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One of the questions that has been on my mind recently is, "what exactly happened on Wall Street last week, and why?" Thankfully, we have the New York Times’ Freakonomics column, which offered a beautifully clear summary in a guest post by economists Doug Diamond and Anil Kashyap on Thursday. I paraphrase what they say below.

1. The US Treasury nationalized Fannie Mae and Freddie Mac on September 8, and has since replaced the management of both companies and will presumably oversee their operation.
2. On Monday, the largest bankruptcy filing in U.S. history was made by Lehman Brothers.
3. On Tuesday, the Federal Reserve made a bridge loan to A.I.G., the largest insurance company in the world, securing the option to purchase up to 80 percent of the shares the company.

In short, the Fed has intervened on an unprecedented scale, in an unprecedented form, and in firms unprecedentedly far removed from its own supervisory authority. Wow! That’s about the craziest thing that’s happened in the financial universe since the Great Depression.

But why?

In the case of Fannie and Freddie, in order to keep the mortgage market from collapsing, the Treasury announced that it would explicitly guarantee the debt. Subsequently, "no self-interested investor was willing to supply more equity to help buffer the losses," leading to the Treasury’s taking over.

In the case of Lehman, the financing dried up, Diamond and Kashyap say, because "for months, short-sellers were convinced that Lehman’s real-estate losses were bigger than it had acknowledged."

In A.I.G.’s case, while its core insurance businesses and other subsidiaries were doing fine,
it needed private investors who were willing to step into this situation and loan it the money it needed to post the collateral on $380 billion in insurance contracts outstanding. Again, no self-interested investor was willing to do this.

Notice anything interesting that all three of these things have in common? They were all undermined by a lack of consumer confidence. Their brands couldn’t hold out against people’s fears about America’s seemingly crumbling financial infrastructure. And with good reason!

Which I think teaches us a good lesson about the limits of the power of branding. If a venerable, respected brand like Lehman Brothers can’t hold off the apparent tide of an emerging reality, neither can you. The lesson? Commit to a brand-reality correlation.

Nick posted something about selling rotten steak last month, and I think we’re seeing a devastating result of trying to do just that here; and even moreso. Thus, I think we can inaugurate a corollary to Nick’s Rotten Steak Rule, the Brand-Reality Corollary.

In short, if your brand comes into conflict with reality, reality’s going to win.