Letting Lehman Fail "Was a Genuine Error"

Treasury Secretary Paulson tries to defend his policy decisions during the crisis:

Struggling to Keep Up as the Crisis Raced On, by Joe Nocera and Edmund Andrews, NY Times: ...It was the weekend of Sept. 13, and the moment Treasury Secretary Henry M. Paulson Jr. had feared for months was finally upon him: Lehman Brothers was hurtling toward bankruptcy — fast.

Knowing that Lehman had billions of dollars in bad investments..., Mr. Paulson had long urged Lehman ... to find a solution for his firm’s problems. ...

But Lehman could not — despite what Mr. Paulson described as personal pleas to other firms... With all options closed, he said, the government’s hands were tied. Although the Federal Reserve had helped bail out Bear Stearns — and was within days of bailing out ... American International Group — it could not help Lehman, even as its default threatened to wreak havoc on financial markets.

“We didn’t have the powers,” Mr. Paulson insisted... By law, he continued, the Federal Reserve could bail out Lehman with a loan only if the bank had enough good assets to serve as collateral, which it did not.

“If someone thinks Hank Paulson could have made the Fed save Lehman Brothers, the answer is, ‘No way,’ ” he said.

But that is not the way that many who have scrutinized his actions see it. Bankers involved say they do not recall Mr. Paulson talking about Lehman’s impaired collateral. And they said that buyers walked away for one reason: because they could not get the same kind of government backing that facilitated the Bear Stearns deal. In retrospect, they added, it was emblematic of the miscalculations by the government in reacting to the crisis. ...

In an hour long interview..., Mr. Paulson defended Treasury’s actions, saying that he and his aides had done everything they could, given the deep-rooted problems of financial excess that had built up over the past decade.

“I could have seen the subprime problem coming earlier,” he acknowledged..., “but I’m not saying I would have done anything differently.”

History will be the final judge. But in contrast with Mr. Paulson’s perspective, other government officials and financial executives suggest that Treasury’s epic rescue efforts have evolved as chaotically as the crisis itself. ... Executives on Wall Street and officials in European financial capitals have criticized Mr. Paulson and Mr. Bernanke for allowing Lehman to fail, an event that sent shock waves through the banking system, turning a financial tremor into a tsunami.

“For the equilibrium of the world financial system, this was a genuine error,” Christine Lagarde, France’s finance minister, said recently. ...

In addition, Mr. Paulson and Mr. Bernanke have been criticized for squandering precious time and political capital with their original $700 billion bailout plan...

[M]any complain the worst of the turmoil might have been avoided if it hadn’t been for Mr. Paulson sticking with an original bailout plan that they viewed as poorly conceived and unworkable. ...

He also defended Treasury’s recapitalization plan against critics who say that he did not extract a high enough price from the banks getting taxpayers’ money. “I could not see the United States doing things like putting in capital on a punitive basis that hurts investors. And we don’t want to run banks.”

Asked what he might have done better, Mr. Paulson replied, “I could have made a better case to the public.”

He added, “I never felt worse than when the House voted no” on the bailout plan Sept. 26, its initial rejection before ultimately passing the plan.

As for Lehman, Mr. Paulson insisted that it was “a symptom and not a cause” of the financial meltdown that took place in recent weeks. The real problem, he contended, is that banks all over the world made wrong-headed loans that have now come back to haunt them. ... Mr. Paulson added, “Ten years from now no one is going to say that this crisis was brought about because Lehman Brothers went down.”

Letting Lehman fail was a mistake, and it made the crisis much worse.

Comments

[Oupoot]

Yes, the consequences of the Lehman failure was enormous, but I dont believe it was a mistake. It was poorly managed, but they had to let some big company fail eventually. Realistically, would the financial system have learned anything from Lehman being bailed out? I dont believe so - they did not seem to have learned anything from the failure of smaller fin. firms.

