Why was Lehman Brothers allowed to collapse while Bear Stearns was not?
The Federal government worked with J. P. Morgan Chase to bail out Bear Sterns in the middle of March, 2008, yet Lehman Brothers was left to file for bankruptcy after the Federal government declined to rescue them in September of the same year.
There are 4 reasons for not rescuing Lehman Brothers.
Issue of solvency
Wrong Expectation from investors
Time to alert
1. Issue of solvency
Differences in problem facing
Lehman - solvency, Bear - liquidity
-Federal Reserve (Taxpayer money) saw itself as lending against reasonable collateral.
By JPMorgan Chase, $29 billion of Fed money was at risk against a collection of Bear Stearns assets thought to be worth $30 billion. JPMorgan would absorb the first $1 billion if the value of those assets declined, providing a cushion ahead of the Fed.
Rejected the offer about to be made by the Korea Development Bank who gave an offer of $23/share
The British government didn't approve the purchase of Lehman by Barclays Bank (a British bank)
2. Wrong Expectation
The Bear Stearns bailout set the expectation that the assumption that the U.S. Federal Reserve & U.S. Department of Treasury will also give a help to Lehman Brothers.
Lehman would also be bailed out, setting up investors and creditors for a fall.
Those with a stake in Lehman surely expected the government to minimize their losses.
The inconsistent treatment of the two investment banks -lead to its bankruptcy
-Due to the regulator's decision on bailing out Bear Stearns in March, it sets the expectation to the public that Lehman would also be bailed out, which
Regulators' decision the preceding March in favor of bailing out Bear Stearns, a (smaller) competing investment bank, rather than...