Why did Lehman Brothers not get bailed out?

Jason ye

11/11/2013

GVPT200

     The financial crisis of 2008, which is also known as the Global Financial Crisis is considered by many people the worst financial crisis since the 1930s Great Depression. It resulted in bankruptcy of financial institutions, high rate of unemployment, collapse of the stock market and bailed out from the U.S government to some of the biggest financial institutions in the U.S. So why did the U.S government bailed out American International Group, Bear Stearns and nationalized Fannie Mae and Freddie Mac but did not help out Lehman Brothers and let it fail.

Frist reason, in my opinion, the U.S government bailed out American International Group instead of Lehman Brother is all about the impact on financial markets. American International Group is the largest insurance company in the world, it insures not just millions of people but also corporations around the world as well. It also insures millions of dollars issued by the financial institutions’ lenders and borrowers. If American International Group collapse, it will have a tremendous effect on those financial institutions that are insured by the American International Group, which may result in collapse of those financial institutions too. The American International Group is like an ignorant kid playing with matches, he could harm not only himself, he could have burn down the entire block, the Fed stepped in not just to save him but also save the entire block, on the other hand, Lehman Brother is more like a kid who pulls the tail of a dog and got attacked by the dog, himself is harmed by the dog but nobody is harmed because of that, so nobody really care about it that much.

Second reason I think why Lehman Brothers did not get bailed out by the U.S government is because its lacked collateral for a loan. During the 2008 financial crisis, before the Troubled Asset Relief Program (TARP) was established, it was illegal for the government to inject capital into Lehman Brothers. Unlike the American International Group, which had insurance addendum that can be evaluative, the Lehman Brothers lacks of ancillary resulted in the Federal Reserve deiced not to bail out Lehman Brothers. Lacked collateral is also a reason why the two potential buyers – Bank of America and Barclays decided to back out at the last moment. Also, there were concerns of “lending into a run”, some top government officers feared giving Lehman Brothers loan can cause its customers to flee away which will ensuring its bankruptcy.

The last reason why the U.S government did not bail out Lehman Brothers is that the risk to taxpayers is high, like Bernanke said, “Lehman's status as a going concern was "melting away" as trading partners pulled back from the firm amid questions about its capital position and access to cash. The Fed couldn't have lent to Lehman without risking a large loss.”

Overall, the reasons why the U.S government didn’t bail out Lehman Brother are reasonable, but it might be better for the economic if the U.S government had bailed out Lehman Brother.