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3-Years Later: Lessons of Lehman’s Collapse Can Save the World

Today is the third anniversary of the collapse of Lehman Brothers. Here's a quick primer for those who just got here: in early 2008 Bear Stearns' fire sale scared Wall Street, in September 2008 Lehman's fall terrified the nation and catalyzed a run on bank stocks and a rout for the global financial system. It was in all the papers.

Unless you happened to work at Lehman at the moment it fell, and I know many who did, this isn't a day for somber reflection but rather a time to ask what, if anything, have we learned. To explore the issue Breakout welcomed Barry Ritholtz, editor of The Big Picture and author of "Bailout Nation."

As Ritholtz sees it, banks are ephemeral entities whose only real assets are reputation and employee talent. When confidence in a bank erodes, a collapse becomes a self-fulfilling prophecy. Rumors of illiquidity spread quickly and talent flees for greener pastures. Such a bank run first took down Bear Stearns yet Dick Fuld --the CEO who presided over the death of Lehman-- ignored what happened to his competitor. Instead Fuld fiercely defended the notion that Lehman was healthy, turned down and assorted offers from Warren Buffett and the South Koreans, among others. Fuld refused to be "low-balled" by would-be suitors right up until Lehman ceased to exist.

The lesson? "If Warren Buffett comes a knockin' and offers you $5 billion, you take it," says Ritholtz. The terms don't matter; banks should take the deal, whatever the terms. It would seem that Bank of America (BAC) learned a valuable lesson.

The other takeaways from 2008 and 2009 are less simple, but we do know regulation isn't the answer. Ritholtz says Dodd-Frank and other laws passed after 2008 did "absolutely nothing." Bank balance sheets are still "festooned with garbage" and none of the regulatory supervision in the world has made a bit of difference.

So Fuld and lawmakers screwed up in 2008. That's water under the bridge. The real point of my thought exercise with Ritholtz was delving into the current European banking woes, an ongoing train wreck often referred to as the "Lehman of the Euro zone."

Can Europe be saved? Ritholtz says yes and with only two rather large and unpleasant moves.

The EU's "Lehman Brothers is essentially Greece and Portugal," according to Ritholtz. The countries need to be taken out proactively before dying on their own accord and causing another panic. "Put Greece on an ice floe, set them out to die, and focus on substantive economies like Italy and to a lesser degree, Spain." It may be an unpalatable choice, especially for Greece, but a Greek sacrifice would undo a larger wrong which occurred at the very inception of the EU. Specifically, Ritholtz says Goldman Sachs (GS) helped Greece "lie their way into the EU" and now it's time for Greece to leave.

The EU needs to draw another lesson from Lehman and Dick Fuld's folly by begging, cajoling, and guilt-tripping Germany into backing a bailout of more substantive economies remaining after the Greek sacrifice. "The Germans are the Buffett of Europe. They're the ones writing the checks," Ritholtz says. It may be the last time the world can guilt trip the Germans into paying even more war repatriations from World Wars I and II. But the EU needs to play all the cards they have and do whatever needs to be done to appease the Germans.

So, Ritholtz's solutions to Europe are letting Greece go and allowing the Germans fleece the ECB in what amounts to a glorified endorsement deal. Got a better idea? Share them in the comment section below.