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A catharsis in international banking is almost complete.
BOSTON — It turns out that there can be catharsis in international banking.
Sixteen Hong Kong banks have pledged to reimburse investors who had bought Lehman Brothers-backed products. This watershed deal demonstrates that the much-maligned financial class is perfectly capable of cleaning up the enormous mess it helped create without requiring government rescue.
Catharsis describes the cleansing of the economy that occurs when businesses in crisis are purged. It is based on Aristotle’s idea of the emotional purification that precedes atonement.
Yet, to this day, many still believe that it was a mistake to allow Lehman to fail (or begin catharsis) last Sept. 15. Lehman operated in more than 40 countries and had more than 650 distinct legal entities outside of the United States. It was the largest bankruptcy in history and shocked the global financial system. Worldwide credit markets froze as those in the industry feared that any money lent might never be repaid. Stunned that such failure could happen so quickly and extensively (although it had been brewing for years), Lehman’s creditors and investors worried they might never recover one penny, pence, pfennig, or fen from the firm.
But 10 months later, atonement is well underway. Hong Kong bankers are planning to return as much as 70 percent of the principal to thousands of investors, many of whom are widows and retirees, who bought Lehman “mini bonds.” While investors won’t get all their money back, the reimbursement will cost the banks more than $800 million.
On the other side of the globe, the administrators of Lehman’s European unit announced plans to return frozen hedge fund assets to creditors early next year.
These international resolutions serve as important future models of how to help make parties whole when there are no unified rules of how to proceed after such a far flung disaster.
Of course, these efforts would not have occurred without pressure from the local regulatory bodies — the Securities and Futures Commission in Hong Kong and Britain’s bankruptcy courts — or the numerous lawyers for Lehman and its creditors.
Their successes show that the recent compulsion of governments to prop up giant financial firms might well be unnecessary. By spreading responsibility to all of the parties, the Lehman resolutions have demonstrated that failure does not have to be catastrophic.