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By Jason Stipp | 09-11-2009 10:26 AM

Why Smart Investors Were Burned in the Crisis

One year after Lehman's collapse, Morningstar's Matt Warren reflects on the government's decision, investors' pain, and the future for I-banking.

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Jason Stipp: I'm Jason Stipp with Morningstar. In September 2008 Lehman Brothers collapsed in a shudder and a shockwave across the financial world. And investors, now that we have seemed to have stepped back from the abyss, may be wondering how has the landscape changed going forward?

Here with me to talk about some of those details is Matt Warren. He is Morningstar's associate director of equity research for banks and financials. Thanks so much for joining me, Matt.

Matthew Warren: Good to be here.

Stipp: So as we look back one year later on Lehman Brothers, the government did let it fail, which wasn't the case for some of the other investment banks. In hindsight do you think that the government would act differently today? Was it a mistake to let Lehman go under?

Warren: I think it was a critical mistake, and part of the reason why we had two back-to-back negative 6% GDP quarters. In fact, if they had let another institution fail in that ensuing week, it would have come close to guaranteeing that we faced disaster.

And there are multiple reasons for that. Part of the reason is that there is no resolution system in place for an institution like Lehman. So you couldn't have an orderly wind-down. What you have instead is a pure panic, where the people that lent to that firm and the counterparties and customers to that firm were left scrambling to try and limit the damage essentially and replace the business they were doing with Lehman.

Lenders took a huge hit. And why lend to a financial firm at 5-6% when you can get 100% loss, or 90+% loss on those monies? I think that proved to be the message that people took home from Lehman.

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