While I am not happy to see a historic company go bankrupt, and have vague but unspecific worries about some kind of general cascading financial problem, I am happy to see the government let Lehman go bankrupt without any sort of special intervention or bailout for a number of reasons:
- Bailouts create awful incentives for other large companies managing their risk portfolios
- I know many small business people who have gone bankrupt, and I once lost my job in a company bankruptcy. There is no reason Lehman equity holders and managers should be immune from the same process just because their company is large and old.
- Lehman's management has failed to get a positive return from the assets in their care. A bailout only keeps these assets under the same management. A bankruptcy puts these assets in the hands of new parties who hopefully can do a better job with them.
- I strongly suspect that the hole in Lehman's balance sheet from underwater assets like certain mortgages is large compared to its equity but small compared to its total assets. If this is true, equity holders will end up with nothing, but most creditors should come out close to whole when everything is unwound.
Like Megan McArdle, I found Obama's recent reaction to the Lehman bankruptcy to be wrong-headed but unsurprising. Obama is blaming recent financial problems on an overly laissez faire approach by GWB in general (LOL,that's funny) and a lack of strong enforcement by the SEC in particular.
But one has to ask, what laws were not enforced? My sense is that these are all perfectly lawful portfolios of mortgages in which the one mistake was systematically being too generous in giving out credit. Mr. Obama's party has always been a strong advocate of pushing banks to be more generous with credit, particularly to the poor, and of promoting home ownership as a national goal. If anything, financial institutions are struggling because they were too aggressive in these goals. McArdle writes:
This was not some criminal activity that the Bush administration should
have been investigating more thoroughly; it was a thorough, massive, systemic
mispricing of the risk attendant on lending to people with bad credit.
(These are, mind you, the same people that five years ago the Democrats
wanted to help enjoy the many booms of homeownership.) Lehman, Bear,
Merrill and so forth did not sneakily lend these people money in the
hope of putting one over on the American taxpayer while ruining their
shareholders and getting the senior executives fired. They got it
wrong. Badly wrong. So did everyone else.
It appears from further Obama statements talking about lack of enforcement for predatory lending laws that the Democrats want to get back on the rollercoaster of whipsawing banks between charges of redlining (you are not lending enough to the poor) and predatory lending (you are lending too much to the poor).
Postscript: While in retrospect there may turn out to have been laws broken, in situations like this, particularly when a management team is trying to head off a liquidity crisis, these tend to be of the reporting and disclosure ilk. We saw back during the Enron failure that people tend to assume law-breaking of some sort to be the cause of a major bankrupcy or collapse, and to satisfy this notion the government aggresively pursued Enron executives. But nothing for which Enron was prosecuted had anything to do with their failure -- all the violations were about disclosure and accounting methodologies. The company would have still crashed, probably faster, without these violations.
Update: More here