The waste in the financial system would simply have remained, festering for who knows how long and causing who knows what problems later on. The LBH failure clearly set in motion the urgent need to get rid of the waste (even if it takes a year for the system to digest). It also woke up Washington to actually take action.

Poorly managed: Yes. Mistake: No.

[Angelica]

Wow, just wow. You mean if he can go back and have it to do over again, he would have still let Lehman fail?

Given what transpired afterwards, this is pig-headed blindness.

I would have way more respect for him if he said "I took a risk letting Lehmans go down, but it didn't work out."

Oupoot,
Given how the fall of Lehman necessitated the 700 billion dollar TARP, why do you think it would have been a mistake to use a fraction of that money to make Lehman counterparties whole a la Bear Stearns?

A stitch in time saves nine.

[James Young]

Paulson would still let Lehmans fail as revenge for not playing ball in the LTCM hedge fund blow up. He's got no reason to be honest about his motivations, therefore it is rational to expect him to lie.

At this level, its not about the rights or wrongs of an individual decision, its power play. Financial eugenics at the US taxpayers tab. No different to suckling Haliburton or KBR on no bid contracts.

Simply, Goldmans got the inside track and gets a handout at 5% from the public (Buffet got over 10% for his contribution), AIG shareholders got taken to the dry cleaners (the lenders were protected), and Lehmans got thrown in to the meat mincer because they didn't have the neccesary political protection.

Maybe a post ex ante rationalisation but hey, we live in an imperfect world.

[BJ Feng]

I agree with Oupoot, and I'll add the following. Thanks to Lehman's failure, can people still be absolutely sure that a firm is too big to fail? No, so they will take the appropriate steps to protect themselves, which also enforces discipline in the market. If we'd seen this type of behavior from the market earlier, all the financial firms would never have been able to build up such risky positions. Far before the point where we are at today, other firms would start to pare back exposure and lending to that company, forcing the company to stop taking on more risk.

The ridiculousness of James Young's comments highlights another reason why Paulson did the right thing. There wasn't enough political capital to save Lehman, AIG, AND get a $700 billion dollar TARP plan passed in Congress. Imagine the rhetoric from James if Paulson had saved everyone. He's just doing it to help his rich Wall Street friends. I can already see James writing those words in an alternate universe. Lehman had to go down, someone had to fall so that Wall Street could be bloodied by the crisis. Both the suffering of the workers and shareholders made it easier to save AIG, which had to be saved.

Mark Thoma wrote, "Letting Lehman fail was a mistake, and it made the crisis much worse."

Yes, we needed the situation to become worse in order to pass the TARP. Look at all the opposition to the TARP plan. Now imagine a scenario where Lehman is saved, and the financial markets look to be shaky, but not in a free fall. Ordinary Americans would demand to know why Congress should authorize $700 billion when the markets aren't that bad! What would the response be? What could Paulson say then? That he knows more than the average Joe? That he can see it coming? That they shouldn't be fooled by the calmness of the market, underneath lies great danger?

No, it would have been impossible to continue on and take the drastic actions that the government eventually did take. I haven't even mentioned all the new FED facilities that have been created. Thanks to the OBVIOUS severity of the situation, these unprecedented actions haven't faced any scrutiny at all! But without that OBVIOUS severity, I bet that the FED opening up facility after facility would draw much more attention and criticism.

Look, people react to events. In order to justify absolutely extraordinary actions, you need a VISIBLE reason. Otherwise main street Americans would not be able to understand why such actions are necessary. Paulson did the right thing in letting Lehman fail, I have absolutely no doubt about that. There is no way the American people would allocate $700 billion dollars to fighting the crisis without there being blood in the streets. And it's not only the $700 billion, the Treasury and government gained important powers to do what they need to. Without visible blood, Congressmen would ask why the Treasury needed more power. Just look at how Congress handled the initial vote, there's no way Paulson could make them understand. I thank Paulson for having the courage to let Lehman fail. This is what we expect from leaders, to do the right thing regardless of the criticism that will always come.

