The Lehman Shock ... why it mattered more in the rest of the world

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In the United States, the sudden bankruptcy of America's fourth-largest investment bank was the cathartic culmination of a process that had been building since subprime lenders began to go bust in 2007. Before Lehman was allowed to fail, we had witnessed the shocking demise of well-known firms such as Bear Stearns and of much larger institutions Fannie Mae, Freddie Mac (the two largest U.S. financial institutions as measured by the size of their balance sheets), and AIG. Throughout the summer of 2008, Treasury Secretary Henry Paulson and the Federal Reserve had been dealing with systemic failure. Yes, Lehman's demise kicked the level of hysteria up several notches and required unprecedented intervention, particularly in the commercial paper market. But it wasn't a solitary event. The same day Lehman failed, Bank of America and Merrill Lynch—a larger firm than Lehman—merged. The same week, Goldman Sachs and Morgan Stanley converted to bank holding companies so they could access new sources of credit. Meanwhile, the Bush administration began to concoct a large-scale bailout and a hot presidential election took a decisive turn. Our attention quickly shifted from the dead to the living and wounded.

But for the rest of the world, Lehman's failure stands out, in part because it marked a beginning rather than an end, and in part because Lehman's failure triggered a series of events that affected economies around the world to a much greater degree than the other failures did. It seemed to be the direct cause of serious problems in a way that these other events weren't.

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