The concept of too big to fail is one that we all learned at once this fall and I think it is a lesson that we will not soon forget. Unfortunately for Lehman, it was not learned quickly enough. Time affords us the ability to look back with laser accuracy on the events of this fall and the demise of our banking system.
Looking back to the demise of Long Term Capital we should have learned a few very important lessons. Firstly, the question as to if an entity is too big to fail comes within a highly tense environment. This is one where fear, excitement, and uncertainty rule. It is somewhat analogous to the tension when a half clothed girl confronts a half clothed boy in the back of a car with the windows steamed up. Passions are running high and one asks the question, “Should we do it?” That question lingers in the thickness of the air until one is ready to answer. The answer is less with thought and more with emotion at that exact moment. At least one party to that discussion has clouded judgment. (Please, spare me, I am not condoning pre-marital sex, I am simply trying to make an analogy).
So too did the question hang in the thick air of those fateful days for Lehman, Bear Stearns, AIG and others. “Should we do it?” Apparently the federal government was not “in the mood” and still screwed Lehman in the process. I sit back on wonder if things had evolved differently, would the answers be the same. If the ordering was AIG, Bear, Merrill, and Lehman- would Lehman still be here today.
Obviously one can argue that the events that occurred all occurred as a dominoes falling in a particular order. Remove one domino in the equation and the others might not fall. Or, perhaps you can consider the idea that if the feds took quick, action on just saving Lehman and buying toxic assets from them, could they have prevented having to set aside $700 billion in the TARP in the first place. We’ll never know.
What concerns me the most right now is the very lack of discussion about how to prevent this from happening again in the future? I personally feel there must be an in-depth inquiry into what has occurred, the sequence of events and how to prevent this from happening again.
In order to diffuse the intense pressure of the decision making, would it be wise for the SEC to create a division that evaluates the size and breadth of a financial institution’s reach and deem them too big to fail each year they file their annual report and 10K? By doing this it will remove the appearance of the government is playing favorites as to who they save and who they let fail. I am sure that Lehman employees would have preferred to know that before the crisis that should there be a problem, the Us Government is ready and willing to step in and help.
You can argue that is the exact wrong thing to do. Any financial institution that is assured a safety net would have no incentive to effectively manage risk. They would simply put all of their chips on the table, hope for the best and if it all goes sideways, call Uncle Sam.
Regardless of how we view the lessons learned here, a concrete set of criteria needs to be established in order to understand the how a bank can get to be too big to fail. Those factors need to be agreed and then need to be referenced when there is a financial crisis.
My views on this subject are obviously impacted by the fact that I am a CPA. What are your thoughts on the issue?
Looking back to the demise of Long Term Capital we should have learned a few very important lessons. Firstly, the question as to if an entity is too big to fail comes within a highly tense environment. This is one where fear, excitement, and uncertainty rule. It is somewhat analogous to the tension when a half clothed girl confronts a half clothed boy in the back of a car with the windows steamed up. Passions are running high and one asks the question, “Should we do it?” That question lingers in the thickness of the air until one is ready to answer. The answer is less with thought and more with emotion at that exact moment. At least one party to that discussion has clouded judgment. (Please, spare me, I am not condoning pre-marital sex, I am simply trying to make an analogy).
So too did the question hang in the thick air of those fateful days for Lehman, Bear Stearns, AIG and others. “Should we do it?” Apparently the federal government was not “in the mood” and still screwed Lehman in the process. I sit back on wonder if things had evolved differently, would the answers be the same. If the ordering was AIG, Bear, Merrill, and Lehman- would Lehman still be here today.
Obviously one can argue that the events that occurred all occurred as a dominoes falling in a particular order. Remove one domino in the equation and the others might not fall. Or, perhaps you can consider the idea that if the feds took quick, action on just saving Lehman and buying toxic assets from them, could they have prevented having to set aside $700 billion in the TARP in the first place. We’ll never know.
What concerns me the most right now is the very lack of discussion about how to prevent this from happening again in the future? I personally feel there must be an in-depth inquiry into what has occurred, the sequence of events and how to prevent this from happening again.
In order to diffuse the intense pressure of the decision making, would it be wise for the SEC to create a division that evaluates the size and breadth of a financial institution’s reach and deem them too big to fail each year they file their annual report and 10K? By doing this it will remove the appearance of the government is playing favorites as to who they save and who they let fail. I am sure that Lehman employees would have preferred to know that before the crisis that should there be a problem, the Us Government is ready and willing to step in and help.
You can argue that is the exact wrong thing to do. Any financial institution that is assured a safety net would have no incentive to effectively manage risk. They would simply put all of their chips on the table, hope for the best and if it all goes sideways, call Uncle Sam.
Regardless of how we view the lessons learned here, a concrete set of criteria needs to be established in order to understand the how a bank can get to be too big to fail. Those factors need to be agreed and then need to be referenced when there is a financial crisis.
My views on this subject are obviously impacted by the fact that I am a CPA. What are your thoughts on the issue?
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