The World Won't Soon Forget The Crisis

Bloomberg appears to be doing a series of articles this week about Lehman's collapse, presumably to sort of commemorate the event's anniversary. Today's piece is particularly interesting. It begins by explaining how the bank's failure sent shockwaves around the world, even in some relatively unexpected ways. I think its stories demonstrate a broader point that I've made in the past: foreign peoples are not likely to trust U.S. banks again for quite some time.

First, here's the story from Bloomberg:

Yu Lia Chun, a retired hospital orderly in Hong Kong, never heard of Lehman Brothers Holdings Inc. before she got a call last September from her banker.

"He said, 'Did you hear the news? Something has happened to Lehman,'" Yu, 66, recalled in an interview in June. "I didn't get it."

Yu, who has a sixth-grade education, said she thought her money was in a savings account. She didn't know she had lent it to a bankrupt American securities firm. Eventually, she found out that her HK$1.2 million ($155,000) nest egg was gone. Her children lost another HK$3.8 million because Yu had persuaded them to make similar investments.

"There is no way a person like me could understand any of this," Yu said, dabbing her eyes with a tissue in a coffee shop in Hong Kong's financial district. "Sometimes I feel like jumping off a building."

This woman's tragic tale shows that even regular people around the world were affected by Lehman's demise. Such a story should be heartbreaking to most American readers. But to non-Americans, anger might be the first emotion felt. Many likely see this woman's suffering a result of American greed that drove excess risk and ultimately caused the bank's failure.

Whether that's a fair assessment or not doesn't really matter to the question of how the financial crisis will affect U.S. financial services' global appeal. What matters is perception. U.S. banks had long been seen as far less risk-adverse than banks located elsewhere. The crisis just showed the world how dangerous their love for risk can turn out to be.

Of course, most banks, globally, were affected. So the problems were not isolated to just U.S. financial firms. They, however, have taken the majority of the blame. They should. That's why I believe in the short- to medium-term, foreign money is going to mostly stay away from U.S. banks. In fact, it will probably stay away from global banks in general, and remain in the hands of local money centers. It will take time for non-domestic banks to regain people's trust. During that time, those people will instead trust what's most familiar to them.