Lehman’s Thud Signaled an Enduring Trauma. It Didn’t Cause It.




My Sunday Washington Post Business Section column is out. This morning, we look at the role of Lehman Brothers within the broader collapse, Lehman’s thud signaled an enduring trauma. It didn’t cause it.

As we have noted many times before, Lehman fell due to the same factors that drove Bear, Citi, AIG, BoA, etc. down: Too much junk paper, too much leverage, too little capital and zero risk controls.

Here’s an excerpt from the column:

“Guess what happened to serious risk-taking? It was embraced by management, which no longer worried quite so much about reckless colleagues. This dramatically changed the incentives and risks for bank management. Indeed, bankers embraced risk with a reckless abandon. The five largest U.S. investment banks lobbied the Securities and Exchange Commission — and won — a waiver of their “net capital” rules, which had kept their total leverage to a 12-to-1 ratio of assets versus liabilities. This was called the “Bear Stearns exemption.” Soon after their leverage ramped up to 20-, 30-, even 40-to-1.

This was the backdrop for a terrific storm. Bear Stearns was the first to go down. Fannie Mae and Freddie Mac were next, seized by the government in a dramatic intervention. Lehman was merely the next bank in the financial trailer park to be ravaged by the tornado.”

The full column is worth a read.


Lehman’s thud signaled an enduring trauma. It didn’t cause it.
Barry Ritholtz
Washington Post, September 22, 2013 

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