What If Lehman Brothers Was Saved?

Over the past week, I’ve been interviewing investors, economists, and other financial experts for BusinessWeek’s upcoming Investment Outlook issue. Again and again, many of these informed folks bring up the Lehman Brothers bankruptcy as the watershed moment/inflection point in the recent financial crisis. Some even muse how different the world might be if the venerable investment bank had not been left for dead. As we all know now, the ripple effect of Lehman’s bankruptcy on money market funds, the banking sector, you name it, was devastating to the financial world.

I’ve been thinking about this a lot, and then I thought about it some more last night after I read a few of the comments from the recent New York Magazine profile of Lehman CEO Richard Fuld. (If you haven’t read that haunting article by Steve Fishman, do it now. It’s a terrific read.) As Fishman wrote:

Fuld understands the political usefulness of Lehman’s collapse. The resentful public got to witness the devastating consequences of a financial failure. Four days after Lehman’s collapse, the government had to bolster the money markets, once the most secure of investments. Two weeks later, a frightened Congress handed [Treasury Secretary Hank] Paulson $700 billion, part of which he quickly doled out to the country’s largest investment banks at advantageous interest rates. If only he’d had that money before, he might have been able to save Lehman, Paulson told interviewers. To those close to Fuld, Paulson was simply covering his ass, doctoring the story post facto. “They could have found a way to save Lehman,” says a person involved with both the Bear Stearns rescue and the Lehman failure.

The Lehman bankruptcy hits especially close to home because the former Lehman Brothers building is literally across the street from BusinessWeek’s offices. I walk by there a lot. Although I bring lunch to work more often than not these days, my favorite soup takeout restaurant is on the ground floor. In fact, my colleague and I just said hi to the Lehman-cum-Barclay’s security guard who stood vigil at the company’s front doors amid the bankruptcy mayhem. He’s a big guy, but exceptionally polite. Maybe he is an ex-New York cop?

“Glad to see you are still here,” I said. “I’m glad I’m still here, too,” he replied.

But Lehman is not here any more, which begs the question: What would the global markets be like if Lehman Brothers, like Bear Stearns before it, and others after it, was deemed too big to fail? Would my 401(k) plan be in better shape? (Not that I would know. I haven’t checked account balances since August.)

I realize this is a Sliding Doors-type of question, and that we cannot change the past, but it’s still instructive to imagine “What If…?”

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