Bernanke and the Lehman Bros. Collapse

[n2doc]

by John Cassidy

Could the federal government have saved Lehman Brothers and prevented the biggest financial blowup since the Great Depression? During a week when many policymakers and financiers are still relaxing on the beach, the Financial Crisis Inquiry Commission is delving into this fascinating question, and you can watch some of the action here.

Yesterday, Dick Fuld, the former head of Lehman, claimed the Fed could indeed have prevented Lehman’s demise during the weekend of September 11 and 12, 2008, by lending money to the investment bank in the same way that it subsequently did to other big Wall Street firms, such as Goldman Sachs and Morgan Stanley. Said Fuld: “I submit that had Lehman been granted that same access as its competitors, even as late as that Sunday evening, Lehman would have had time for at least an orderly wind down or for an acquisition which would have alleviated the crisis that ensued.”

Today, it was Ben Bernanke’s turn in the witness chair, and he was asked repeatedly about Fuld’s statements. In response, he repeated an argument he has used many times before: the Fed lacked the legal authority to rescue Lehman. Under an obscure provision of the Federal Reserve Act of 1934, the Fed could lend large sums of money to stricken Wall Street firms—or any other type of firm—but only if the firm could provide adequate collateral. But Lehman didn’t have sufficient collateral for the size of loan that would have been necessary to save it (tens of billions dollars) and the government had no choice but to let it file for Chapter 11. “The only way we could have saved Lehman would have been by breaking the law,” Bernanke said. And he went on: “I was not prepared to go beyond my legal authorities.”

So far so predictable. But for the first time Bernanke also offered a second argument to justify his inaction: even if the Fed had gone beyond its legal remit and tried to save Lehman, it wouldn’t have worked, because the panic enveloping the firm was already too advanced. All along, Bernanke insisted, he was determined to try to prevent Lehman’s demise. Citing his own academic research into the banking collapses that helped prolong the Great Depression, he said he was perfectly aware that if Lehman were allowed to fail, or did fail, the consequences would be “absolutely catastrophic…. I never wavered in my view that we should do absolutely everything we could do to prevent a collapse.”



Read more http://www.newyorker.com/online/blogs/johncassidy/2010/09/bernanke-changes-story-on-lehman-collapse.html

[Renew Deal]

1. Could they? Yes. Would it prevent the panic? No

And should they? No

I don't buy that they couldn't help them, but then again I think their competitors were happy to see them sink.

[izquierdista]

2. Competitors like Hank Paulson

It's hard to get a bailout when your chief rival's CEO is doling out the lifeline.

[Swamp Rat]

3. yep