The Lehman Myth in the Financial Crisis

Posted by Scarlett Lu
David A. Skeel is the S. Samuel Arsht professor of corporate law at the University of Pennsylvania School of Law.

America’s great corporate and financial crises are usually accompanied by spectacular corporate scandals that provide a simple, roughly accurate storyline for the crisis as a whole. Early in the Great Depression, Franklin D. Roosevelt railed against the “Ishmael or Insull whose hand is against every man’s” — a reference to Samuel Insull, whose utilities empire had imploded in scandal. The Insull story, along with several other scandals, inspired the securities laws of 1933 and 1934 and other important corporate reforms. Sixty years earlier, the Philadelphia banker and railroad magnate, Jay Cooke, had been the face of the Panic of 1873.

The current crisis has been deficient in these terms. In the absence of obvious, hissable villains and a simple story line, the conventional wisdom seems to focus more on the crisis itself than on its causes, with the Lehman Brothers bankruptcy now viewed as its pivotal moment. The Lehman story line is worrisome for at least two reasons: it threatens to distract attention from the causes of the crisis and the story line itself is deeply mistaken.

The absence of a simple story line was brought home to me when I began giving occasional talks about the crisis in late 2007 and early 2008. click to read more.