Monday, September 15, 2008

Lehman Brothers Declares Bankruptcy: Taxpayers Spared

Lehman Brothers BuildingIs it possible that the government has finally learned their lesson? After Lehman Brothers spent a weekend trying to find a buyer, the interested parties withdrew when the government said they would not offer any financial support to a potential buyer (as they did with Bear Stearns). That left Lehman Brothers with little choice but to file for chapter 11 bankruptcy protection this morning. This bankruptcy becomes of the largest in history, with $613 billion in debts, according to the Wall Street Journal. While a bankruptcy of this magnitude is certainly not a good thing, the fact that the government allowed it to happen should be looked at as a breath of fresh air by taxpayers.

There was a lot of speculation heading into the weekend that the government would do what they have been doing all along through this financial crisis and step in to save the day when push came to shove. Surprisingly, though, the government held its ground after attempting to help piece together a deal between Lehman and Barclays; when the government refused to provide additional backing, Barclays backed out. Since the government was more than willing to step in and provide assistance for J.P. Morgan to purchase Bear Sterns, this news definitely came as a shock to me. I can say that I’m glad the government finally took a stand, and if nothing else we will get a chance to see what life looks like after a major investment bank failure.

With Lehman and Bear Sterns gone, and Merrill Lynch agreeing to be sold to Bank of America, the only major investment banks left are Goldman Sachs and Morgan Stanley. Who knows whether or not these two companies will be able to make it through the financial crisis intact, but I feel much better that a new precedent has been set that we will allow the markets to take their due course with them. If the government had chosen to bail out Lehman, after doing so for Bear Sterns, then the other two brokerages would all but expect the same to be done for them if needed. Lehman’s bankruptcy will show them that this is not the case, and that they need to take matters into their own hands.

Sure, this is going to be painful in the short term; the markets are going to tank. Over the long haul, though, by taking a stand, the government is telling Wall Street that they can’t assume a government bailout. This will lead to better business decisions and risk management by these financial institutions, a more stable U.S. economy and less of a burden for taxpayers.

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