It is extraordinary that one year after the collapse of Lehman Brothers many of its former employees still feel cheated.
Many of those who didn’t land a job with Barclays, the British bank that bought the remains of Lehman out of bankruptcy, seem to feel that they were deprived of an entitlement to keep their jobs, their fortunes, and their reputations despite the failure of the business they worked for.
In short, they feel that they were entitled to a bailout by their fellow Americans.
Today Jane Pedreira, a single mother who worked in Lehman’s research department, explains the sad story of her plight on the op-ed page of the New York Times. She was laid off, told she couldn’t remove personal files from her computer, deprived of a promised severance and told she could only keep her health insurance if she could pay for it herself. She still has trouble paying her bills.
We’re sympathetic to her situation. Getting laid off sucks, especially when you are good at your job and the economy makes it tough to find a new position.
But Pedreira’s sense of entitlement is ridiculous.
I was robbed first by Ben Bernanke, the Federal Reserve chairman, and Henry Paulson, the former Treasury secretary, who refused to support a sale of the company, and later by the bankruptcy judge who approved the sale of Lehman to Barclays for peanuts.
What is Pedreira talking about? The only thing she was possibly robbed of was a bailout. That’s what she means when she claims that the Fed and Treasury “refused to support a sale of the company.” She means that they refused to take money from the American people to subsidise the sale of the company. Because they sure were supportive of a sale–indeed, they had been urging one for months and spent that calamitious weekend a year ago desperately trying to arrange a sale in the face of fierce resistance by Lehman’s executives. They just weren’t willing to put the rest of us on the hook for Lehman’s mistakes.
Where did this sense of entitlement come from? No act of Congress or consent of the American people ever assured her of a bailout. Exactly the opposite was the case: over and over again the elected and appointed officials stressed that under our somewhat free-market system firms that the market rejected as too risky would be allowed to fail.
Indeed, it was this sense of entitlement to other people’s money that helped create the failure of Lehman. Its executives—especially chief executive Dick Fuld—assumed that the government would not allow Lehman to fail. And others on Wall Street were only willing to rescue Lehman if they too were permitted access to the public coffers. Lehman counter-parties and creditors—and the Reserve Bank money market fund in particular—also seemed to have assumed access to taxpayer money.
This sense of entitlement is made all the more obnoxious by the fact that the executives—and, to a large extent, the everyday employees (including research analysts like Pedreira)—were highly compensated for profits the firm earned by taking on risks the costs of which they expected to be able to stick with taxpayers of their bests went wrong. The phrase for this is “privatized profits and socialized risk.”
Perhaps Pedreira thinks that the prior and subsequent bailouts of financial firms create some kind of de facto entitlement to bailouts. But this is nonsense, dangerous nonsense. The explicit public purpose of the bailouts were to stem systemic risk that may have ruined the broader economy. The idea was that the taxpayers would foot the bill now to avoid worse consequences later. (This may be very wrong-headed.) It certainly was not to make sure people like Pedreira would never lose their jobs, have their firms shut down or have trouble paying their bills.
“I know the public at large doesn’t have sympathy for Wall Street employees, but did I deserve to be robbed because of the mistakes of others?” Pedreira concludes.
We’re sorry, Miss Pedreira, that you lost your job. But that’s what happens when your employer goes out of business. And, according to our president, we’re now working hard to make sure that this is what will happen in the future. That’s what all this talk about “resolution authority” is aimed at. Working on Wall Street isn’t a guarantee that you are immune from the market.
You weren’t robbed. You just didn’t manage to rob the rest of us.
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