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.
The timeline for the Lehman reparations seems to be roughly equal to that of the other international institutions that were rescued by their governments. Iceland only announced in June how it would compensate Britain and the Netherlands for the losses to local investors when Iceland’s IceSave internet bank failed last fall. IceSave is part of Landsbanki, one of three Icelandic banks that were nationalized last October when they nearly collapsed under the weight of $60 billion in foreign debt.
Under the proposed IceSave deal, Iceland will cover $5.5 billion in deposits for some 200,000 British and 120,000 Dutch savers who were hurt by Landsbanki’s involvement in the sub prime crisis.
Both IceSave and Lehman received significant international excoriation. Investors in Hong Kong flooded the streets last fall to demand repayment. In Britain, Prime Minister Gordon Brown ordered Iceland’s assets frozen under a section of Britain’s anti-terrorist statutes. Icelanders are still smarting from being compared to Al Qaeda.
But the Lehman resolution does not drag taxpayers, in the country where it is headquartered (the U.S.), into some overblown rescue scheme. Instead, it puts responsibility where it belongs, on the shoulders of the management, employees, shareholders, investors, business associates and regulators worldwide who enabled the company to operate in the first place.
Catharsis prevents any one country from being hobbled by the reckless management of an international financial class that is too creative for its own good.
Susan E. Reed has covered business and international affairs for CBS News, The New York Times, The New Republic and other news organizations.
Read more on the global economic meltdown:
Why we're (still) screwed
A World of Trouble, the sequel
The Great Recession of 2009