Sunday, September 14, 2008

Lehman Headed For Liquidation?

Despite rumors to the contrary it appears that there will be no bailout or other deal to save Lehman brothers from going under.

Apparently, the sovereign wealth funds got out early and at the end the two leading contenders for taking over Lehman was Bank of America and the British bank Barclay's. However, both demanded some form of government support and at least for now it appears (though it can't be ruled out that this will change) that Henry Paulson stands by his earlier opposition to this.

This means that unless someone change their attitude Lehman brothers will be liquidated, something which will cause downward pressure on the price of financial assets. In the long term, this would be good as it will speed up the adjustment process and discourage future reckless behavior but it will in the short term aggravate the economic downturn.

As more news arrive, I'll probably return to this story.


Blogger Rebecca Wilder said...

If the U.S. government does not finance a bailout (and it is looking that way), that will reduce some of the moral hazard pressure that has been building in the wake of F/F and Bear. Allowing banks to fail will hurt a little in the short run, but it is efficient to allow market forces to define the winners and the losers.

10:47 PM  
Blogger Allen said...

I'm with you both, I too think in the long run it would be best to let them fail.

4:44 AM  

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