The problem of 'too big to fail' institutions is still with us, says the banker who almost saved Lehman Brothers.
Bob Diamond, the former head of banking giant Barclays who in 2008 was leading a deal – eventually aborted – that could have saved Lehman Brothers, has said that there was no way to rescue the firm then and, moreover, that there is still no way to unwind a "too big to fail" institution.
“Five years ago, I was in the New York Federal Reserve building, engaged in discussions with Hank Paulson, then US Treasury secretary, Tim Geithner, the New York Fed president, and others. We were meeting about the possibility that Barclays could acquire Lehman Brothers, which was teetering on the verge of bankruptcy,” Diamond wrote in the UK’s Financial Times.
It has been suggested that the Barclays-Lehman deal was aborted due to a veto from the Bank of England and the UK's Financial Services Authority, the then regulator. Diamond, however, said that the firm wasn't savable.
“It soon became clear that neither regulators, legislators nor bankers were equipped to prevent the collapse of a leading global financial institution,” he wrote.
While Diamond noted significant improvements in the financial system, he said the problem these moves have proved “insufficient to end the ‘too big to fail’ problem,” and that governments need to develop a mechanism to wind down systemically important institutions should the need arise.
“Political leaders, regulators and banks need to collaborate on the core issues in an internationally-co-ordinated effort to establish a robust resolution regime. Why is finding a solution to this problem so important?,” he wrote. “Without an international plan to wind down an important bank in an orderly fashion, political and regulatory leaders are compelled to create more rules – often to protect national and regional markets and economies.”
Barclays, along with HSBC and Standard Chartered, was one of the few major UK institutions to refuse a bail out. Although Diamond was credited for having a steady hand at the helm during the crisis, his career was tainted following controversy over manipulation of Libor interest rates by Barclays traders. He resigned in 2012.