How terribly amusing

The broad outline of what happened to Lehman has been in the public domain for more than a year. The bank, under the leadership of Wall Street\’s longest serving boss, Richard Fuld, borrowed too much – it was, in the jargon, \”overleveraged\” – and made huge bets on the US property market. When that market started collapsing, Lehman needed to borrow to meet its obligations – but credit had tightened up, and the bank went under.

OK, so that\’s what went wrong then. I don\’t know if it is, although it sounds about right. But that\’s the analysis we\’re offered in this piece. Excellent.

Bad investment decisions caused the collapse. Not bonuses, CDOs, CDSs, insufficient regulation, just plain old bad business decisions. Fine. Same stuff that killed Northern Rock, Dunfermline Building Society and the same thing that\’s killed myriad banks and finance houses down the years.

So, what is the recommendation about how to try and make sure it doesn\’t happen again?

In the medium term, however, it\’s much more important to fix the financial sector. We don\’t just need to do the right things in terms of making the banks safe, we need to do them in a co-ordinated international way, and to start the task of changing the culture of investment banking. That culture is such that it is certain to take the world back into crisis again in the future – unless the rules of the game are changed.

Coordinated international regulation! My word, how amazing is that? And, umm, this regulation….is it going to stop people making bad business decisions? No? Then what\’s it going to achieve then?

4 comments on “How terribly amusing

  1. But this is like saying bad navigation sunk the Titanic and killed 1,500 people. Yes, but… No-one’s seriously arguing that Lehman Bros didn’t make mistakes, the problem is what processes led to those mistakes and what consequences it had for the wider financial and economic system.

  2. Tim Worstall:

    “Bad investment decisions caused the collapse. Not bonuses, CDOs, CDSs, insufficient regulation, just plain old bad business decisions.” Interesting. Would you like to elaborate on this argument? I would like to see your publishing an article somewhere on this: that CDOs etc. didn’t have anything to do with the collapse. You;d presumably have to explain why “bad investment decisions” had nothing to do with the creation of toxic CDOs, CDSs, etc. Go on, publish that somewhere reputable!

    When an arsonist burns down a house, you would presumably argue that “it was only the striking of the match that caused the fire, not the smashing in of the door, the pouring of petrol all over the place, the raging anger, the lack of fire extinguishers, the absence of police and the fire brigade, and so on, that drove it. ONLY the striking of the match.”

  3. I pointed out in an earlier exchange that Lehman’s collapsed because they bet everything on a huge property scheme outside Bakersfield,just before the US housing bubble burst.Some banking regulation might prevent investment banks getting sucked into and down by punts on speculative property,but it is surely easier to tax land values so as to remove the temptation .

  4. Nick,

    If I might borrow your analogy, I think Tim’s point is that insisting that regulation would prevent the same happening again is essentially suggesting that by tightening up and controlling the sale of matches and petrol and quizzing all potential purchasers if they are planning on burning someone’s house down.

    Whilst that would, you might scoff, be ridiculous, that is in fact what the regulation would end up doing…

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