REPORT: The Fed Could Have Saved Lehman Brothers, But…
The collapse of Lehman Brothers in a record-setting bankruptcy could have been avoided, but the political will was lacking at the Federal Reserve to rescue the troubled investment bank, according to newly published research.
“Fed officials have not been transparent about the Lehman crisis. Their explanations for their actions rest on flawed economic and legal reasoning and dubious factual claims,” says Laurence M. Ball, chairman of the economics department at Johns Hopkins University and author of the report.
From the NY Times:
As the last eight years have unfolded, the enormous economic and political consequences of the Lehman Brothers failure have emerged with stark clarity, never more evident than in this week’s Republican convention.
The widespread anger, frustration and disillusionment that has fueled the rise of Donald J. Trump can be traced to Lehman’s collapse, the bailout of Wall Street and the ensuing Great Recession.
No wonder the debate over Lehman’s fate, and whether it could have been avoided by Treasury and Federal Reserve officials, hasn’t subsided.
Now a widely respected academic — Laurence M. Ball, chairman of the economics department at Johns Hopkins University and author of “Money, Banking and Financial Markets” — has produced the most comprehensive and persuasive argument yet that the Federal Reserve could have saved Lehman from the precipitous and chaotic bankruptcy that occurred that fateful weekend in September 2008.
He recently presented the result of four years of research, “The Fed and Lehman Brothers,” to a group of economists gathered in Cambridge, Mass.
By focusing narrowly on a claim by the Fed that it had no choice but to let Lehman fail, Professor Ball, in his 214-page paper, has brought much needed clarity and rigor to the historical record. His conclusions directly contradict accounts in testimony, memoirs and myriad media interviews by the principal decision makers — Henry M. Paulson Jr., the former Treasury secretary; Ben S. Bernanke, then the Fed chairman; and Timothy F. Geithner, who was president of the New York Fed.
As Mr. Bernanke told the Financial Crisis Inquiry Commission in 2010, the “only way we could have saved Lehman would have been by breaking the law, and I’m not sure I’m willing to accept those consequences for the Federal Reserve and for our systems of laws.”
That’s because by statute the Fed can make loans only to institutions it believes can pay them back. Again, to quote Mr. Bernanke: “The company’s available collateral fell well short of the amount needed to secure a Federal Reserve loan of sufficient size to meet its funding needs.”
But after what seems an exhaustive review of a now voluminous record of transcripts, exhibits and other evidence from multiple official inquiries, Professor Ball concludes there is “no evidence” that the decision-makers “examined the adequacy of Lehman’s collateral, or that legal barriers deterred them from assisting the firm.”
Rather, the decision to let Lehman fail reflected a mixture of politics — Mr. Paulson famously said he didn’t want to go down in history as “Mr. Bailout,” and the Bush administration had come under fierce criticism for rescuing Bear Stearns and the mortgage giants Fannie Mae and Freddie Mac — economic policy driven by managing “moral hazard,” and a misguided sense that investors had anticipated a Lehman failure and the consequences would be manageable.
Rest from the NY Times here…
Copy of the report below…