Too Big To Fail: Regulators Learned Wrong Lessons of Lehman's Fall, Wolf Says

A year after the failure of Lehman Brothers, global regulators are still dealing with the aftermath and struggling to learn the lessons of the great panic of 2008.

Martin Wolf, chief economics commentator at The Financial Times, says letting Lehman fail was the right course, if only because it forced regulators to "grapple with the crisis properly."  The steps taken in Lehman's wake ultimately stabilized the global economy and reinvigorated the financial markets -- at least for the time being, Wolf says, as we discuss in more detail in a separate segment.

But Wolf fears regulators learned the wrong lessons of Lehman's bankruptcy, i.e. that they can't ever allow a large financial institution to fail.

"That's unworkable," Wolf says. "How can you have a capitalist financial system in which all the major institutions are government guaranteed?"

The "right" lesson of Lehman's failure is we need a new set of rules and regulation "which allow us to close down institutions which are in fact failed without causing a panic of this scale," Wolf says." I believe that will be possible to do."

Stressing the need for a "credible bankruptcy option" for big firms, Wolf describes the basic framework for these rules in the accompanying clip.

But even as he's advocating new rules and regulations to change the "too big to fail" doctrine, Wolf cautions against overzealous regulation, such as the Fed's reported plan to strictly curb compensation at major financial firms.

"There's a genuine concern about the structure of compensation and the incentives it creates," he says. "But I think we have to be realistic: We cannot expect regulators...to run these giant institutions. We know regulation is going to fail...Financial people are very clever at finding ways around the rules and generating new risk in the system."