Lehman's Lies

The WSJ has a fantastic piece of reporting about Lehman's failure this morning, which explains something I hadn't understood until now. Yes, Lehman's bankruptcy caused the credit crisis to get much worse. But the mechanism might well have been Lehman's lies, rather than its failure per se:

On Sept. 10, one day after Lehman executives calculated the firm needed at least $3 billion in fresh capital, the firm assured investors on a conference call it needed no new capital at all. Lehman said its massive real-estate portfolio was valued properly, but Wall Street executives who have seen it say it was overvalued by more than $10 billion. As hedge-fund clients began yanking their money from Lehman, the firm assured them it was on solid financial footing.

In the wake of the collapse, it was clear that if Lehman couldn't be trusted, then it would be silly to trust any other troubled financial institution, either -- AIG, WaMu, Wachovia, Fortis, Hypo Real Estate, you name it. And so they all got taken over.

And it's not nearly over yet. The European shoe is only beginning to drop: banks there are much more leveraged than banks in the US, and a European credit crunch is therefore even more devastating than a US credit crunch. Add in the feedback mechanisms from Europe back into the US, and things are likely to get much worse before they get any better.

Oh, and did I mention? TED's at 391bp -- another new record. I have a feeling this is going to be a long week.