[a]

"Letting Lehman fail was a mistake, and it made the crisis much worse."

Wait a minute. We didn't let Countrywide fail, and the crisis got worse. We didn't let BS fail, and the crisis got worse. We didn't let AIG fail, and the crisis got worse. The same week-end as Lehman went down, Merrill was bought by Bank of America, and the crisis got worse. So why when Lehman goes down and the crisis gets worse, is the conclusion that letting Lehman go *made* the crisis worse and was a mistake? There's a presupposition here about cause and effect, I'm afraid, that just isn't born out by the facts.

[MattYoung]

The mistake was Lehman nbot having good collateral. The result would be bankruptcy with the bankruptcy judge or nationalization with the nationalization czar. Is there really that big of a difference?

[Ellen1910]

Letting Lehman fail was a mistake, and it made the crisis much worse. Mark Thoma

How "much worse"? 1%? 5%? 50%? More? And how bad was it before it got worse?

C'mon, you econometricians. Sharpen those pencils and help us poor benighted lay folks out.

[wally]

Some of us believe that all five of the major US broker-dealers should have been shut down. The social cost of putting up with those people is greater than the financial benefit.

[Too Late]

"The real problem, he contended, is that banks all over the world made wrong-headed loans that have now come back to haunt them."

This is the case. The magnitude of the bad debt was too large to deal with after the fact. The bad loans should have been prevented in the first place. Its too late once trust in repayment is destroyed. Policy has sown the wind, and now the nation is reaping the whirlwind.

[Unsympathetic]

Mark,

No. You are flat-out wrong on this. Lehman's CDS outstanding was not an issue - because CDS is not an issue.

MORE firms should have, and should be in the future, "allowed" to fail. This crony capitalism crap needs to be put to pasture, and more executives such as Fuld and Mozilo need to have their personal fortunes expunged and be sentenced to spend the rest of their entire lives behind bars for their crimes.

Mellon's liquidation theory was not good policy at that time.. because the loans during GD 1.0 were made on sound terms but the liquidity did not exist. Today, the loans never were sound to begin with.. and so all banks should be forced to write 100% of their bad loans down to market prices.. today. Recapitalize with preferred shares where needed.

Nobody's lending because nobody knows where the bombs are.

[bakho]

Lehman was already failed and could not have been "saved". Only an earlier intervention in 2007 or earlier to set up a process to handle the impending failures more smoothly could have helped. The lack of action to prepare for the crisis was the problem. Once the crisis was full blown it was too late.

It is difficult to second guess because we don't have the numbers and there is too little transparency. We only have the opinions and leaks from insiders to make themselves look less bad or to ding other players. Maybe saving ML while letting Lehman fail was a better deal than trying to prop them up only to have a larger collapse later? We can't know because we don't have the information. Lehman failure let a lot of air out of the super bubble, but there is a lot more air in the financial super bubble. The financial sector is overblown, unsustainable and needs to contract with less money going to fewer institutions. That cannot occur painlessly.

Sept 13 was too late. The Lehman parrot was already dead. There are likely a few more dead parrots still nailed to their perch and they need to be dead and buried in order to restore confidence.

To Quote Monty Python: "
'E's not pinin'! 'E's passed on! This parrot is no more! He has ceased to be! 'E's expired and gone to meet 'is maker! 'E's a stiff! Bereft of life, 'e rests in peace! If you hadn't nailed 'im to the perch 'e'd be pushing up the daisies! 'Is metabolic processes are now 'istory! 'E's off the twig! 'E's kicked the bucket, 'e's shuffled off 'is mortal coil, run down the curtain and joined the bleedin' choir invisibile!! THIS IS AN EX-PARROT!!"

http://www.youtube.com/watch?v=e6Lq771TVm4

[hari]

I suspect a lot of people don't recognize Lehman was world's largest dealer in the bond market - particularly in emerging Asian financial centres including its beachhead in Hong Kong.
The failure of Lehman was a real *schock* to the global financial market - it never recovered from it.

