Letting Go Of Lehman Brothers Case Studies Examples
Do you believe that the U.S. government treated some financial institutions differently during the crisis? Was that appropriate?
The decision made by US government might be based on the policies that were never known to the public. After careful analysis of case, we might conclude that the decision made by the government was biased on some basis. We can say this because there were instances where Federal Reserved bailed two companies before Lehman. In addition to this, Federal Reserve bailed AIG after two days of Lehman fall. But, in real, as the government should look for the country’s financial and economic interest, this act does not seem to be biased. Not saving the Lehman Brothers was the right decision taken as their attempt to prevent bankruptcy came late.
There is no point in analyzing the appropriateness of government's differential treatment to different companies, but it is worth examining the reasons for that kind of treatment. The government would protect and support those companies whose failure will have a devastating impact on the economy. When Federal Reserve bailout the companies, it sees the collateral held by the companies as like the bank does when giving credits to others. The companies like Fannie Mae, AIG and Freddie Mac had sufficient collateral but Lehman Brothers did not have sufficient collateral so it did not get a bailout (Admin, 2008). Moreover, the government expected Barclays and Bank of America to buy the Lehman Brothers, which prevented the government to take a decision of bailing out Lehman Brothers.
Many analyst has explained the government move of not bailing out Lehman Brothers as the government move to mark the fall of Lehman Brothers as an example for others and teach others about the ways of dealing with such issues in future. So, it was an appropriate move.
Many experts argue that when the government bails out a private financial institution it creates a problem called “moral hazard,” meaning that if the institution knows it will be saved, it actually has an incentive to take on more risk, not less. What do you think?
It is a very nature of human that if they see a safe side then they push the limits beyond the permitted level. In the case of Lehman Brothers, the argument of moral hazard is very realistic. If the company knows that they will be saved no matter what happens to them, then it is sure that they will find it easier to take any risk. The decision of the government to allow Lehman Brothers fail might be taken as an act of government to set an example for other. The instances of bailout that began from 1998 motivated companies to take unnecessary risk for higher profits. The companies took unnecessary higher risk for higher profits as they knew that government would bailout them at any cost in case the situation turns unfavourable.
Do you think that the U.S. government should have allowed Lehman Brothers to fail?
The government’s move to allow Lehman Brothers to fail had double sided effect. The failure of Lehman Brothers created the domino effect not only in US but also all over the world. The decreased value of Lehman's stock by 73% in first two quarters left 1,500 employees without a job. This decline in the stock value also stood as a reason for the weaker confidence of US investor that eventually caused Dow Jones and S&P500 index to fall in the ninth month of 2008.
If the government had rescued Lehman Brothers like others, then the investors’ confidence would not have weakened, and the global recession would not have come. On the other hand, the government should think, "What would tax the payer say if the government had used the tax collected from public to bailout few private companies?" Since, the companies were investing and spending recklessly, the government intentionally let Lehman fail because it would be a lesson for others. Every other company would learn about the consequences of their miscalculated and misjudged investment and spending while they will also see how big would be the loss to the global economy. So, the government decision to let Lehman Brothers to fail was good as it visualized the market participants about the possible magnitude and consequences of their failure (Eiteman & Stonehill, 2010).
Admin. (2008, October 1). Fannie Mae and Freddie Mac in the Financial Crisis. Retrieved February 21, 2015, from http://www.nextwave.org/lending/fannie-mae-and-freddie-mac-in-the-financial-crisis/
Eiteman, D. K., & Stonehill, A. I. (2010). Multinational business finance. Reading, MA: Addison-Wesley Pub. Co.
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