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?