Lehmans entrenched market position on the continent was immense in terms of commercial paper, and its role as an intermediary with American financial centres.

Paulson told Charlie Rose that he tried to get SWF to buy into Lehman - meaning Chinese, I think - and eventually it failed to materialize. Paulson couldn't have seen the tidal wave just around the corner to take down the rest.

[The Baron]

@hari:
If Lehman was so important to the rest of the world, why is it our (The U.S.) responsibility to save them? Why didn't the EU, China, or Arab funds step in to save them? Maybe, just maybe, because saving these firms and letting overpaid thieves walk away with their ill gotten gains is not just immoral, but actually bad policy too?

[lonesome moderate]

One point that was previously raised, I believe by Bruce Wilder: the fact that Lehman Brothers is going through bankruptcy court is going to provide us our only real window into the kinds of business practices that got us into this mess. In the end that is the only thing that will truly fix these problems--if there is any possible way to sweep all this under the rug and pretend that we don't need fundamental reforms, then that is what will happen.

[Windowdog]

C'mon there is no reason to think that a massive bailout wouldn't have been necessary even if Lehman had been bailed out. Personally I'm glad they let it fail. Let the creditors eat that mess, one less thing for the tax payers to swallow. Also I do agree that there should be a day in court for one of these behemoths. Let the record show all the trash they were able to package as assets during the bubble.

This economy was already a house of cards, blaming the first card that fell for the collapse is a bit short sighted.

[anne]

Hari:

"I suspect a lot of people don't recognize Lehman was world's largest dealer in the bond market - particularly in emerging Asian financial centres including its beachhead in Hong Kong."

The disruption of the bond market, domestic and international, was immediately threatening, in just the way Long Term Credit threatened the bond market, but for some reason Henry Paulson could not understand the problem, which may be from less of a knowledge of the bond market than Robert Rubin had. Lehman had to be rescued, which has nothing to do with rewarding Lehman executives and everything to do with protecting markets.

[Bruce Wilder]

I think bakho has it right: Paulson's "mistake" was not the specific error of "allowing" Lehman to fail. It was the ad hoc approach, continuing a full year after the scope of the problem declining real estate values posed for MBS had emerged in outline. Letting the credit crisis come on in wave after wave (Lehman marked the fourth wave!) without a systematic response to how losses would be realized was extremely foolish. A back-of-the-envelope calculation in August 2007 could have given any well-informed observer a reasonable expectation of the magnitude of loss, which would have to be realized. Thinking that a trillion dollar loss centered on a dozen very large institutions could be "contained" by routine processes seems unaccountably naive.

[Bruce Wilder]

Again, the Fed and Treasury didn't "let" Lehman fail. Lehman failed. The choice was whether to allow ordinary bankruptcy proceedings to handle Lehman's failure. Like Lehman's bankruptcy would be "ordinary".

We don't let podunk commercial banks in backwater towns in the Midwest enter ordinary bankruptcy; we have a process for their expedited liquidation for a reason. To not step in, to expedite the orderly liquidation of Lehman, a huge N.Y. investment bank, was an act of insanity.

Let's not get confused by shorthand language. Lehman had failed; its "rescue" was not an option. What was possible, and advisable, was an expedited liquidation.

Paulson and Bernanke, apparently, thought that the markets had had ample time to magically prepare for the inevitability of a Lehman liquidation. The markets, apparently, thought Paulson and Bernanke had had ample time to prepare an expedited liquidation of Lehman. Oops. No magic. No preparation. (So much for the magic of markets, and the idea that government that governs least, governs best.)

Oupoot thinks the market, lacking the magic Bernanke and Paulson were hoping for, needed a lesson in moral hazard. I doubt the market learned any more than Oupoot from this episode.

Someday, I'd like read an analysis of why soldiers and bankers vote Republican. It seems idiotic.

