Struggling to Keep Up as the Crisis Raced On , J. Nocera & E. Andrews, NYT

It was the weekend of Sept. 13, and the moment Treasury Secretary Henry M. Paulson Jr. had feared for months was finally upon him: Lehman Brothers was hurtling toward bankruptcy — fast.

Knowing that Lehman had billions of dollars in bad investments on its books, Mr. Paulson had long urged Lehman’s chief executive, Richard S. Fuld Jr., to find a solution for his firm’s problems. “He was asked to aggressively look for a buyer,” Mr. Paulson recalled in an interview.

But Lehman could not — despite what Mr. Paulson described as personal pleas to other firms to buy some of Lehman’s toxic assets and efforts to persuade another bank to acquire Lehman. With all options closed, he said, the government’s hands were tied. Although the Federal Reserve had helped bail out Bear Stearns — and was within days of bailing out the giant insurer American International Group — it could not help Lehman, even as its default threatened to wreak havoc on financial markets.

“We didn’t have the powers,” Mr. Paulson insisted, explaining a decision that many have since criticized — to allow Lehman to go bankrupt. By law, he continued, the Federal Reserve could bail out Lehman with a loan only if the bank had enough good assets to serve as collateral, which it did not.

“If someone thinks Hank Paulson could have made the Fed save Lehman Brothers, the answer is, ‘No way,’ ” he said.

But that is not the way that many who have scrutinized his actions see it. Bankers involved say they do not recall Mr. Paulson talking about Lehman’s impaired collateral. And they said that buyers walked away for one reason: because they could not get the same kind of government backing that facilitated the Bear Stearns deal. In retrospect, they added, it was emblematic of the miscalculations by the government in reacting to the crisis.

The day after Lehman collapsed, the Fed saved A.I.G. with an emergency $85 billion loan, but the credit markets around the world began freezing up anyway. It was at this point that Mr. Paulson — feeling outgunned by pursuers, like Butch and Sundance — decided he had to find a systemic solution and stop lurching from crisis to crisis, fixing one company’s problems only to find several more right behind.

“Ben said, ‘Will you go to Congress with me?’ ” said Mr. Paulson, referring to the Federal Reserve chairman, Ben S. Bernanke. “I said: ‘Fine, I’m your partner. I’ll go to Congress.’ ”

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Should Lehman Have Been Rescued?, John Carney (via Felix Salmon), Market Movers

I have to get on plane to Chicago, so don't expect much more here any time soon. In the meantime, here's an IM I just had with John Carney of Clusterstock about whether Treasury was right to let Lehman fail.

I thought it was the right decision at the time, but with hindsight I think it was clearly a mistake. Even Hank Paulson seems to think that it would have been a good idea to rescue Lehman, if only he'd been capable of doing so. But Carney still thinks that letting Lehman fail was the right thing to do.

John Carney: I personally don't get what the problem with letting lehman go bankrupt is. Everyone keeps saying it was a disaster.

Felix Salmon: well, it cost well over a trillion dollars
in terms of the global bailouts needed as a result

John Carney: How so.
Post hoc, ergo propter hoc?
Don't buy it

Felix Salmon: What's the probability that bailouts of this magnitude wouldn't have been needed if the implicit Treasury TBTF backstop had been shown to exist?
multiply that probability by the global cost of the bailouts, and you still get a number much bigger than the $60 billion or whatever that Treasury would have needed to bail out Lehman

John Carney: First, I'm not sure $60 billion would have bailed out Lehman

Felix Salmon: "Lehman officials said they believed the firm had not one but two potential buyers: Bank of America and Barclays, the big British bank. But both had conditions. Bank of America wanted the Fed to make a $65 billion loan to cover any exposure to Lehman's bad assets, according to one person privy to the discussions who did not want to be identified because of their sensitive nature."

John Carney: Second, I just don't see why propping up Lehman would have avoided all the other bailouts.
That is, we don't have a confidence crisis.
We have a solvency one.
Morgan Stanley would still have failed

Felix Salmon: You can't say that MS would have failed in the wake of a Lehman bailout with any certainty

John Carney: I have the facts on my side: it did fail.

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