HOW OUR IDEOLOGY BLINDED US:

How the collapse of Lehman Brothers pushed capitalism to the brink: The Wall Street titan's bankruptcy triggered a system-wide crisis of confidence in banks across the globe (Andrew Clark, 9/04/09, The Guardian)

It was well known that Lehman, an Alabama cotton trader turned banking behemoth, was the biggest bankruptcy in US history. But nobody anticipated quite what would follow - a week that has become known on Wall Street as the great panic of 2008.

Mercifully, many Asian stockmarkets were closed the next morning for a holiday. But shares plunged in Taipei, Mumbai and Manila. And when the business day opened in Europe, the FTSE 100 index dived by 4%. In New York, financiers awoke to the news that not only had Lehman Brothers collapsed but that another struggling brokerage, Merrill Lynch, had been bought by Bank of America for $50bn (£30bn) in a buyout negotiated in just 48 hours. The Dow Jones industrial average slumped by more than 500 points, its worst fall since the aftermath of the terrorist attacks of 11 September 2001, with an all-time record of 8bn shares changing hands.

"There was a tremendous amount of nervousness," says Anthony Conroy, head trader BNY ConvergEx, a New York brokerage. "People were worried about the ramifications not just for a day or a week but for the months and years ahead."

At the time, it just seemed like a good dose of capitalist medicine to let Lehman fail. We free marketeers forgot that lending is primarily a matter of faith, not of capital.

Posted by Orrin Judd at September 4, 2009 9:57 AM