[roger]

I think Bruce is right: "It was the ad hoc approach, continuing a full year after the scope of the problem declining real estate values posed for MBS had emerged in outline."

The mistake was not in letting Lehman fail, but in letting Lehman lie. After Bear Stearns went down, the logical thing to do was to have the SEC send accountants to go through the books of all the investment banks and map out the problem. The SEC could not do that, of course, because they'd been starved of funds for over a decade. Regulations are no good - in fact, they are pernicious - if the regulator is made a laughingstock before the institutions it is supposed to regulate.

Instead, however, of seeing that BS signaled a problem, the business press pundits congratulated each other on solving a problem. In fact, each time that a problem is compounded by a pseudo-solution, premised on the idea that the market will painlessly self-correct.

[bakho]

Many people assumed when the warning bells were going off during 2007 that the Treasury and Fed MUST be working on some contingency plan to deal with the possible crisis. Our assumption was wrong. We also wrongly assumed that FEMA must have been prepared to deal with Katrina.

The Bush administration seems to be so rigidly opposed to regulation and intervention of any kind that they fail to make the proper contingency plans.

The Waxman committee just raked Greenspan, Snow and Cox over the coals (maybe they "waxed" them) for not coming to Congress to ask for crisis intervention tools in advance. They did not ask for the tools because a crisis like the current one does not exist in their ideology. Why prepare for the inevitable if it is against your religion or ideology and you are in denial?

[paine]

"Letting Lehman fail was a mistake, and it made the crisis much worse"
i agree completely with this
however linking it to what really matters
to the real production of real products system
both domestic-ly and global-ly
i doubt the coming real output and jobs contraction
will be noticeably longer or deeper

a nice bout of sheer panic is just what wall street deserved.......for starters

then a total credit by pass operation *
uncle to real economy directly
g to bizz not g to pri-banks to bizz

* built on the existing in place
hi fi orgs (now drafted and deputized by uncle...
errr...after suitable decapitations
of the biggest suits
in the top suites

[paine]

"A stitch in time saves nine"
not this time comrade

[Easy Money]

Good to see many realize transparency is what matters most. No counting the number of people that needed the Lehman failure to find out just how messed up our financial system had become. Letting Lehman fail was one thing Paulson did right.

The government should not bail out any market. It should set the rules and enforce laws. Other forms of market support and bailouts lead to corruption and crony capitalism. Why not bailout my neighborhood farmers market? Only because they have no PAC and the ability to threaten financial doom. All this concern for saving this or that market only serves to hide problems that need to be fixed.

[paine]

"the logical thing to do was to have the SEC send accountants to go through the books of all the investment banks and map out the problem."

date sensitive truth

if in august 07 such and such had been done
blah blah ........blah

i notice lots of u play if me and myself
were in ben and paulson's seats

a weird blend of the possible and the plausible

might help to lead off with

this was possible for a czar

or

this was plausible for an elected regime
in a system of dispersed power
and limited authority

i get the feeling we ought now to notice our
corporate capitalist system's "limitations"
as an engine of social welfare
and personal liberation

maybe even consider
why ought we bother to rescue it
even in our minds

[paine]

"Good to see many realize transparency is what matters most"
to state a problem is not to solve it eh ???

we'll need to create ample and effective
agent "lucification incentives "here

if there's better money to be gained by hiding facts with curtains....facts will be hidden
and illusions conjured
iron law bans on obscuration misdirection
and fiddle dee diddle
are but formal futile gestures

[paine]

lehmans' top troll
as old boy revenge target
thrown to the helots scape goat
and
" shit america we need a bail out here" wake up call

fuld the trotsky of wall street's politbureau

[anne]

Paine:

"Letting Lehman fail was a mistake, and it made the crisis much worse"

i agree completely with this
however linking it to what really matters
to the real production of real products system
both domestic-ly and global-ly
i doubt the coming real output and jobs contraction
will be noticeably longer or deeper

a nice bout of sheer panic is just what wall street deserved.......for starters

[Interesting argument, but as for panic that would not seem likely to help.]

