Global Financial Crisis: the U.S. Gov Vs Lehman Brothers Bank (Case Study) - Essay Example

Firms like Barclays and the Bank of America who were ready to bid on Lehman Brothers expected the government to intervene and cover part of Lehman’s losses. This was however never the case. (Dolezaleck 2009, p. 7-8). It was not appropriate for the US government to treat these institutions differently. This is because of the held perception that Lehman’s bankruptcy would affect the economy negatively. Even though it was argued that the amount of money to be lent was determined by collateral security, put in place during the period of financial crisis, it was impossible to determine the value of securities held by the financial institutions that were bailed out.

Filing to bail out Lehman was discriminatory. Private financial institutions and the problem of moral hazard I concur with the experts’ opinion that when the government bails out a private financial institution, it creates a problem called moral hazard because an institution’s knowledge that the government will save it increases its incentive to take on more risk. I agree with this line of thought, as some will think that they will not incur any consequences for their risky ventures. One of the reasons to my opinion is the explanations that have been given to support the US government’s decision for allowing Lehman Brothers to go into bankruptcy because reasons identify the problem of moral hazard.

Paulson, the secretary of treasury was under pressure from “members of the congress” (Aato, Harle and Moisio 2011, p.110) who had raised the issue of moral hazard in reference to financial institutions