The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers.
OK, obviously that's not good news for Lehman or its investors, but it is good news for those who are fans of corporate responsibility, incentives for solid corporate management and sound government policy. Why?
Lately we have seen a number of cases where the federal government has decided to step in and act as the insurer (or in some cases broker) of last resort: Bear-Stearns, Fannie Mae and Freddie Mac, National Flood Insurance post-Katrina. The problem with a blanket policy of last-resort bailouts is it creates a culture of moral hazard. CEO's, management and local governments have little incentive to account for their own decisions if they know they will be bailed out by the big federal safety net.
Allowing Lehman to fail sends a signal to other companies: We're not here to save you from your mistakes.
To me that's good government policy.