[Julio]

"i get the feeling we ought now to notice our
corporate capitalist system's "limitations"
as an engine of social welfare
and personal liberation

maybe even consider
why ought we bother to rescue it
even in our minds"

I thought so: That sound was not Lehmann crashing, it was the Emma Goldman Band starting up.

[paine]

anne

"panic"

not help ??

at least it would satisfy my craving for laughter

i try hard not to overly consider
what breed of horse any one rides in here on

but only if you handle aspects
of a foundation or endowment fund's portfolio
can i even begin to make sense
of your some time delicate considerations
vis a vis
the para-gooonish players
on our security markets

[paine]

julio

bravio

[Cynthia]

Bruce (Wilder) writes,

"Someday, I'd like to read an analysis of why soldiers and bankers vote Republican. It seems idiotic."

Idiotic though it may seem, soldiers and bankers vote Republican because they know damn well that Republicans will keep tax dollars flowing their way even if they are knee-deep in moral hazard.

[FOREST FOR THE TREES]

ARSONISTS
BJ Feng
"Lehman had to go down, someone had to fall so that Wall Street could be bloodied by the crisis.

Otherwise main street Americans would not be able to understand why such actions are necessary."

bakho says...
"Lehman was already failed and could not have been 'saved'.

The financial sector is overblown, unsustainable and needs to contract with less money going to fewer institutions. That cannot occur painlessly."

CONTROLLED BURNERS
hari says...
"I suspect a lot of people don't recognize Lehman was world's largest dealer in the bond market - particularly in emerging Asian financial centres including its beachhead in Hong Kong.
The failure of Lehman was a real *schock* to the global financial market - it never recovered from it.

Lehmans entrenched market position on the continent was immense in terms of commercial paper, and its role as an intermediary with American financial centres."

Angelica says...
"Given how the fall of Lehman necessitated the 700 billion dollar TARP, why do you think it would have been a mistake to use a fraction of that money to make Lehman counterparties whole a la Bear Stearns?"

ONLOOKERS (PYROMANIACS)
Bruce Wilder says...
"Again, the Fed and Treasury didn't "let" Lehman fail. Lehman failed.

To not step in, to expedite the orderly liquidation of Lehman, a huge N.Y. investment bank, was an act of insanity."

paine says...
'Letting Lehman fail was a mistake, and it made the crisis much worse'

"i agree completely with this
i doubt the coming real output and jobs contraction
will be noticeably longer or deeper

if there's better money to be gained by hiding facts with curtains....facts will be hidden

fu(e)ld the trotsky of wall street's politbureau

blah blah ........blah

to state a problem is not to solve it eh ???"

GUESS WE'LL WAIT FOR ARBOR DAY

[roger]

Mr. Paine - "i notice lots of u play if me and myself
were in ben and paulson's seats" -

what other way is there to play? The luxury of a comments section is that one is only a player in a game, a video game - this one is called "winding the tape over." In August, 2007, the mistake was a governmental mistake. The Fed's response to minor tremors in the financial markets was to lower the interest rate and start throwing cheap money at financial institutions. They were operating under the mistaken belief that the problem was somehow being driven by a liquidity problem at the top, a little financial sector bump, when they were really being driven by structural problems at the bottom, a long long gap between the percentage of the productivity gain traditionally garnered by the working class and the amount being garnered in the naughties. Blah blah blah. In other words, the government should have been working to "spread the wealth around" way back then. Letting the Fed operate as the entire Federal economic plan was the endgame of an ideology that rules out the state having any role in the economy, except as an irritant. Which is not only delusional, but leads, over time, to truly misunderstanding economic crises.

In this game, the scenario invites us to sit in Bernanke or Paulson's seat. We we are taking a retrospective on whether Lehman should have been saved, I figure we can continue the alternative reality scenario and talk about whether Lehman's lies shouldn't have been investigated by the SEC after having experienced BS's lies. I'd stick with my scenario call.

