because the Chinese work three times harder than us, but because of the imbalance in the relative value of Western and BRIC currencies.

What has this got to do with Lehman's? Western economies have been gutted by artificially cheap imports, particularly in manufactureds. This has skewed our economies to retail, services and banking so we can keep earning a crust.

No doubt Western politicians and bankers are far from blameless. But just suppose for a moment that Chinese goods costs were based on actual standards of living. Then the UK economy would be more balanced: we would make more and import less, at least from Brazil. India and China.

I therefore contend that the banking/financial/economic crisis is a SYMPTOM and not a cause.

I can already hear people screaming: 'nationalism'; 'isolationism'. Not so. The point I am making is that the competition is unfair because of the currency imbalances, not that I am opposed to free trade. My main concern here is that the situation, already bad, will get worse. And that will provoke nationalism on a truly terrifying scale. That I want to avoid. Will China listen? I am not sanguine.

Mark Wadsworth said...

If AIG had entered into bets with 'losses' of £400 billion, then other banks and hedge funds presumably stood to gain £400 billion had they cashed in those bets.

So maybe the counter parties would have foregone paper gains of £400 billion but that is not a real loss to anybody in particular.

Imagine you go to the bookies and place £100 at four-to-one and the horse wins. You think you've won £400, but the bookie goes insolvent and you just get your £100 back. Is that, to you, a real loss of £400?

Methinks not.

Richard Elliot said...

I never want to work in a bank if anything like Lehmans going under ever happens again. It was truly awful.

However, I agree it was the right thing to let it go.

monoi said...

Mark, it is a real loss of at least £300 if you went out and spent those £400 on credit before you actually got the money!

I would contend that if Bear Stearns had been allowed to fail a year earlier, Lehman would still be there.

Anonymous said...

Richard Eliot: "I never want to work in a bank if anything like Lehmans going under ever happens again. It was truly awful."

RBS, one or two of the Belgian banks a couple of the French a few Chinese and loads more American banks including Citi ought to be shut.

We have massive overcapacity in the financial sector, the global economy is shrinking and we need fewer banks.