Policy implications
Lehman Brothers Holdings International is not the first, nor likely the last, systemic financial company to run aground. The case is interesting, however, because the failure occurred during the most severe financial crisis in the USA since the Great Depression. The economic and financial market climate in which Lehman failed greatly complicated any resolution method that did not involve taxpayer assistance in the form of capital infusions or blanket guarantees of creditors. Yet Lehman became the poster child for the orderly liquidation authority provisions of Title II of the 2010 Dodd–Frank Act. Drawing inferences from Lehman about the effectiveness of bankruptcy in dealing with failing financial firms is problematic. It is difficult to use a single data point – the Lehman bankruptcy – to separate out the impact of Lehman’s failure, the use of bankruptcy to resolve it, and the policy uncertainty. Still, Lehman’s bankruptcy offers guidance on how to approach future failures of large, complex financial firms. It appears that there are provisions of bankruptcy law that merit review and possible revision. In the absence of those changes, it may be the case that systemically important pieces of an insolvent firm may be more effectively resolved in an administrative proceeding such as the Orderly Liquidation Authority established under Dodd–Frank. But based on the experience with Lehman, there is no clear evidence that bankruptcy law is insufficient to handle the resolution of large, complex financial firms.
