lehman brothers
International Finance
Assignment: Mini case (Letting Go of Lehman Brothers)
AGHA ZAIN HAIDER
Q1) Do you believe that the U.S. government treated different financial institutions differently during the crisis? Was that appropriate?
This question that whether the government treated some institutions differently is not a difficult one to answer. Saving AIG and letting go Lehman brothers defines it all but they had their reasons. The (FDIC) would say that AIG having collateral whereas Lehman brothers showing no such promise for payback was the reason for different treatment.
Lehman Brothers failure was a wakeup call for government. However, if Lehman Brothers had been aided, perhaps the financial world would not have come to a screeching halt, stopping lending and borrowing altogether for a brief period of time.
Institutions confidence in the system led them to this point whereas government was expecting Barclays and American bank to intervene which they never did. 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.
Q2) 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. What do you think?
It is human nature to push limits, and the moral hazard argument fits very well with the Lehman brother’s 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. Perhaps it was very important to let one financial entity fall so
Assignment: Mini case (Letting Go of Lehman Brothers)
AGHA ZAIN HAIDER
Q1) Do you believe that the U.S. government treated different financial institutions differently during the crisis? Was that appropriate?
This question that whether the government treated some institutions differently is not a difficult one to answer. Saving AIG and letting go Lehman brothers defines it all but they had their reasons. The (FDIC) would say that AIG having collateral whereas Lehman brothers showing no such promise for payback was the reason for different treatment.
Lehman Brothers failure was a wakeup call for government. However, if Lehman Brothers had been aided, perhaps the financial world would not have come to a screeching halt, stopping lending and borrowing altogether for a brief period of time.
Institutions confidence in the system led them to this point whereas government was expecting Barclays and American bank to intervene which they never did. 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.
Q2) 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. What do you think?
It is human nature to push limits, and the moral hazard argument fits very well with the Lehman brother’s 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. Perhaps it was very important to let one financial entity fall so