[Patricia Shannon]

I don't know what "should" have been done about Lehman.
However, I do remember it was pointed out that they were the only ones that had contributed more to Democrats than Republicans. If you don't think it's possible that was at least a factor, you are living on Cloud 9.

[halbhh]

It's thought to be an error by many, since it is not commonly understood that it's a collapsing credit/debt *bubble*.

The idea of hoping to return to "normal" (recent) credit conditions (circa 2006 etc) is especially telling, although I think I've seen less of that instance of the fallacy lately.

Of course in a collapsing credit/debt bubble, the collapse *cannot* be averted.

It can be....prolonged....though.

This is a danger not commonly understood.

Prolonged, drug out, and made to be even worse thereby.

[Lafayette]

OP: It was poorly managed, but they had to let some big company fail eventually.

That is not evident. Why save all the others and not Lehman. The others were better run? Not really.

Not saving Lehman did NOT send the message to the market that had been intended. Meaning "get your act together". Paulson had convinced lead-head that sector integration would save Wall Street investment banking. Wrong, great miscalculation.

You can't save a business that had become a house of cards.

We'll let the Attorney General handle Mr. Paulson after "regime change", since he is ostensibly as guilty as the rest of them. Throughout this crisis, he's just tried to save his sorry ass and that of his species.

The real solution was not (only) illiquidity but insolvency, which Gordon Brown recognized after having consulted with the Swedes who had gone through this problem a while before. (Read about it here.) The answer was there all along, but the nerd for Wall Street couldn't tell the forest from the trees.

Which is why so many people are so upset. How did such ignorant people earn so much money? They'll walk away from this crisis smelling like roses, whilst the rest of smell like ....

[anne]

What is never mentioned about letting Lehman Brothers fail is what was always mentioned in Japan during the 1990s and what Paul Krugman alone emphasized then, that is protecting jobs, protecting not a few jobs but hundreds of thousands of jobs that are even now being lost directly in the finance industry and indirectly as many jobs in connected fields. The need was to protect workers, which Japan did and we are not doing. Japan avoided any significant recession, we are not so avoiding a significant recession.

Why is there no mention of the jobs lost at Lehman?

[Anthony Wikrent]

The really big mistake was rescuing AIG. The collapse of AIG should have been used to demolish the shadow banking system and Wall Street once and for all. That would have been the only way to save the real economy. But, such was never in the cards, because - to borrow the headline from Chris Hedges's piece last week - "the idiots who rule America" cannot conceive of sacrificing Wall Street to save the real economy. As Hedges wrote: "Our elites—the ones in Congress, the ones on Wall Street and the ones being produced at prestigious universities and business schools—do not have the capacity to fix our financial mess. Indeed, they will make it worse. They have no concept, thanks to the educations they have received, of the common good. They are stunted, timid and uncreative bureaucrats who are trained to carry out systems management. They see only piecemeal solutions which will satisfy the corporate structure. They are about numbers, profits and personal advancement. They are as able to deny gravely ill people medical coverage to increase company profits as they are able to use taxpayer dollars to peddle costly weapons systems to blood-soaked dictatorships. The human consequences never figure into their balance sheets. The democratic system, they think, is a secondary product of the free market. And they slavishly serve the market."
http://www.truthdig.com/report/item/20081020_the_idiots_who_rule_america/?ln

So now the financial markets are in pure panic mode, world wide. Neo-liberal economics has become nero-liberalism, and the generations of business leaders, economists, and others who have been mis-educated these past four or five decades are simply incapable, by the very nature of what they believe, of finding a solution.

[Henderson]

Allowing Lehman to fall was the worst decision that can taken given situation since all the creditors will withdraw there money from the financial system converting sub-prime mortgage crisis into a recession. If government wouldn't have bailed out AIG that would be another depression.