Fama: Bank Failures Could Have Been Sorted Out “In a Week or Two”

There’s a lot of strange stuff on Eugeme Fama’s interview with John Cassidy, much of which has been pointed out by others. But one of the strangest elements, to my view, was this argument he mounts against government intervention to prevent financial institutions from failing:

The experiment we never ran is, suppose the government stepped aside and let these institutions fail. How long would it have taken to have unscrambled everything and figured everything out? My guess is that we are talking a week or two. But the problems that were generated by the government stepping in — those are going to be with us for the foreseeable future. Now, maybe it would have been horrendous if the government didn’t step in, but we’ll never know. I think we could have figured it out in a week or two.

We’ll never know what would have happened had the government let Fannie & Freddie & AIG and Bank of America and Citigroup fail. But we do know that Lehman Brothers went bankrupt on September 15, 2008. Two weeks later, it was September 29, 2008. Three and a half months after that, it was January 13, 2009. And a full year after that, Reuters published this article:

A U.S. bankruptcy judge on Wednesday approved a Lehman Brothers Holdings Inc plan to speed up the process of resolving some 65,000 creditor claims by handling certain objections in bulk.


At a hearing in U.S. Bankruptcy Court in Manhattan, Judge James Peck approved the plan, saying it would apply to all creditors except 10 who still opposed Lehman’s plan and would be given an opportunity to object to it in February.

In other words, well over a year after the failure of a relatively small important financial firm, we’re still having judges give approval for plans to speed up the process of resolving claims. You can say what you will about the TARP, but it’s just clearly false that bankruptcy could have been figured out in a week or two.