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Did Lehman Have To Go to Save Wall Street?

A year ago this weekend, the Lehman Brothers announced their collapse. With hopeful signs being seen in the economy today, many experts reflect, “What was the impact of the Lehman Brother bankruptcy in the global financial industry?” What if the government bailed-out Lehman Brothers the same way it bailed out Bank of America, Citibank, and a host of other institutions?

We all know the events that preceded the announcement of Lehman Brothers on September 15, 2008. Not surprisingly, the stock market tanked that same day, dropping more than 500 points. The American International Group nearly gave and it had to be bailed out with an $85 billion loan from the US government. European banks were tethering on the edge and there were rumors that Morgan Stanley will be next to go. In general, panic is in the air all over the Western banking industries.

Because of these catastrophic results, the Treasury’s and the Fed’s decision not to help the ailing investment bank was seen as many as the single biggest mistake the government committed in the crisis. Looking back now though, many economic experts are suggesting that the Lehman Brother collapse might have been necessary to prevent other big banks from falling.

A visiting scholar at the American Enterprise Institute suggested that “If the Lehman Brothers’ failure had not triggered the panic phase of the cycle, some other institutional failure would have done so.” Indeed, the weakness of the financial industry was revealed immediately following this event.

However, for people who experienced the Lehman Brothers collapse first hand though, any explanations cannot take away their bitterness. Richard Fuld, the former chief executive of the investment bank, noted that Lehman committed the exact same mistake that other firms did – too much leverage, underestimating the risk of over-relying on real estate, and playing down the risks. Yet, other banks in its position were bailed out; Lehman Brothers was the only one to fall.

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