Newspaper article International New York Times

'Brexit' Isn't Really a Lehman Moment

Newspaper article International New York Times

'Brexit' Isn't Really a Lehman Moment

Article excerpt

Britain's vote and Lehman's collapse both upended what people thought they knew about how the world worked.

Is this another Lehman Brothers moment?

That question sometimes has been whispered, and sometimes shouted, in the aftermath of Britain's vote to leave the European Union. It has been a turbulent few days on global financial markets, but is this, like the Lehman Brothers bankruptcy announced on Sept. 14, 2008, the trigger of much bigger financial calamities to come?

The short answer is "no."

The long answer is "no, but."

Lehman was a financial event with long-lasting geopolitical consequences. "Brexit" is a geopolitical event that may or may not turn out to have long-lasting financial consequences.

The most fundamental similarity between Britain's vote and the Lehman failure is that both were deep shocks to markets and upended the understanding that investors, banks and policy makers had about the way the world worked.

In 2008, the widespread view was that the United States government would not allow a large, interconnected financial firm to go bankrupt, and that Lehman would be bailed out just as Bear Stearns and Fannie Mae were. In 2016, the assumption was that while Britain might threaten to leave the European Union, its voters would never actually choose such a disruptive path.

So in both cases, an event prompted a reordering of what we thought was plausible. In 2008 it went like this: If the United States would let Lehman fail, could Goldman Sachs and Citigroup be the next dominoes to fall? If an investment bank like Lehman could default, could any financial firm really be trusted?

And Lehman Brothers had $619 billion in liabilities, which by definition were somebody else's assets. Who knew for sure what other banks were sitting on huge losses from Lehman's bankruptcy that would make them insolvent?

Against that backdrop, banks globally hoarded cash and became highly reluctant to lend to anyone. It was a modern version of a bank run.

There are few signs any of that is happening in response to Brexit. European bank stocks have fallen sharply since the vote last week. They've actually fallen by a larger percentage than during the first three trading days after the Lehman declaration. …

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