Another take on Jim Rogers’ tough-love theory from Demon Of Our Own Design author Richard Bookstaber…
Aaron Task: One year later, the consensus among regulators is letting Lehman Brothers file for bankruptcy was a mistake.
Famed hedge fund manager Jimmy Rogers says otherwise, telling The Financial Times: “Letting Lehman fail was perhaps the only thing governments have done right during this whole drama.”
The outspoken money manager goes on to say the 1998 rescue of Long Term Capital Management (LTCM) was the financial market equivalent of original sin and the resulting moral hazard led to “the madness of serial bubbles.”
But Richard Bookstaber, author of A Demon of Our Own Design and noted expert in risk management, disagrees.
First, it’s wrong to call LTCM a bailout, since the fund’s investors and principals suffered huge losses, he says. Second, had the Fed not intervened in 1998, Lehman Brothers would have failed then, triggering the same kind of domino effect as its 2008 bankruptcy caused. “At some point, the government has to step in and protect people who are not really involved,” he says.
In a similar vein, Bookstaber believes letting Lehman fail in 2008 was a mistake because of the “acute pain” that came thereafter for both Wall Street firms and the economy as a whole.
That said, he is not a proponent of bailouts in which lenders are made whole and “key decision makers and traders…still pocketed money from many other years based on apparent profits.”
Bookstaber, who has testified before Congress numerous times on related issues, says the key for regulators is to change the incentive structure on Wall Street so senior management is “only the hook” if trades go awry in such dramatic fashion. (Bookstaber’s testimonies are available on his blog.)
“It would be nice if we get to the point where there’s no notion of ‘too big to fail’ and we should be developing regulation to allow that to happen,” he says. “But you can’t pull that safety net away given the regulatory structure and the huge size and interconnectedness of the firms today.”
In other words, not much has changed in that department in the year since Lehman’s failure.
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