In dying, Lehman Brothers let others live
The failure of Lehman has paradoxically ensured that, not only is it business as usual at the six biggest banks in the US, they are bolstered by the Federal Reserve to prevent them from failing
Morning commuters walk past Occupy Wall Street campaign protesters sleeping near Wall Street in New York in 2011
Now that five years have passed since Lehman Brothers died, very nearly taking the global financial system over the cliff in the process, it is surely time to erect a suitably inscribed tombstone over the grave.
Among possible legends that might be etched under the name and dates of the deceased, only one could truly commemorate the failed bank’s singular contribution to the community in which it lived: martyr.
No matter that the bank routinely manipulated its balance sheet, recklessly gambled away billions and ruined thousands of customers by selling them ultimately worthless financial “products”, the system that nurtured it and its peers survives.
By shaking the pillars of the global financial system in its death throes, Lehman ensured that no other major bank will ever be allowed to fail again, however deserving it may be of the bailiff’s knock.
Officially of course, the US government is quite prepared to dismantle any firm, however big, that again threatens the system. The Dodd-Frank Wall Street Reform and Consumer Protection Act, the legislative response to the crash signed into law by US president Barack Obama in July, 2010, theoretically enables the authorities to seize and dismantle a failing institution whose collapse would once again threaten the whole system.
Its 2,300 pages include intricate directions under which banks with more than $250 billion in assets should devise “living wills”, blueprints for their own orderly deconstruction.
Mr Obama has subsequently touted the “tough regulation” he imposed on banks with this legislation. Wall Street eminences, such as JPMorgan Chase chief executive Jamie Dimon, assiduously endorsed the notion with regular complaints about the regulatory straitjacket they must now endure.
The problem is that no one really believes that there is any threat at all to the continued existence of the “too big to fail” banks, six of which are American with a further 23 based in Europe and Asia. Thanks to the Götterdämmerung of Lehman’s passing, the survivors have been placed on permanent life support.
The big six
Thus, bondholders investing in the six biggest US banks are so convinced that the government will always bail out these institutions that they are willing to accept lower returns than they would get from investing in smaller banks.
For the big six – JPMorgan Chase, Bank of America, Goldman Sachs, Wells Fargo, Citigroup and Morgan Stanley – this subsidy on borrowing costs has been calculated as amounting to $82 billion in extra profits between 2009 and 2011 alone.
The Federal Reserve, meanwhile, directs a ceaseless stream of cash at these same behemoths in the form of purchases of their holdings of mortgage-backed securities and other mechanisms.