The Signal and the Noise: Why So Many Predictions Fail-but Some Don't

by Nate Silver

Intermission: Fear Is the New Greed The precise sequence of events that followed the Lehman bankruptcy could fill its own book (and has been described in some excellent ones, like Too Big to Fail). It should suffice to remember that when a financial company dies, it can continue to haunt the economy through an afterlife of unmet obligations. If Lehman Brothers was no longer able to pay out on the losing bets that it had made, this meant that somebody else suddenly had a huge hole in his portfolio. Their problems, in turn, might affect yet other companies, with the effects cascading throughout the financial system. Investors and lenders, gawking at the accident but unsure about who owed what to whom, might become unable to distinguish the solvent companies from the zombies and unwilling to lend money at any price, preventing even healthy companies from functioning effectively. It is for this reason that governments—at great cost to taxpayers as well as to their popularity—sometimes bail out failing financial firms. But the Federal Reserve, which did bail out Bear Stearns and AIG, elected not to do so for Lehman Brothers, defying the expectations of investors and causing the Dow to crash by 500 points when it opened for business the next morning. Why the government bailed out Bear Stearns and AIG but not Lehman remains unclear. One explanation is that Lehman had been so irresponsible, and its financial position had become so decrepit, that the government wasn’t sure what cou...