Friday, September 12, 2008

No More Bailouts: Let Lehman Brothers Fail

I just read an opinion piece by James Conrad on Seeking Alpha that made some great points about the government bailouts that have already happened (i.e., Freddie, Fannie and Bear Sterns) as well as one that may happen with Lehman Brothers. His point is that we shouldn’t be bailing out any of these companies, and the notion that the economy will tank if we don't is unfounded. He believes that we should let these companies take due course toward chapter 11 bankruptcy and fulfill their self-made destinies.

The following are some excerpts from the article:

"There is nothing that differentiates Lehman Brothers from any other big company except the fact that its debt, including a lot of counter party debt arising out of various derivatives, is held, mostly, by other Wall Street players."

"There is always systemic risk whenever a large company fails. There were also systemic risks to the energy markets when Enron, a huge energy trader, went bankrupt, but we got through that. That is what Chapter 11 bankruptcy exists to do."

"They do not have the best interest of the nation at heart. There is no reason why a company, like Lehman, cannot unwind properly, using the bankruptcy tools available, rather than being placed upon the backs of innocent taxpayers. Hank Paulson’s company, Goldman Sachs (GS), stands to lose billions on a Lehman collapse."

"Seeking to abuse the public coffers, in support of private interest, is not unique. PIMCO, one of the biggest bondholding institutions in the world, stood to lose tens billions of dollars on Fannie/Freddie bonds if the two GSEs collapsed without a bailout. So, Bill Gross, its Chairman, wrote, again and again, on the need to have those two institutions bailed out by the federal government, and lobbied to make it happen."

"Lehman Brothers is a private company. It is not a charitable institution, or a government agency. Its purpose is to make money, like its counter parties. In its day, it earned huge profits, and a very large percentage was paid out to its top management, in the form of salary and yearly bonuses. That top management is still in power."

Conrad goes on to bring up several other points as well, which lead one to question the logic behind using taxpayer funds to rescue these companies. I'm not a big fan of bailouts myself, so I tend to agree with many of Conrad’s points. I understand why the Freddie and Fannie bailout happened (even though I didn't really support the original debt guarantee), but I question the idea that Lehman Brothers is "too big to fail." I really hope the government sees the light on this one and lets Lehman Brothers fall to its own fate. If nothing else, an example needs to be set for these Wall Street investment firms that they need to do a better job of risk management, or else they will pay the price.

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