Lehman Had To Die So Global Finance Could Live

[interestrateripoff]

http://www.nytimes.com/2009/09/12/business...ml?ref=business

What if they’d saved Lehman Brothers?

What if, a year ago this weekend, the government and the banking industry had somehow found a way to keep Lehman from filing for bankruptcy? How might that have changed the course of the financial crisis?

We know, of course, what did happen; it is seared in our memory. On Monday, Sept. 15, 2008, when the news broke that, despite nonstop efforts that weekend, there would be no last-minute reprieve for Lehman, à la Bear Stearns, all hell broke loose.

The stock market tanked, dropping more than 500 points that day. The Reserve Primary Fund, a money market fund that held Lehman bonds, “broke the buck.†Shortly afterward, the American International Group nearly collapsed, and had to be bailed out with an extraordinary $85 billion loan from the government. Morgan Stanley was rumored to be next. Banks all over Europe were teetering. There were even fears about the stability of mighty Goldman Sachs. On Wall Street — indeed, in financial capitals all over the Western world — the panic was palpable.

Ever since that weekend, most people, including me, have viewed the decision by Henry Paulson Jr., the Treasury secretary at the time, and Ben Bernanke, the Federal Reserve chairman, to allow Lehman to go bust as the single biggest mistake of the crisis. Never mind that the two men have insisted ever since that they had no other option; surely, they could have created some options if they’d wanted to. Or so goes the conventional wisdom.

Christine Lagarde, France’s finance minister, for instance, called the decision “horrendous†and a “genuine mistake.†According to David Wessel, author of a book about the crisis, “In Fed We Trust,†the head of the European Central Bank, Jean-Claude Trichet, has said the same thing in private. He quotes one of Mr. Trichet’s aides as saying, “It never occurred to us that the Americans would let Lehman fail.†In speeches and articles, in books and television appearances, commentators of every political stripe have pointed to the Lehman bankruptcy as the event that turned the subprime crisis into a full-blown financial collapse.

As we approach this anniversary, though, I’ve begun to question that conventional wisdom. Yes, the fall of Lehman Brothers set off a contagion of panic. And I’m still convinced that Mr. Paulson and Mr. Bernanke could have found a way to save Lehman had they been so inclined (more on that in a moment). But I’ve become convinced that, if Lehman had been saved, the collapse would have occurred anyway.

John H. Makin, a visiting scholar at the American Enterprise Institute, wrote recently, “If the Lehman Brothers’ failure had not triggered the panic phase of the cycle, some other institutional failure would have done so.†I’ll go a step further: it is quite likely that the financial crisis would have been even worse had Lehman been rescued. Although nobody realized it at the time, Lehman Brothers had to die for the rest of Wall Street to live.

•

A week ago, a Reuters reporter traveled to Richard Fuld’s vacation home in Ketchum, Idaho, to see if the former Lehman chief executive would say anything about the anniversary. (When Mr. Fuld walked outside to meet her, he said, “You don’t have a gun; that’s good,†according to the reporter.)

Standing in his driveway, leading, as ever, with his chin, Mr. Fuld talked about the “pummeling†he had taken for presiding over the bankruptcy. “They’re looking for someone to dump on right now and that’s me,†he said. “The facts are out there. Nobody wants to hear it, especially not from me,†he added.

Mr. Fuld’s bitter remarks reflect the way many former Lehman executives feel, even now, about the fact that their firm was the only one to go under during the crisis. After all, they say, Lehman’s mistakes — too much leverage, an overreliance on shaky real estate assets, playing down the risks on its balance sheet — were the same mistakes just about every firm made. Bear Stearns made those mistakes — and was rescued. Citigroup made those mistakes — and was rescued.

