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Debt Crisis Could Make Lehman's Fail Look Lame

Downgrade could be worse: Neel Kashkari

By Polly Davis Doig,  Newser Staff

Posted Jul 30, 2011 11:55 AM CDT

(Newser) – If the debt follies in Washington result in US credit being downgraded, it could end up being a worse financial hit than the epic failure of Lehman Brothers, writes Neel Kashkari. The former assistant secretary to the Treasury, who was appointed by George W Bush to oversee the $700 billion bank bailout, notes the harsh lessons of 2008 and breaks down the similarities and differences between then and now in the Washington Post:

  • Too safe to fail? Pre-2008, everyone "generally believed that major US investment banks were so large they would never be allowed to fail." But since US Treasurys have been the "risk-free" gold standard for decades, "a far bigger shock" than Lehman could occur.

  • How much money are we talking? With a whopping $14 trillion, US Treasurys are "the single biggest security market in the global economy." Lehman, in comparison, was worth $600 billion—less than 5% of that.
  • Will we actually default? Probably not. "But a small deviation from a cherished belief can be as shocking as a large deviation from a weaker belief."

Kashkari points to differences in the economic climates of 2008 and the present, but says a "US downgrade has the potential to be as bad or perhaps worse than the Lehman shock." We may be sure of only one thing: "There is no upside to finding out." Click for Kashkari's entire column.

In this Nov. 10, 2008 file photo, assistant Treasury Secretary Neel Kashkari, a Bush-era appointee who led the federal government's $700 billion bank rescue effort.
In this Nov. 10, 2008 file photo, assistant Treasury Secretary Neel Kashkari, a Bush-era appointee who led the federal government's $700 billion bank rescue effort.   (AP Photo/Mark Lennihan, FILE)
An employee poses for photographers with part of a Lehman Brothers company sign at Christie's auction house in London on September 24, 2010.
An employee poses for photographers with part of a Lehman Brothers company sign at Christie's auction house in London on September 24, 2010.   (Getty Images)
The Lehman Brothers European headquarters sign is displayed in an auction house in London, Friday, Sept. 24, 2010.
The Lehman Brothers European headquarters sign is displayed in an auction house in London, Friday, Sept. 24, 2010.   (AP Photo/Kirsty Wigglesworth)
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COMMENTS
Showing 3 of 5 comments
freethemall
Jul 30, 2011 12:59 PM CDT
Thank you so much you moronic teabaggers who let yourselves be let astray by the selfish, shortsighted, privileged super minority.  And thank you so much President Obama for not engaging in the debate until it was too late.
passinthru1
Jul 30, 2011 12:58 PM CDT
In this game of chicken, Obama and Congress are both thinking they'll come out looking good. Fact is, I want them all out, the whole lot of the Executive AND Legislative branch,  Democrats and Republicans alike.   Throw 'em all out the next election.  Start fresh with a new group and pass a law that none of them get paid and none of them can draw down on their own pricey Congressional/Executive branch benefits until a financial plan is put in place.
CHRiSTFELD
Jul 30, 2011 12:23 PM CDT
If the Earth were to crash into the sun and burn, it would make Obama look really bad---and that's all that really matters.

 
Lehman Brothers • financial crisis • Neel Kashkari • Treasury bills • debt ceiling • bank bailout • US Treasury

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