Letting Go of Lehman Brothers

1. Do you think that the U.S. government treated some financial institutions differently during the crisis? Was that appropriate?

The U.S. Federal Reserve, the Comptroller of the Currency and the Federal Deposit Insurance Company (FDIC) support, is the institution charged with assuring the financial stability and viability of the U.S. financial system. When they feel as if the failure of an individual large bank could have a significant effect on the health and functioning of the financial system, they step in. The FED is required by law only to lend to, and is limited by, the amount of assets collateral any institution has to offer against rescue loans. But many critics have argued that it was not possible to determine the collateral value of the securities held by Lehman of AIG or Fanny May and Freddie Mac accurately at this time because of the credit crisis and the illiquidity of markets. So why help AIG or Fanny May and Freddie Mac and not Lehman Brothers?

The Federal Reserve officials have said that the companies that did receive bailouts, such as AIG, Fannie Mae and, Freddie Mac, clearly had the collateral and showed great promise of paying them back in the future, while Lehman Brothers did not. Those representing the Lehman Brothers have said that they did have the collateral and should have been bailed out, but because the government was expecting other companies, namely Bank of America and Barclays, to purchase parts of Lehman Brothers, they did not step in.

By the time that Lehman Brothers filed for bankruptcy, the financial crisis was already on its way. It also became readily apparent that following the AIG rescue the U.S. authorities moved quickly to try to create a systemic solution, rather than continuing to be bounced from one individual institutional crisis to another. Some analysts view the Lehman Brothers’ fall as the government’s wake-up call in dealing with the ensuing financial crisis. Secretary Paulson has noted that it was increasingly...