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The collapse of Lehman Brothers, a year ago next week, symbolised the global financial crisis. But did it cause it?
It did, but in the same way that the assassination of Archduke Ferdinand in Sarajevo caused the First World War: it was a catalyst.
The financial crisis, like the First World War, was going to happen in any event. That does not make its consequences, still unfolding, any less cataclysmic.
Lehman's was a 158-year-old institution and the fourth-largest investment bank in the US. Like other investment banks, it had become deeply involved in the practices which contributed to the dangerous instability in banking institutions.
It traded extensively in complex, structured products such as mortgage-backed securities. It was heavily involved in sophisticated financial derivatives, mostly credit-default swaps.
And it operated on the basis of enormous leverage, enabling big returns to be made on shareholders' equity but greatly increasing risk.
There had been a succession of panics and near disasters in the banking system throughout 2008.
The system came closest to crisis point in March when another US investment bank, Bear Stearns, had been rescued from collapse.
The Federal Reserve decided that the house of cards could not be allowed to collapse, not least because there was a staggering $10 trillion of derivatives to which Bear Stearns was counterparty.
For the first time, an investment bank was considered "too big to fail".
The bank was rescued with a $29 billion credit line, leading to a takeover (by JP Morgan) at a knockdown price.
The crisis at Lehman's shared some common elements with that at Bear Stearns, not least a vast exposure as counterparty to credit derivatives.
But on this occasion the US administration made the crucial decision to let it go bankrupt.
They decided that the bank was insolvent rather than illiquid and could not be rescued through a credit line in support of a private takeover (in this case the potential "white knight" was Barclays).
There has been fierce debate ever since as to whether this was the correct call.
But the US administration clearly felt that the direct government support or guarantees demanded - including by the British Government, which would not support a Barclays takeover without them - involved the US taxpayer taking high risks while leaving a private bank to take future profits.
An alternative would have been to nationalise the bank. At this stage of the crisis, nationalisation was no longer a dirty word, even in the Bush administration.
It had already taken over the country's main mortgage lenders (the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, Freddie Mac and Fanny Mae).
With hindsight, Lehman's should have been nationalised because of the enormous systemic risk involved.
But the US administration took the view that the risks of collapse were manageable and that it was time a big bank was taught a lesson, "pour encourager les autres" (one of the "autres", Merrill Lynch, quickly took the hint and sold out to the Bank of America for a tiny fraction of its pre-crisis value).
The ensuing panic and contagion spread through the world financial system.
Strikingly, depositors did not panic as in earlier crises (or at Northern Rock the previous year), mainly because savers had been reassured that governments could provide a safety net.
But inter-bank lending dried up and share prices collapsed, leading to the near-meltdown in October of the whole banking system until government guarantees, recapitalisation and part-nationalisation saved the day.
This intervention, together with aggressive economic policy including the slashing of interest rates and big budget deficits, has staved off Armageddon.
The End of the World is no longer Nigh. But the early signs of recovery are tentative at best - and there is potentially a painful and costly legacy for British and US taxpayers, the unemployed and other victims of the crisis.
The most worrying aspect of the financial crisis's aftermath is a palpable sense in the financial community that what happened was just an unfortunate accident caused by a misjudgment on the part of the US administration.
They argue that nothing was, or is, fundamentally wrong and so we can now go back to business as usual, bonuses and all.
This is a dangerously and foolishly wrongheaded notion which, if unchecked, will lead in due course to even greater grief.
Indeed, more thoughtful people in the financial community, such as Stephen Green at HSBC, Lord Turner of the FSA and, this week, Lloyd Blankfein at Goldman Sachs, already worry aloud that much of the activity in their industry is of limited economic and social value, if not actually dangerous.
Yet there is a serious loss of momentum in the UK behind reforms designed to reduce the risk of a similar, or even bigger, crisis recurring.
The nettle has not yet been grasped that banks which are too big to fail are just too big.
Barclays, having successfully snapped up what was left of Lehman's, has embarked on a mission to become the world's largest investment bank, knowing that, at present, it can rely on British taxpayers' guarantees.
The bonus culture, which Lehman's embodied, is coming back with a vengeance. Little progress seems to have been made to create a clearing house for over-the-counter derivatives.
The return to economic "normality" is being heralded by merger activity such as this week's unsuccesful bid by Kraft for Cadbury's, which reduces competition but nets fat fees for the banking and legal intermediaries.
Civil servants are working away in international committees to produce modest, worthy reforms to bank regulation. But the political leadership is no longer there.
The Government seems to have bought the self-serving arguments from the banks that measures to rein in damaging behaviour will "undermine the competitiveness of the City" or "discourage innovation".
Archduke Ferdinand's legacy wasn't just a world war but a failure to learn from that war, leading to another.
I fear that Lehman's ultimate legacy may not just be the last financial crisis but the next one, too.
Reader views (4)
Vince Cable - the man with 20/20 hindsight.
- Roger, Winchester, England, 14/09/2009 21:16
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To blame the crisis on bankers is wrong. It was Blair and Brown's 10 years of maintaining weak and ineffectual regulation coupled with their desire for unsustainable growth to fund their spending plans that were the cause of this financial disaster.
Analysis has shown that there has been next to no real growth since Brown and Blair came to power. It has all been created by borrowing on artificial asset inflation and pointless public sector jobs - to claim otherwise is simply dishonest.
- Andy Davids, London, 14/09/2009 09:33
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The real scandal is the bankruptcy of all American and British insurers and hopelessness of all Anglo-Saxon management consultants. The sooner Han communists take over the reins of running dog capitalists the better.
- Paul Lettan, Old St Pancras, London, 11/09/2009 16:41
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The way the stock market is now 'flying high' is a sure indicator of instability and another major drop coming at some point. The market moves on emotion, and as soon as the euphoria of coming out of 2008 in one piece wears off for most, watch out.
- Phil Jones, London UK, 11/09/2009 14:31
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