What really happened?
A week from Tuesday will be the second anniversary of Lehman Brothers’ bankruptcy and the ensuing panic that helped spawn the deepest recession since the Great Depression. Yet two years on, a mystery remains about the fateful weekend before Lehman’s fall.
Last week, during the Financial Crisis Inquiry Commission’s final hearings, entitled “Too Big to Fail,” two competing versions of events were revisited about the last frantic 72 hours of Lehman’s life: That the government did not have the legal “authority” to rescue the firm or, more conspiratorially, that the firm was knowingly killed because politics made it impossible to save.
A trove of new e-mails and notes released as part of the commission’s investigation may provide a more concrete answer — one that presents a slightly different version of history than the one the government would have had us believe.
Our leaders at the time — Ben S. Bernanke, Timothy Geithner and Henry M. Paulson Jr. — insisted over and over again that they did not have the legal authority to rescue Lehman as they did for Bear Stearns and the American International Group.
That may very well have been true, according to the documents. But they also show that the decision not to lend to Lehman wasn’t just a legal issue, it was made against the backdrop of a heated political climate.
The e-mails tell the story:
¶Jim Wilkinson, chief of staff to the Treasury secretary Paulson, wrote on the morning of Sunday, Sept. 14, 2008, the day Lehman fell: “No way govt money is coming in ... I’m here writing the usg coms [United States government communications’] plan for orderly unwind ... also just did a call with the WH [White House] and usg is united behind no money. No way in hell Paulson could blink now.”
¶Kevin Warsh, a Federal Reserve governor, on the evening of Friday, Sept. 12, 2008, wrote to a colleague: “I hope we don’t protect anything.”
¶Donald Kohn, vice chairman of the Federal Reserve, several hours later to Mr. Bernanke and Mr. Warsh: There’s a “strong predilection against by both Treas. and Fed” providing liquidity to Lehman. “We’re exploring the bankruptcy option as well as way of involving private sector in wind down outside of bankruptcy — but could give no 100 percent guarantees on what perception of situation would be Sunday evening.”
¶Lucinda M. Brickler, senior vice president of the Federal Reserve Bank of New York, on that same night to another colleague: “There has also not been much appetite over the past few days for ideas that involve extending public support beyond the existing programs. These issues and speculation about how bankruptcy would likely unfold are the drivers of this thinking.”
Of all the e-mails unearthed from that weekend, however, a two-sentence note from Mr. Bernanke to a colleague on the Sunday night while Lehman was in the process of filing for bankruptcy speaks volumes: “In case I am asked: How much capital injection would have been needed to keep LEH [Lehman] alive as a going concern? I gather $12B or so from the private guys together with Fed liquidity support was not enough.”
In other words, the chairman of the Federal Reserve didn’t even know how much money would have been required to rescue Lehman, even temporarily. (In fairness, he has argued that the ultimate amount of money needed was almost irrelevant because the Fed would have been lending into a “run on the bank.”)
Of course, the disclosed e-mails were cherry-picked by the Financial Crisis Inquiry Commission and surely do not provide a complete picture of the discussions in those last 72 hours.
But what is clear is that the politics of the moment played a factor — or at least was discussed among senior and junior staff — in the decision not to lend to Lehman Brothers, perhaps the greatest mistake of the crisis.
While there is no question that our leaders at the time worked around the clock to find a private market solution for Lehman — and I have praised them in this column for staving off another depression in the wake of the panic that followed Lehman’s collapse — its failure should go down in history as a gigantic misstep. (In truth, though, no one has yet to offer up another option for the government.)
In defending its decisions, Thomas C. Baxter Jr., the general counsel of the Federal Reserve Bank of New York, said at the hearings last week, “The Federal Reserve did not ‘allow’ Lehman Brothers to die.”
In an interview, Mr. Paulson acknowledged that many of his colleagues pressed him to make decisions based on politics, but said that “I never once let politics or public sentiment interfere.” He added: “If we could have found a legal means to save them we would have.”
The Fed and Treasury have long contended that they did not have the legal authority to save Lehman. There’s truth in that statement. Once the Fed determined that Lehman did not have enough collateral to pay back the loan, the Fed was legally prevented from making the loan.
As Mr. Baxter put it, the Fed had determined that a loan to the firm would have been “a bridge to nowhere.” (Lehman may very well have been insolvent, though Richard S. Fuld Jr., the firm’s chief, has argued otherwise.)
Still, the Fed’s determination of Lehman’s ability to survive was ultimately subjective. Phil Angelides, chairman of the Financial Crisis Inquiry Commission who is no friend of Wall Street, called it a “conscious policy decision.”
In one curious e-mail that might encapsulate the weekend, Pat Parkinson, then the deputy director of the Fed’s research and statistics division, who had been working on contingency plans for Lehman and had suggested a number of ideas that required government assistance, replied to an e-mail from a colleague on Friday night before Lehman fell. “I have attached some comments, but I am not sure they will be helpful. I’m forced to guess why plans have changed.”
He added at the end of his note, “In any event, this now looks to me like a god-awful mess.”
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