Learning Absolutely Nothing from Lehman

Tired of Lehman Brothers Holdings Inc.? Weary of turgid, dutiful recapitulations of events from last year? Everyone is doing it (hell, I did one in a column in last week's The Deal magazine), and it might be palatable if anyone really had anything new to say about Lehman, Merrill Lynch & Co., Bank of America  Corp.(NYSE:BAC) or Ben Bernanke, Timothy Geithner and Henry Paulson or, for that matter, shorting. Maybe the low point came over the weekend when a BBC-produced show on National Public Radio offered a seemingly endless recreation (fake voices, seemingly fake dialogue) of the financial events that did in Lehman. This seemed to consist of lots of deep male voices self-importantly telling things to each other that the shoeshine guy knew. Stilted is a compliment. It was like getting trapped in an endless round of meetings; in other words, it was like a speed read of David Wessel's "In Fed We Trust."

For all the vast outpouring of retrospectives (including Wessel in Monday's Wall Street Journal describing all the innovative stuff Bernanke et al. pulled off), two things stand out. First, no one can yet explain what regulators were doing between the fall of Bear Stearns Cos. in March 2008 and the collapse of Lehman Brothers, which, yes, the shoe shine guy suspected might be coming. In Monday's paper, Wessel inadvertently deepens that matter with the comment that "top officials" had no idea that the Reserve Prime money market fund was stuffed full of Lehman paper. Really? The systemic issue with Lehman was not that it collapsed, but that it was so deeply interconnected with key parts of the financial sector. Regulators had clearly been frightened by the extent of Bear's credit default swap exposure; but according to Wessel in his book, Bernanke and Paulson thought that the rest of the Street had already begun to pull back. Now there's this stray fact about the money markets.

It is important, as the president will say Monday to a Wall Street audience, to get the power to move in and shut down a failing firm. But it's really unsettling to know that regulators drifted into the Lehman situation not really knowing what the systemic profile of the firm was. Did they have to be in the dark? Were there things that they could have known and gamed out -- like the money markets? What were they really up to in those seven months? Why were they continually surprised?

The second thing that's really obvious is that despite Washington's large role in inflating the bubble, then trying to save us all from its consequences, politics is now more a part of the game than ever before. I'm not really talking about matters like bailouts, bonus debates or even lobbying. What I'm talking about is the longer-term macroeconomy and the role of the Federal Reserve. The New Republic this week features a piece by Peter Boone, who works for a unit of the London School of Economics, and the ubiquitous Simon Johnson of MIT arguing that the very steps that got us out of the short-term mess -- the very innovations Wessel praises -- will create yet another, even more devastating bubble. The pair are a little vague about where and when that bubble will occur (they gesture toward capital flowing into some Asian and Latin American markets), as is The New York Times, which leads Monday's Business Day with a grab-bag of a story about the next bubble as well.

Now talking about the inevitability of the next bubble is an easy game to play: Who's going to say you're wrong? And we're certainly going to be in for bubble prognostications, ala the Times, every time a market surges (as we were regularly after the dot-com bust, leading one to suspect that promiscuous bubble forecasting may desensitize us to the real thing). But Boone and Johnson are absolutely right about the politicization of the Fed, nearly every aspect of which points to a simulative, liquidity-driven return to growth. The bailouts and the recovery are fueled by low-interest rates. Congress has failed so far to do anything with regulatory reform. If the Fed does get systemic regulatory powers, it will have traded any autonomy left (and after all the bailouts, not a lot was left) for increased power. And Congress and the administration, both of which define the origins of the crisis as a matter of out-of-control bonus-happy bankers and debt-crazed consumers, seemingly can't return fast enough to the pre-Bear status quo, with some tightening of enforcement throughout the system, though how long that will last is anyone's guess.

Who knows what may change this situation? But the real lesson of the Lehman meltdown and failure may turn out to be that it was not a deep enough shock to change a political and economic system that seems to require liquidity-driven growth, just as it hasn't changed global trade imbalances in the least. The real lesson of Lehman and of all these recaps may be that we've learned very little at all. - Robert Teitelman Robert Teitelman is the editor in chief of The Deal.

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