Submitted by: Submitted by Kimalexis16
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Date Submitted: 10/02/2015 09:17 PM
Kim Alexis D Teposo BSF 3A
August 4, 2015
Financial Crisis in US
September 15 marks the fifth anniversary of the Lehman Brothers bankruptcy, the supposed spark that set off the financial crisis of 2008. Conventional wisdom holds that it was the federal government’s decisionagainst bailing out this investment bank that froze credit markets and sent the economy into the “great recession.”[1] In reality, though, while the Lehman bankruptcy sent a clear signal to investors of trouble in the marketplace, it was far from the cause of the crisis.
The key policy failure was likely regulators’ decision the preceding March infavor of bailing out Bear Stearns, a (smaller) competing investment bank, rather than the decision not to save Lehman. The Bear Stearns bailout set the expectation that Lehman would also be bailed out, setting up investors and creditors for a fall. At the very least, those with a stake in Lehman surely expected the government to minimize their losses. Thus, the inconsistent treatment of the two investment banks—not simply the act of letting Lehman file bankruptcy—was the main problem.
Arbitrary Decisions
In the case of Lehman and Bear Stearns, two of the nation’s largest investment banks, inconsistent government policy heightened uncertainty in the financial markets. On March 24, 2008, the Federal Reserve announced it would provide (through the New York Fed) special financing to “facilitate” JPMorgan Chase’s acquisition of the financially troubled Bear Stearns. In other words, the U.S. government bailed out the investment bank Bear Stearns, allowing shareholders to avoid a total loss.
Naturally, the managers, creditors, shareholders, and potential buyers of Lehman Brothers (a much larger investment bank) expected similar treatment. When both Barclays and Bank of America were unable to secure similar protection against losses, they withdrew their bids.[2] Lehman filed for bankruptcy the next day—September 15, 2008.
It would...