Lehman's fall set off market bonfires
Lehman Brothers was so interconnected within the financial sector that when it failed, experts tell reporter Nancy Marshall Genzer, markets and financial institutions faced huge losses.
Richard S. Fuld Jr., chief executive officer of Lehman Brothers, is sworn in to testify before the House Oversight and Government Reform Committee. (Karen Bleier/AFP/Getty Images)
More on The Economy, Wall Street, Crime - Law, Politics, America's Financial Crisis
Links
- Audio: Rep. Henry Waxman grills Richard Fuld about the amount of money he was making as CEO of Lehman Brothers when investors were losing lots of money.
- Document: Testimony of Luigi Zingales on 'Causes and Effects of the Lehman Brothers Bankruptcy'
- Chart: Take-home compensation for Richard S. Fuld, Jr. (PDF)
TEXT OF STORY
Kai Ryssdal: Committee members questions Fuld sharply about his lack of accountability for the bank's failure.
But part of the blame for where we find ourselves today lies with the decision by Ben Bernanke and Henry Paulson to let Lehman go under.
Marketplace's Nancy Marshall Genzer has more.Nancy Marshall Genzer: When it came to Lehman, the government was playing dominoes. Problem was - it didn't realize what a big domino Lehman was. You've probably heard the term credit default swaps. If I've invested in a company that has problems, I buy a credit default swap. Basically, it's insurance. Marilyn Cohen is president of Envision Capital Management. She says Lehman was involved in lots of these swaps. Then Lehman went bankrupt.
Marilyn Cohen: And that really really set off a bonfire.
Why? Because everybody was interconnected in what Cohen calls counterparty risk. And she says it was the first time that a bank this size went belly up and all the swaps had to be paid. That paved the way for the $700 billion bailout.
Cohen: It helped open the floodgates because we never had an institution that was so leveraged and had so much counterparty risk file for bankruptcy.
The day after the government let Lehman fail, it bailed out the insurance giant American International Group. Why? You guessed it - AIG was on the hook. Gus Fauchet is an economist with Moody's Economy.com.
Gus Fauchet: The concern was that AIG would have to pay out on all these credit default swaps, and that they would be unable to do so.
The government decided AIG really was too big to fail. Steven Davidoff is a law professor at the University of Connecticut. He says the overall government bailout is Lehman's legacy.
Steven Davidoff: It's small comfort for Lehman brothers, but it did finally spark the government to do something.
And now government officials have their minds set on oversight.
In Washington, I'm Nancy Marshall Genzer for Marketplace.
Comments
Comment | Refresh
From West Chester, PA, 10/06/2008
The last name is spelled Faucher. Thanks.
Gus
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