Peter Schiff: Lehman Brothers Revisited

NEW YORK (TheStreet) -- As we pass the one year anniversary of the fall of Lehman Brothers, journalists, politicians and market analysts have seized on the occasion to offer seemingly sober assessments of what went wrong and what went right in the lead up and aftermath of the biggest financial event since Black Tuesday.

The most popular storyline offered by these Monday morning quarterbacks is that the mistaken decision to allow Lehman to fail resulted from the Bush Administration's misplaced faith in the free markets. In this telling, the real crises began in the days following the Lehman bankruptcy, which unleashed a financial panic that would have caused complete economic collapse -- if not for the subsequent federal intervention.

In reality, Lehman's demise was simply the result of an unfolding crisis that began years before. Popular belief aside, allowing the institution to succumb to the overwhelming debts on its balance sheet was perhaps the only correct decision made by government since this crisis began. The propagandists' complete reversal of cause and effect now threatens to spur the government to compound prior mistakes and bring on the next phase of the financial crisis. Unfortunately, this chapter will likely be much more dangerous than what we saw last fall.

In March of 2008, in the aftermath of the Bear Sterns "bailout" (which itself was a major mistake), equity shareholders walked away with a generous ten dollars per share, all creditors were made whole, and most employees got jobs and bonuses from JPMorgan(JPM). As a result of this largess, the Fed created a very serious problem for itself. After Bear, the perception took hold that investment banks were too "interconnected" to fail. The resulting moral hazard decreased the financial stability of the banking system and exposed taxpayers to open-ended risks. The Bush administration rightly determined that a message needed to be sent that Bear was an isolated case, and that capitalism still held sway on Wall Street. The fall of Lehman, which was helped along by the unrealistic recalcitrance of its chairman Richard Fuld, would be that clear signal.