• Lisa Simpson
• Sep 30,2009
• In: Finance

There is a Strong Opinion that Allowing Lehman Brothers to Fall was one of the Best Gifts to the Financial System

Politics played a dominant role in allowing Lehman Brothers to drown and the others to be pulled aboard. Immediately after taking over Fannie Mae and Freddie Mac only a week before the Lehman collapsed, the Congress became jittery about again lending a helping hand. David Wessel writing in The Wall Street Journal quoted Paulson to have said, “I’m being called Mr. Bailout. I can’t do it again.”

Paulson reiterated later that he did not have the right to save Lehman Brothers. But from the above quote it seems that Paulson was not genuinely hunting around for any authority. He wanted to send out a firm message that collapsing entities must fight their own battles. Speaking to the media Paulson said, “I never once considered that it was appropriate to put taxpayers’ money on the line” to save Lehman Brothers.”

But except for Lehman Brothers all the other tottering firms were thrown a life line. This has led to resentment among the former employees of Lehman. The treatment they received was unfair. Many lost their jobs.

But there is a strong opinion that allowing Lehman Brothers to fall was one of the best gifts to the financial system.

During the months that bridged Bear Stearns bail out and Lehman Brothers refusal, Paulson and Bernanke had suggested to the leaders in the Congress about the necessity of passing a law that would give them some extra tools to grapple with catastrophes of a bigger nature – should it happen. But the duo quickly understood that there was no political need for anything to be done. After the collapse of Lehman, Paulson and Bernanke had sufficient ground to persuade the Congress to pass the necessary bill. It sanctioned $700 billion as potential funds for bailing out financial entities. With it Paulson shored up the financial system and somewhat eased the crisis.

Even after the convenience of holding up Lehman collapse as an example it was not easy to pass the bill and required two attempts to get it done. Without allowing Lehman to collapse the bill would never have been passed. Thus ultimately the drowning of Lehman turned out to be a blessing for others.

If Lehman had been allowed to be bought by Bank of America (an original plan) some other firm, may be much bigger and posing a greater threat to the international financial order would have failed instead of Lehman. By that time panic had accelerated and a debacle was inevitable.

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