Mini-Case Letting Go of Lehman Brothers

Timothy Brewster Hague

9/15/14

FINA 4040

Mini-Case Letting Go of Lehman Brothers

The Mini-Case of Letting Go of Lehman Brothers focuses on the study of the governmental actions of letting the company fail. In this short paper I will give a short summary of the main issues, talk about whether the U.S. government treated other financial institutions differently, consequences of a governmental bailout, and state my opinion on the U.S. government action towards the Lehman Brothers.

The main issue in this case study revolves around the question of was the Lehman Brothers “Too Big to Fail?” Having been on the verge of failing over many times of its course since 1850, Lehman Brothers finally had shut their doors in 2008. When they reported for bankruptcy in September of 2008, it recorded for the largest bankruptcy file of over $600 billion in assets.

Following the end of the Lehman Brothers, many entertained the question if the U.S. government treated some financial institutions differently during the financial crisis. I think the U.S. government did in fact treat some financial institutions differently, but for the right reason. When American International Group (AIG) asked for governmental help during the crisis, they ended up receiving $182 billion in taxpayers money, whereas Lehman Brothers did not receive granted support. This decision was appropriate because AIG presented high reason of how their valuable assets will back up the emergency loan. On the other hand, Lehman Brothers is a known institution for taking large risks; therefore an appropriate action of denying Lehman Brothers granted support took place. This brings us to our next topic of when the government grants a bailout, it creates a problem called “moral hazard.”

A “moral hazard” is defined as that if the institution knows it will be saved, it actually has an incentive to take on more risk, not less. By this definition of moral hazard, I agree with this idea. Taking the Lehman...