Lehman Brothers Failure Questions Essay

Having taken part to the events occurring in this scenario only in a few occasions, and as the ultimate guarantee of rescue, the FED,in conjunction with FDIC and the Office of the Comptroller of the Currency, made decisions aimed to save those institutions, for instance AIG, Fannie Mae and Freddie Mac, whose failure would have had a greater impact on financial system’s wealth and perspectives of recovering from the crisis were reliable. This was the main reason for declining any proposal of action in favor of Lehman. Some argued that the company’s bankruptcy was an intentional choice rather than a â€Å"genuine error†, aimed to induce the restoration of higher degrees of financial discipline. However, had the government disposed a plan in favor of Lehman Brothers, this would have prevented investors from losing faith towards financial institutions, the financial system from freezing and economy from carrying the weight of the crisis Notwithstanding, further attempts to save Lehman Brothers did not came to completion for several reasons, not only due to Government stillness, but the giving out of other financial actors i. . Bank of America and Barclays. In an ultimate analysis is thus important to consider that the â€Å"unfair† practices were not carried on by the sole Government, but by all financial institutions acting in the system as a whole: every actor placed a risky bet, whose consequences seem difficult to be addressed to just one responsible. Do you think that the U. S. government should have allowed Lehman Brothers to fail? Although Lehman Brothers was the fourth-largest U. S. investment bank, it was seen by many analysts as the weakest of Wall Street’s biggest firms. It is plausible therefore to think that the government willfully took the decision to let it go bankruptcy, in the purpose to restore a certain degree of indipendence from the market, and serving as threat for other institutions preventing them from adopting hazardous behaviours. The government decision of non-intervention had immense costs both in terms of financial losses inflicted to the credit market operators and institutions, and of lost in confidence in the market itself, that eventually turned into terror and paralyzed the credit market worldwide. Indeed investors’ confidence in th market and general concerns about the security of the banks continued to plumb during Lehman Brothers’ stock value erosion and afterwards. Nonetheless, consequences from Lehman Brothers’ bankruptcy had spread in a broader sense affecting all clusters of stakeholders: for instance, it could be mentioned the forced lay off of up to 1,500 people, which amounted to about 6 percent of Lehman’s work force. With hindsight, the decision of the US Government to allow such a giant as Lehman to fail is difficult to support, especially considering the devastating negative impact it had in a long-term perspective. Almost no objection that it should have been a critical decision to take at that time. It indeed brought the evidence that the financial market needed a shock, which unveiled some crucial problems and send a clear message to the banking system, proving that â€Å"too big to fail† companies were likely to face collapse as well, though no one would have believed this before. Many experts argue that when the government bails out a private financial institution it creates a problem called â€Å"moral hazard,† meaning that if the institution knows it will be saved, it actually has an incentive to take on more risk, not less. What do you think? Moral hazard, or, in other words, the willing of companies to act recklessly, bearing large risk exposure, has the consequential effect of distorting competition, thus mitigating risk perception and allowing excessive risk-taking, which is ultimately transferred from financial institutions to the society as a whole. This had been a controversial argument , largely discussed in the light of the financial crisis of 2008. The core of the debate was to what extent did moral hazard caused the crisis, and to what extent did government’s guarantees of rescuing perpetuated an hazardous behavior among market players. The moral-hazard argument is not only due to eventual interventions from governments, but is increasingly being considered by expertise as an inner element of a company’s strategic policy, drawing the shape of the decision making process in the interest of the company itself. However, corporate decisions are rather made in the interests of individuals than for the company as a whole, which causes a loose the connection between those interests and the company’s long-term health assumption. The possibility to gain short term benefits, at a relatively low cost, leads to reckless behavior regardless of eventual bails out from governments, with long term costs that hardly find responsibles to pay them back. One key factor is indeed limited liability, which allows investors and executives, ultimately liable for companies’ decisions, to enjoy the benefits of their risk-taking, while eventually limiting their exposure. The Government is responsible for contrasting moral hazard practices and maintaining investors’ confidence in the stability of both financial and economic activity, ensuring that the system don’t suddenly shut down in a panic. It can happen that, indeed, the expectation of further intervention from regulators and politicians may be an incentive for hazardous practices itself. However, moral hazard is an intrinsic disease of corporate strategies, thus of the financial market, whose antidote only relatively depends on government rescuing hand upon financial institutions. References James K Glassman ,The Hazard Of Moral Hazard. Commentary. New York: Sep 2009. Vol. 128, Iss. 2; Pg. 28, 5 Pgs James Surowiecki ,Hazardous Materials; The Financial Page. The New Yorker. New York: Feb 9, 2009. Vol. 85, Iss. 1; Pg. 40 John M. Berry, When Too Big To Fail Gets Too Chaotic To Manage,The Fiscal Times, May 10, 2010