THE BLOG

How Did Europe Respond to the Lehman Collapse?

2009-09-16-ptcyfailurecollapseofLehmanBrothersUSinvestmentbank20080915worldwidefirstfewdaysofnewsheadlinesandimagesmainlyfromUKperspective10DHD.jpg

As we reflect on the event that has become the symbol of the financial crisis -- the Lehman collapse of September 24, 2008 -- the national reactions on both sides of the Atlantic offer interesting comparisons.

In a strange way, the U.S. was better prepared to manage such an event, namely because it was happening within a single country. But this is not the only reason: after all, in the first days of the crisis the European Central Bank acted more decisively than the Federal Reserve. The main reason is that it took place in the domestic market for U.S. financial institutions and in a foreign market for everybody else. While on the surface this should not matter, it does -- one of the great challenges of international finance is to have the same visibility and the risk management domestically and abroad.

While the European reaction has been forceful and avoided major bankruptcies such as Lehman Brothers, Europe did not take any major steps towards reforming the system and chose to blame the others: Wall Street, the United States regulatory system, the bonus system, offshore tax havens, and American greed. Part of this was an opportunity to express their criticism of a system that at least Continental Europe perceives the U.S. system as Michael Douglas expressed it in the Wall Street movie: "greed is good; greed is what America is all about." However, they stopped short of admitting that European regulators failed as much as their U.S. counterparts and that European Banks had as many toxic assets as those in the U.S.

The interventions in the form of stimulus packages were also very different, but contrary to U.S. public assumptions, they were much more substantial in Europe than the official numbers would appear. One of the ways Europe contributed to stabilizing potential problems for consumers is the enormous amount it spent through increased claims for unemployment benefits.

The collapse of Lehman Brothers also reflects differences between the legal systems. While the liquidation of the hedge funds is fairly straightforward in the U.S., the UK system proved to be totally inadequate and 3,500 clients of 700 hedge funds representing $ 65 billion could not access their money. The UK Government recently asked the banks to "write a will" explaining how they should be liquidated in case of collapse. The lesson has been heard.

What the American public opinion and the media sometimes characterize as "socialist Europe" is often misunderstood. One of deepest beliefs in Europe is that compensation should remain within some limits and that the more you earn, the more you should contribute to the social welfare. The gap between low salaries and high salaries is three times wider in the United States than in the rest of the world. It is a fundamentally different way of expressing solidarity.

While consumers on both sides of the Atlantic have felt the sting, with unemployment rates rising dramatically, the Europeans tend to have the advantage of a system where European consumers still continued to spend money while keeping a healthy 10% average savings rate. In contrast, in the U.S. consumer credit is in a free fall, undercutting the economic recovery. The drop by 10% on an annual rate in July 2009 is mostly due to the brutality of the unilateral credit lines by the credit card companies who systematically increase rates and play tricks on the new Credit Card Act of 2009. The $38.5 billion of late fees for 10% of the accounts penalize the least favored customers.

The differences of attitudes correspond are fundamentally cultural. It is the system of values that makes the type of interventions different. It does not mean it is better or worse. But at least the United States Government is actively pursuing regulatory reforms while Europeans have not yet finished finger pointing at ... the others.