Dare one ask, amid all the comment to mark the year since the collapse of Lehman Brothers, were the financial regulators wrong in refusing to rescue the bank?

The authorities, principally the US Federal Reserve and Securities & Investment Commission, sought to make an example of Lehman but in doing so caused a much greater financial disaster. The failure of the American bank triggered the collapse or near-collapse of banks around the world. Icelandic lenders went bust while HBoS, RBS and Bradford & Bingley had to be rescued by the UK government and most Wall Street banks were given US public funds.

Although the anniversary of Lehman’s collapse in September 2008 is being celebrated as the depth of the financial crisis it is worth remembering that it came more than a year after the start of the credit crunch and the run on Northern Rock, and six months after JP Morgan rescued Bear Stearns. Fannie and Freddie were also already in trouble in America.

That first year of crisis now looks like the phoney war that followed September 1939 before serious battle began. But the alternatives of nationalising banks or encouraging private-sector takeovers was established in the months before Lehman failed. Why then let Lehman go to the wall?

There is no doubt Lehman was the architect of its own failure but that failure almost caused the collapse of the whole western banking system.

The suspicion is that the authorities differentiated between retail banks, where voter pressure ensued they took action, and investment banks like Lehman, where they wanted to set an example. But letting Lehman fail led directly to the Icelandic banks’ collapse, Merrill Lynch’s rescue by Bank of America, HBoS’s painful merger with Lloyds and the injection of government funds into Lloyds, RBS and most Wall Street firms. Barclays was forced to seek private funding. All those banks were weak, but Lehman was the tipping point.

With new regulatory regimes being drawn up there is the suggestion that splitting retail banks from investment institutions will solve the problem. But Lehman was purely a casino bank and its collapse has exacerbated the financial crisis.  With the benefit of hindsight, the lesson is that if the collapse of both sorts of bank can cause havoc then both need regulating tightly and both need rescuing if they fail.

Lehman got its banking badly wrong, but the authorities got it badly wrong in letting it collapse.

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