U.S.

government treated different financial institutions differently during the crisis

Based on what I have read, I personally think that its very good for U.S. government to do the same for all peer companies. All people rely on banks and financial institutions in one way or another and in the long-run, aiding this banks was more likely than not the right move to make. Whether the different treatment given to financial institutions was appropriate is difficult to determine. It does not seem fair for Lehman Brothers to not have received any government aid, but then again they were known for taking large risks and with the chance to succeed also come the risk to fail.

Ideally the Federal Reserve support, protect and buffer financial institutions which might have a significant effect on the market as a whole. Just as banks review the credit of new clients wishing to borrow money, so the Federal Reserve looks at the collateral and the ability to repay loans of the institutions. This kind of supports would be enough and no need to very specific support for special companies. By the time that Lehman Brothers filed for bankruptcy, the financial crisis was well on its way. Some analysts view the Lehman Brothers fall as the governments wake-up call in dealing with the ensuing financial crisis, prompting the bailouts of the other companies.

Many experts argue that when the government bails out a private financial institution it creates a problem called moral hazard, meaning that if the institution knows it will be saved, it actually has an incentive to take on more risk, not less.

I agree with this idea. It is human nature to push limits, and the moral hazard argument fits very well to the Lehman brothers case. If rewards are associated with higher risk, one might think that an organization would push until punished. It is possible that the government let Lehman Brothers fall and fail to maintain its status in the financial markets as an example to other institutions. The "moral hazard" argument implies that a message or lesson has to be communicated. The real message became, in part, that some of these big Wall Street firms could fail, and no one would have believed this before. Lehman was "too big too fail." Because of problems with valuation of disguised bad assets and excessive liabilities, Lehman could hardly be assessed, so a lesson needed to emerge to prevent a "moral hazard" and create a moral marking point in the financial collapse. Precept had to be established to prevent further collapses and create a change in the practices of financial institutions.

Do you think that the U.S. government should have allowed Lehman Brothers to fail?

The U.S. government's decision to allow Lehman Brothers to fail is a double-edged sword. The implications behind allowing Lehman Brothers to fail include a massive domino effect on the U.S. market, the world markets and many large companies Lehman Brothers invested in and acquired over the years. During the first and second quarter of 2008 Lehmans stock value decreased by 73% due to exorbitant losses which in turn led to 1,500 employees becoming unemployed. Lehmans stock value decreased further when propositions for the Korean Development Bank to buy the struggling bank fell through. As a result of a steadily declining market value, Swiss Re estimates its overall net exposureas approximately CHF 50 million. In addition to the foreign markets, U.S. investor confidence diminished causing the S&P 500 and the Dow Jones to plummet in September 2008. Due to the size of the bank, its collapse has been accused as the major force behind the downward spiral of economies, domestic and foreign. Had the U.S. government assisted Lehman Brothers as it did with Fannie Mae and Freddie Mac and AIG, investor confidence across the globe may not have faltered as it did which in turn would not have negatively impacted the world markets.