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History Credits Lehman Brothers’ Collapse for the 2008 Financial Crisis. Here’s Why That Narrative is Wrong.

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History Credits Lehman Brothers’ Collapse for the 2008 Financial Crisis. Here’s Why That Narrative is Wrong.

Brookings Institution,

5 min read
5 take-aways
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What's inside?

Lehman Brothers’ demise was not the main trigger for the 2008 global financial crisis.

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8

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Recommendation

In 2008, Lehman Brothers had not planned for a worst-case scenario, because it assumed that regulators would step in to prevent its bankruptcy. Therein lay the problem, according to professor David Skeel in this thought-provoking reconsideration of Lehman’s role in the financial crisis. While the financial system looks better prepared today to weather future tumult, market expectations about potential government intervention remain consequential. This intriguing article makes an important contribution to policy debates on pending laws for distressed bank resolutions.

Summary

Three misperceptions underpin a prevailing belief that the Lehman Brothers’ bankruptcy sparked the 2008 worldwide financial crisis. The first misperception lies in the hindsight view that regulators’ refusal to rescue Lehman Brothers was a mistake. The second is that the firm’s demise was a singular event that set off the financial conflagration that followed in the United States and abroad. The third is that normal bankruptcy proceedings could not properly manage the losses stemming from the insolvency of a systemically important financial institution.  

In reality, a cluster of events ignited the crisis...

About the Author

David Skeel is a professor of corporate law at the University of Pennsylvania Law School.

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