Lehman Failure About Capital Adequacy, Not Liquidity
Standard & Poor’s draws three major conclusions from the bankruptcy filing by Lehman Brothers Holdings:
- Some companies are indeed not too big to fail;
- While the availability of liquidity can provide some form of short-term life support to an institution under severe stress, it is either real or perceived capital inadequacy that can precipitate a company’s failure; and
- The impact from a regulatory action or inaction can have unintended consequences through indirect exposures and linkages that sometimes are only known to direct market participants. Moreover, the current instability in the financial system is coming at a time when the U.S. economy is already weak and continues to deteriorate.
In today’s world, market events can easily overwhelm financial fundamentals in a speedy manner, and short-selling by hedge funds and other investors can lead to confidence loss and crimp a firm’s financial flexibility.
Details of S&P’s analysis are available here.
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