Lehman Collapse: Why Didn't We Stop It?

Prof. Pablo Fernández refutes predictability of crash


Pablo Fernández

Following the 2008 collapse of Lehman Brothers, growing ranks of financial experts have claimed that the bankruptcy was all but inevitable. Prof. Pablo Fernández sifted through the data that was publicly available at that time and found nothing to portend the firm's collapse. Is the financial community now suffering collective amnesia?

Indeed, only one out of a total of 106 reports issued by analysts between January and September of that year recommended selling Lehman stock, he says. During Lehman's final days, major financial institutions such as Deutsche Bank and Morgan Stanley clamored to buy shares in the firm, and Lehman was able to hang onto its "A" rating right up to the day of its bankruptcy.

Examining the predictability of the Lehman crash, Fernandez questions the many financial analysts and pundits who now claim that Lehman Brothers' collapse was all but inevitable.

After the bank's sudden failure, the idea began to take root that the downfall of Lehman had been foreseeable all along. In a matter of months, these "a posteriori prophets," as Fernández calls them, had executed a perfect about-turn. Those who had lauded Lehman's management during the good times were now claiming that the firm's bankruptcy had been obvious.

But, as Fernandez argues, such arguments hold little weight, especially considering the paucity of public information at that time on the true state of Lehman's balance sheet.