Bloomberg Opinion marks the 10th anniversary of Lehman’s bankruptcy with a collection of columns from around the world.
One of the most intriguing aspects of the 2007-09 financial crisis is how little understanding there is of what actually occurred. Some of this has to do with the complexities of the event, as well as how hard it is to identify forces lurking below the surface that had built up over the years.
Even a decade later, many people still cling to false ideas about the underlying causes (there wasn’t just one, folks!) of the crisis. What follows are my 10 favorite flawed memes, misunderstandings and just outright falsehoods about the financial crisis and its aftermath:
No. 1. Lehman’s collapse caused the crisis: “If only we had saved Lehman Brothers, we could have avoided the crisis,” goes a popular lament. This reflects a fundamental misunderstanding of the scale of the dislocations. To accept this premise — former Lehman employees are some of the loudest apostles of this theory — then one has to pretend an entire universe of other issues didn’t exist.
Lehman, like Bear Stearns before it, suffered from many of the same issues that afflicted most of the U.S.’s other big banks and brokers: too much junk paper, too much leverage, too little capital and deficient risk controls. Lehman was simply among the most overleveraged and undercapitalized of the lot.
No. 2. If not for X, we would have been OK: Take your pick of things to insert here, but it’s important to understand that this was not a single event, but rather the result of many factors that came together over time. These include: the Federal Reserve’s ultralow interest rates, a fundamentally weak recovery from the dot-com collapse, the housing boom and bust, huge amounts of financial leverage, securitization of mortgages, the embrace of derivatives and reckless deregulation of the financial industry that enabled much of the above, and more. I depicted these elements via this graphic in “Bailout Nation.”
No. 3. Repeal of Glass-Steagall: The argument is that in the decades after Glass-Steagall was enacted during the Great Depression, Wall Street crises were confined to Wall Street and didn’t spill onto Main Street. See as examples the 1987 stock-market crash or the Mexican peso crisis of 1994. But the causative issue we run into to is the but-for test. Would we have had a crisis if Glass-Steagall were still in place? I don’t see how we can make that claim. Perhaps had Glass-Steagall not been repealed, the crisis might have been smaller, but it is very hard to say it wouldn’t have occurred anyway.
No. 4. Bailouts were the only option: There were many other options, but they would have been very painful and required considerable foresight. I believed then (and still believe) that the best course of action would have been prepackaged bankruptcies for all the insolvent institutions instead of bailouts. I would have had the federal government provide debtor-in-possession financing, allowed qualified private institutional investors to bid on the assets thereby letting markets set the valuations, with the government picking up the rest. It would have been more difficult in the short term, but the economy would have rebounded much sooner.
No. 5. Taxpayers were repaid in full and even made a profit: There are two major issues with this claim: The first is that the Troubled Asset Relief Program and most other loans and bailouts were all (or almost all) repaid. But to make that happen, the federal government in a move questioned by tax experts allowed failed American International Group to carry forward the net operating losses for use to offset future earnings; this was a stealth bailout worth tens of billions of dollars that didn’t appear to “cost” anything. Meanwhile the Federal Reserve kept rates at zero for almost a decade. This resulted in a huge transfer from savers to bailed-out lenders.
The federal government also took a huge amount of risk during a period when financial markets tripled. And that is before we account for all of the collateral losses and moral hazards we created.