Lehman’s legacy

Five years ago, after Lehman Bros, a US financial institution, had filed for bankruptcy on September 15th, 2008, the global financial system came close to collapse in the turbulent weeks that followed. Six months earlier the US authorities had helped to rescue investment bank Bear Stearns because it was judged too big to fail. Lehman Bros, however, was allowed to fail. And it collapsed with unanticipated, disastrous consequences that governments and bankers worldwide struggled to contain as the crisis spread beyond the US.

Against a background of global market turmoil, a Fianna Fáil-led government took a momentous decision later that month. When the government agreed to a request by Anglo Irish Bank for a bailout, it was clearly haunted by the destabilising effect of Lehman's collapse on financial markets. No one knew then that rescuing a bank, seen as too big to fail, would eventually cost taxpayers some €30 billion. But the high cost of bailing out both Anglo and other Irish banks crippled the domestic economy. And inexorably, it led two years later to a national humiliation – a bailout of the State by international lenders.

The origin of the global boom and bust was a credit-fuelled property bubble in the US. Its housing boom was facilitated by high-risk mortgage securities -– sub-prime lending – in which investors quickly lost confidence, as more and more homeowners defaulted on their loans, and credit froze in response. The US experience was quickly replicated elsewhere, including Ireland. Domestic banks that had long enjoyed easy access to cheap credit for property lending found they could no longer borrow. Property prices plummeted and exchequer revenues, which were over-reliant on construction activity, fell, as taxes raised from property sales declined sharply.

The Lehman saga, and its aftermath, has produced few obvious heroes and many villains. In Ireland, as elsewhere, there were too many reckless bankers, imprudent borrowers, lax regulators, and ineffectual credit rating agencies. And, not least, a complacent government that showed little foresight. After the British government rescued Northern Rock in 2007 the Fianna Fáil-led coalition failed to prepare for the gathering financial storm that was to follow a year later.

The villains have gone largely unpunished. For the high burden of proof that comes with criminal cases has made successful prosecution difficult to achieve, in Ireland and elsewhere. And few bankers, so far, have gone to jail. The real unsung heroes in this unfolding financial drama are taxpayers, who have paid excessively for the financial follies of the banks. Will a financial crisis next time be any different? Only if we first learn the lessons from this crisis, which a long overdue parliamentary inquiry on banking should help to identify.