Trying to make sense of today’s banking turmoil? Start with our reading recommendations
The Fed and Lehman Brothers: Setting the Record Straight on a Financial DisasterIn September 2008 Lehman Brothers failed, setting off a disastrous and deep credit crunch that threatened to tip the world economy into a depression. The bank was not saved by the Treasury or the Federal Reserves and officials have since insisted that a bailout was not legally possible.
When an economy is purring, profits go up, as do asset values. Credit becomes easier to obtain, spending rises and the boom intensifies. Investments come to seem less risky. But when the mood turns, the feedback loop reverses direction. As asset prices fall, banks grow stingier. Firms feel the pinch, fall behind on repaying their debts and sack workers, who then struggle to pay their debts. The desperate sell what they can, so asset prices tumble, worsening the crash. Mania turns to panic.
, known as “Fred the Shred”, was the chief executive of Royal Bank of Scotland, briefly the world’s largest bank, before it collapsed into the arms of the British state in the country’s biggest bank failure. The anecdotes packed into the book show a man who was compulsive about small irrelevant details, yet who was never fully able to grasp the risks his bank was running or how dangerously thin its cushion of capital was.
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