The Wall Street Journal is fast becoming a shill for discredited – repeatedly, definitively discredited – ideas. Take this book review for example. In it we have Hoover Institution fellow David Henderson take issue with former Federal Reserve Governor Alan Blinder’s account of the financial crisis. Apparently Mr. Henderson faults Mr. Blinders analysis laying the blame for Lehman’s collapse squarely at Lehman’s door. His main argument:
“But Mr. Blinder omits a crucial fact about Lehman, one that, by itself, explains why the huge drop in value of Lehman’s mortgage-backed securities led to its collapse: the effect of changes in federal bankruptcy law. Thanks to the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, when Lehman went bankrupt it could not simply, as in earlier days, pay holders of derivatives as much as possible with its assets. Instead, it had to give each derivative holder a new contract identical to the one it had signed with Lehman, but with a different counterparty. Lehman would also have to pay the transaction cost of the new contract. Such costs are typically about 0.15% of the contract’s total value. That’s small, right? No. When Lehman went bankrupt, the face value of Lehman’s derivative contracts was $35 trillion—with a “t.” The transaction costs alone were $52.5 billion. That is what sank Lehman.”
Hmmm. That would be really bad if the regulation actually COMPELLED Lehman to take on a ridiculously huge amount of counter-party risk for no good reason. But in reality, the law only requires that you be able to cover the bets you make, like an insurance company or a wino at the track. Mr Henderson seems to think that its ok to take on TRILLIONS in bets you can never hope to cover and expect regulators (fair enough – they should) to blow the whistle. But the onus for compliance is on the institution, not the enforcement agency. “You didn’t stop me from buying the crack” doesn’t usually work as a defense against drug arrests.
If the vultures at Lehman had actually behaved in way that complied with either the spirit or letter of the law, there would have been no collapse. They would have taken on no more risk than their balance sheet could absorb. Instead they took on over 30 TRILLION in bets they could not cover, and Mr. Henderson asks us to take this as acceptable business practice, to absolve Lehman’s mangers and risk professionals. Hey, they were only chasing a buck, and that’s the ONLY thing a corporation is supposed to do! Well, as every wino at the track surely knows, YOU BETTER BE ABLE TO COVER YOUR BETS.
Lehman’s managers deserved a lot more than a managed bankruptcy, they deserved to be in jail for a long time. And the WSJ, supposedly the newspaper of record for the business world, should take a long hard look in the mirror and reconsider its apparent policy of absolving the criminal behavior of its readers and their paymasters.