Business

Thursday August 20, 2009

Why was Lehman Brothers allowed to collapse?


IN dealing with the Influenza A (H1N1) pandemic, the Malaysian Government has, at least based on the media reports and anecdotal evidence, been very actively dealing with it. Unlike the SARS crisis, the number of people infected has been much lower.

Maybe this is due to the fact that the Malaysia and other governments have been more careful with this pandemic. Or perhaps the situation is not that serious in the first instance. Nevertheless, we are not medical experts and would trust the proper authorities to deal with it.

The issue is not in the way we handle the pandemic. The sense of urgency is right and the publicity given is appropriate. What really bothers us is that there are so many more urgent and important problems that have been outstanding for so long and they have been neglected perpetually with lame excuses. Why are we not dealing with them in the appropriate manner?

Well, Malaysians would not be surprised with the way our priorities are set wrongly. It is most typical and expected. However, this acting-very-busy-but-doing-nothing performance is not confined to the Malaysian Government. The United States is guilty of the same.

The United States is very famous for having regular testimonies and endless committees on endless issues. The current testimony by Federal Reserve chairman Ben S. Bernanke is an excellent example.

Regarding the acquisition of Merrill Lynch by Bank of America, Bernanke gave his testimony before the Committee on Oversight and Government Reform in the US House of Representatives at Washington and was grilled again and again.

Before this, there were the testimonies by General Motors, Ford, and Chrysler to the Congress. It is impossible to list all the testimonies because the list is very long but the impression one gets from following them is about a government that is extremely responsible and very accountable, and very proactive about dealing with all kinds of problems.

There is no denying that many of the issues being dealt with by the US Congress are of extreme importance. The point that i Capital would like to make is that the “mother of all issues” has been conveniently left out or forgotten. What is this issue that no one in the West wants to talk about?

What is this issue that even the Western mass media has been eerily and disquietingly silent on? It is so uniformly silent that one gets the very uneasy and uncomfortable feeling that there is a collusion of silence, intentional or otherwise.

The current US-led financial crisis has led to a severe economic contraction, not only in the United States but globally. Most observers have blamed this on problems arising from the US subprime and housing bubble. i Capital puts the blame squarely and simply on the collapse of Lehman Brothers, which immediately led to the Lehman Panic and caused a global panic.

i Capital believes there is much convincing evidence of the role this single collapse has on many aspects of the economy and financial markets. However, i Capital shall just show two very visual evidence of the tremendous impact the collapse of Lehman Brothers caused.

The Dow Jones Transport Average chart shows from 2006 until May 2008, even though this index went up and down, it was generally moving in an upward trend. This index is made up of railway, logistics, and airline companies and companies like UPS and FedEx.

Their businesses are extremely sensitive to economic conditions. Their business would almost immediately slow down the day the economy slows down. US house prices peaked around mid-2006. US housing starts and housing sales peaked in mid-2005. From 2006 to May 2008, the US house prices, sales and starts plunged month after month and the subprime problem got worse and worse.

Yet, from 2006 to May 2008, this extremely economy-sensitive index kept rising and made an all-time high around May 2008. By August 2008, the transport index had fallen only a few per cent. If the plunging US house prices, sales and starts, and rapidly worsening mortgage problem had caused the economic recession, why is it that this economy-sensitive index did not fall from 2006 to August 2008? Why did it plunge only in September 2008 at the same time when Lehman Brothers went unrescued and unwanted?

The second chart shows US housing starts and US gross domestic product growth from 2006. Why was the US economy still generating positive economic growth from 2006 to mid-2008 even though US house prices, sales and starts were plunging and the housing mortgage problem was rapidly worsening? Why did the US economy only contract in the third quarter of 2008, the period when Lehman Brothers was “forced” to collapse as an abandoned financial child?

The answer is simple. The surprising collapse of Lehman Brothers led to a panic so huge, so pervasive that normal business activities came to a standstill. The cause of the severe global slump and the plunge in stock markets was simply the “Lehman Panic”.

i Capital is not trying to establish the real cause-effect relationship. It is already very clear. Only those who refuse to see the real cause and effect have not seen it. i Capital is asking some simple but vital questions, questions that no one in the West is asking.

Why was Lehman Brothers allowed to collapse?

Earlier in 2008, Bear Stearns was very quickly rescued. Come September, so were Fannie Mae and Freddie Mac, Merrill Lynch, Citigroup and AIG all got urgent help. Bear Stearns was smaller and far less important than Lehman Brothers.

In September 2008, gigantic financial institutions were already falling like tenpins and markets were already extremely nervous. The Fed and the US Treasury surely would know the consequences and how severe they would be if Lehman Brothers, in such a nervous and fragile environment, was not rescued at once.

The Fed and the US Treasury surely would know the exposure of Lehman Brothers and its linkages with the counterparties everywhere. If moral hazard was the reason for not rescuing Lehman Brothers, why then rescue so many others at about the same time?

We do not know why Lehman Brothers was not rescued. This is very troubling. Even more frightening is, the subsequent unperturbed silence. What we do know is that no one is asking why it was not rescued. So, i Capital rephrases its question: Why is the “mother of all issues” not being asked by the relevant parties ?

Why is the US Congress not conducting extensive and intensive hearings into this fundamental issue? So, it appears that this acting-very-busy-but-doing-nothing behaviour is not only confined to the Malaysian politicians. The US politicians are guilty of the same crime.

Even more puzzling is the absence of supposed responsible investigative reporting from the Western mass media. Where is the critical and objective journalism that the Western mass media is so proud to boast of? Why is the disquieting silence so unsettling? What is the hidden agenda?

Without really knowing why Lehman Brothers was not rescued, how can we know how the US government conducts its monetary and economic policies? Without really knowing why Lehman Brothers was not rescued, how can we tell what the future monetary and economic policies of the US government would be? If no one asks the right questions, how can we get the right answers and policy solutions?

  • E-mail this story
  • Print this story