The Martyrdom of Lehman Brothers

by ANDREW COCKBURN

Now that five years have passed since Lehman Brothers died, very nearly taking the global financial system over the cliff in the process, it is surely time to erect a suitably inscribed tombstone over the grave.

Among possible legends that might be etched under the name and dates of the deceased, only one could truly commemorate the failed bank’s singular contribution to the community in which it lived: martyr.

No matter that the bank routinely manipulated its balance sheet, recklessly gambled away billions and ruined thousands of customers by selling them ultimately worthless financial “products”, the system that nurtured it and its peers survives.

By shaking the pillars of the global financial system in its death throes, Lehman ensured that no other major bank will ever be allowed to fail again, however deserving it may be of the bailiff’s knock.

Officially of course, the US government is quite prepared to dismantle any firm, however big, that again threatens the system. The Dodd-Frank Wall Street Reform and Consumer Protection Act, the legislative response to the crash signed into law by US president Barack Obama in July, 2010, theoretically enables the authorities to seize and dismantle a failing institution whose collapse would once again threaten the whole system.

Its 2,300 pages include intricate directions under which banks with more than $250 billion in assets should devise “living wills”, blueprints for their own orderly deconstruction.

Mr Obama has subsequently touted the “tough regulation” he imposed on banks with this legislation. Wall Street eminences, such as JPMorgan Chase chief executive Jamie Dimon, assiduously endorsed the notion with regular complaints about the regulatory straitjacket they must now endure.

The problem is that no one really believes that there is any threat at all to the continued existence of the “too big to fail” banks, six of which are American with a further 23 based in Europe and Asia. Thanks to the Götterdämmerung of Lehman’s passing, the survivors have been placed on permanent life support.

The Big Six

Thus, bondholders investing in the six biggest US banks are so convinced that the government will always bail out these institutions that they are willing to accept lower returns than they would get from investing in smaller banks.

For the big six – JPMorgan Chase, Bank of America, Goldman Sachs, Wells Fargo, Citigroup and 220px-American_CasinoMorgan Stanley – this subsidy on borrowing costs has been calculated as amounting to $82 billion in extra profits between 2009 and 2011 alone.

The Federal Reserve, meanwhile, directs a ceaseless stream of cash at these same behemoths in the form of purchases of their holdings of mortgage-backed securities and other mechanisms.

The fact that the system is geared to preserving and bolstering the very same kinds of institutions that brought us so close to ruin does generate the occasional expression of disquiet in official circles, especially when episodes such as the multi-billion dollar train wreck inflicted by JPMorgan’s “London Whale” indicate that the global financial industry culture may not have changed all that much.

“The ‘oversize banking’ model of too big to fail is more dangerous than ever,” declared IMF managing director Christine Lagarde a few months ago, urging “more intense and intrusive” controls.

Unsurprisingly, this is not the message that comes from the big banks’ own management. As James Gorman, head of Morgan Stanley, told an interviewer recently, the probability of another 2008 crash “in our lifetime” is “as close to zero as I can imagine.”

“He may not know what’s happening inside his own bank, let alone the others,” scoffs Jeff Connaughton, author of The Payoff – Why Wall Street Always Wins, “all of them [the mega-banks] are basically dependent on the implicit guarantee of a government bailout.”

A former White House lawyer and Senate staffer, Connaughton was at the heart of a valiant effort in the immediate aftermath of the crisis to take apart the biggest banks. The effort, he recalls, was doomed to failure thanks to the official dogma (shared on shores far distant from Washington) that “we can’t harm one hair of a banker’s head”.

No one has ever explained exactly why Lehman was denied a government bailout in its last desperate days (one Wall Street theory holds that the bank’s chief executive,Richard Fuld, had once at a party stepped on the foot of Henry Paulson, the former Goldman Sachs chief who headed the US Treasury during the crisis, and hadn’t apologised) but clearly, in dying it allowed others to live.

Some lived better than others of course. Upper level Wall Street paychecks remain remarkably handsome (Gorman made just under $10 million last year) and no one has gone to jail for the frauds of yesteryear, while small investors around the world never regained the life-savings vaporised in the disaster. The rest of us must endure the austerity regimes mandated by the major banks as a condition of their support for governments’ own borrowing. Someone always has to pay the price of martyrdom, including the cost of that headstone.

Andrew  Cockburn is  the co-producer  of American  Casino, the 2009  documentary  on the Wall  Street crash.

This article originally appeared in the Irish Times.

Andrew Cockburn is the Washington editor of Harper’s Magazine.  An Irishman, he has covered national security topics in this country for many years.  In addition to publishing numerous books, he co-produced the 1997 feature film The Peacemaker and the 2009 documentary on the financial crisis American Casino.  His latest book is Kill Chain: The Rise of the High-Tech Assassins (Henry Holt).

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