Lessons from Lehman

Everyone is running with his or her own “Lessons from Lehman” post as if we have actually learned anything from the financial crisis – and as if it is already over and behind us. Well, I have some lessons learned for you via Dharma Joint (hat tip Scott).

Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we’re still recovering, they’re choosing to ignore those lessons. President Obama

I burst out laughing when I read the above line in the President’s speech yesterday. "The lessons of Lehman!" I thought, "he’s got to be joking." I have no doubt Big Finance took that lesson straight to heart.

Let’s consider the meaning of the "lessons of Lehman." Given the context, I suspect the President wants Big Finance to see the demise of Lehman as an object lesson- as one might warn a friend trying to ride out a hurricane in New Orleans by reminding him to remember the lessons of Katrina. If this friend had just moved to New Orleans and was unfamiliar with Gulf Coast hurricanes, the "lessons of Katrina" reminder would likely be sufficient.

If, however, this friend owned a house in the French Quarter and had ridden out Katrina the reminder of the lessons thereof might evoke a chuckle and a quick retort, "Katrina taught me that the French Quarter is safe." "The lesson of Lehman," Big Finance CEOs might chuckle to themselves, "is to make sure we’re too big to fail." Lehman’s balance sheet wasn’t big enough, thus failure was an option for them, but not for the biggest banks.

Obviously, I am of a slightly cynical frame of mind here.  But, let’s get real.  If you are Goldman or Bank of America, you are bigger than ever. Right now, you’re earning cash money. Bonuses are huge. None of your top executives have left the firm – yet. And your share price has leapt to within striking distance of pre-Lehman levels – in Goldman’s case, it’s higher. When the president gives a big speech on regulatory reform, you don’t even need to show up. So, I don’t imagine you learned a whole lot from the crisis that will make you do things any differently.

From July at Bloomberg:

“Our model really never changed,” Goldman Sachs Chief Financial Officer David Viniar said yesterday in an interview. “We’ve said very consistently that our business model remained the same.”

Just today in the Wall Street Journal:

There’s another Japanese proverb that brings the lesson about vision and action into perfect focus for me. The proverb is: “Money grows on the tree of persistence. Now, when I was a boy growing up in America, we were always taught that ‘money doesn’t grow on trees.’ That was the grown-ups’ way of teaching us the value of money. There should be a new version: ‘Money doesn’t grow on over-leveraged homes in an inflated real-estate market.’ I guess it’s too late for that one. But I like the image of a tree of persistence…a symbol of the steady effort, even through the worst of times and the most painful experiences…that enables us to turn our vision and action into real achievement.

So, while everyone is spinning their tales of lessons learned, you should be clear in your mind that, a year on, the real lesson of Lehman’s collapse is that it pays to be too big to fail.

3 Comments
  1. Anonymous says

    So why does this not apply to the USA? Is the USA too big to fail? 30% of the world economy?

    Also, last year you posted about predicting the end of recessions. What does that method predict now?

  2. Anonymous says

    This is the thread I am talking about.
    https://pro.creditwritedowns.com/2008/09/chart-of-day-unemployment-as-recession.html

    Here is an article about a similar, if not the same, way to predict recession beginnings and ends.
    http://www.jprr.org/index.php/jprr/article/viewFile/106/23

    Comments please
    Thanks

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