I’ve been getting a lot of questions comparing a potential bankruptcy by China’s Evergrande to the Lehman Bros event in 2008; whether it will lead to a similar outcome.
That appears unlikely. For starters, Lehman Bros was just one of a series of dominoes to fall. In the bigger scheme of things, it was a relatively a small player that got a disproportionate amount of attention. Less well remembered was the earlier implosion of the far larger federal housing GSEs. Fannie Mae and Freddie Mac were taken into conservatorship on September 6, 2008. Lehman Bros collapsed nine days later.
Fannie and Freddie may have sidestepped their share of the blame if only because they were bailed out and have an ongoing constituency of stakeholders. It’s much easier to dance on the grave of Lehman Bros than surviving trillion dollar government supported enterprises.
Evergrande is much bigger than Lehman Bros but not as big as Fannie and Freddie. It is also less interconnected with the rest of the global financial system. Moreover, policymakers are well prepared to fight the last war … it’s the unexpected that poses the bigger risks.