As we observe the five-year anniversary of the financial crisis — Lehman Brothers filed for bankruptcy five years ago this coming weekend — the most intriguing hypothetical question about those fateful days is what would have happened had the government bailed out Lehman, according to a commentary in the New York Times DealBook blog yesterday. The collapse of Lehman has long been considered the domino that led to the tumbling of so many others: Merrill Lynch’s hasty sale to Bank of America; the bailout of American International Group; the breaking of the buck in the money market; the near-collapse of Goldman Sachs and Morgan Stanley that led them to become bank holding companies; and the decision by the government to pursue the $700 billion Troubled Asset Relief Program to bail out the entire banking industry. No one at the time had suggested that Lehman deserved to be saved, according to the commentary, but the argument has been made that the crisis might have been less severe if it had been saved, because Lehman’s failure created remarkable uncertainty in the market as investors became confused about the role of the government and whether it was picking winners and losers. The government had bailed out Bear Stearns and then nationalized Fannie Mae and Freddie Mac, but it left Lehman for dead, only to turn around and save AIG. Read more.
