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Macro & Geopolitical

The Five Real Lessons from Lehman

September 2018 - 4 min read

It's been 10 years since the collapse of Lehman Brothers. Christopher Smart, Head of Macroeconomic & Geopolitical Research, reflects on what the crisis taught us about market dynamics - and human nature.

September in the Northern Hemisphere means the end of summer, the start of school and, this year, a slew of retrospectives marking the 10th anniversary of the collapse of Lehman Brothers and offering a solemn review of its lessons.

While the reminiscences frequently leap from the emotional shock of those weeks to the politics of who should have gone to jail and the relative merits of the Consumer Financial Protection Bureau, the real lessons should center around market dynamics and human nature. Here are my top five.

1. Remember the Laws of Gravity
When something falls from a great height, it needs a great deal of cushion to absorb the impact. Banks that were far too levered could hardly be expected to survive the impact—and they didn’t.

There will always be debates about the correct amount of loss-absorbing capital to have on hand, but it is almost always more than you think.

2. You Will Never Regret Investing in Sound Plumbing
The great aggravating circumstance amid the chaos of the financial crisis was the inability to know who stood on the other side of many trades. The establishment of central clearinghouses for derivatives represents a marked improvement in financial transparency. If a counterparty has a problem, it no longer casts doubt on flows through the entire system.

3. Pendulums Swing—And Overshoot
When it comes to regulation, too much naturally strangles innovation and growth. Too little leads to sloppiness and fraud. There is much to dislike in the Dodd-Frank Act (as sponsors Christopher Dodd and Barney Frank themselves would tell you). But at the time, the system overall needed more rules, and consumers in particular needed better protection from shoddy practices and unscrupulous professionals.