What’s more, they say, in the months and weeks leading up to the September crisis, the firm, realizing that it might need a Plan B, proposed that it be allowed to become a bank holding company. It also asked for access to the Fed’s discount window, which is reserved for troubled banks. (What Lehman didn’t do, however, despite the repeated urging of Mr. Paulson, was find a partner with deep pockets or raise additional capital.) These are the “facts†Mr. Fuld was referring to when he spoke the Reuters reporter.

But Timothy Geithner, then New York Fed president, now Treasury secretary, didn’t like the idea of letting an investment bank become a bank holding company — so he said no. Immediately after the Lehman default, however, that is exactly what he allowed Morgan Stanley and Goldman Sachs to do, which helped stabilize both firms.

Of course, politics played a role, too. Congress had no stomach for another bailout on the heels of the takeover of Fannie Mae and Freddie Mac just a week before Lehman weekend. In his book, Mr. Wessel, the economics editor of The Wall Street Journal, quotes Mr. Paulson as saying in a conference call, “I’m being called Mr. Bailout. I can’t do it again.â€

Although Mr. Paulson would later say that he had no legal authority to save Lehman Brothers, it seems pretty clear from Mr. Wessel’s account that he wasn’t really looking for any authority. He wanted to send a message. That Monday morning, in announcing the Lehman default, Mr. Paulson told the media: “I never once considered that it was appropriate to put taxpayers’ money on the line†to save Lehman Brothers

More at the link.

Was Lehman allowed to go bust to save Goldman Sachs? Another competitor gone and that means more trade will go the GS and JP Morgan?

[24gray24]

yes thoroughly corrupt...if it saved the financial system for Lame and brothers to go bust, it would have saved it even better if Goldman Sachs had gone bust too. But they didn't let GS go bust, they just changed the rules.

[Live Peasant]

The Last Days of Lehmans

Haven't seen it so can't say owt about it other than just saw it advertised

[bajista]

http://www.nytimes.com/2009/09/12/business...ml?ref=business

more at the link.

Was Lehman allowed to go bust to save Goldman Sachs? Another competitor gone and that means more trade will go the GS and JP Morgan?

Of course. However the mistake was not to let Lehman go bust but the saving of other ( bankrupt) institutions.

[Ruffneck]

did the authors read the history books?

lehman bros failed to help in the 1998 LTCM collapse , this is why they were sacrificed this time....

if they would have pitched in back in 98 then maybe they would have been offered more assistance this time around

[Guest happy?]

Like Adam Applegarth, Dick Fuld's problem was that he began to believe his own publicity. The inability to distinguish fact from fiction invariably ends with a sharp re-alignment.

[R K]

Fuld was a knobhead who challenged the Giant Squid.

That's what you get for being a knobhead that challenges the Giant Squid.

He's gone - Giant Squid making record profits and shares back where they were before the collapse.

Simple.

Edited September 13, 2009 by Red Karma

[catmandu]

From a financial perspective it may well have been a mistake to let Lehman die, but personally if you go through a huge bank-created crash of that magnitude and there are no major casualties then the guilty think they can get away with it again.

It's good to have experience of the downside as well as the upside when doing business as it encourages clear thinking and responsibility when making financial decisions.

[24gray24]

From a financial perspective it may well have been a mistake to let Lehman die, but personally if you go through a huge bank-created crash of that magnitude and there are no major casualties then the guilty think they can get away with it again.

It's good to have experience of the downside as well as the upside when doing business as it encourages clear thinking and responsibility when making financial decisions.

That will also apply, with even more piquancy, when Geitner, Paulson and various other Goldman Sachs executives get assassinated.

[Guest happy?]

Fuld was a knobhead who challenged the Giant Squid.

That's what you get for being a knobhead that challenges the Giant Squid.

He's gone - Giant Squid making record profits and shares back where they were before the collapse.

Simple.

Simple, direct, and accurate.

[WaitingGame]

Can anyone explain the £138 Billion that JP Morgan paid Lehman Bros just AFTER they went bankrupt? I remember it happening but couldn't get my head around it - sure something fishy was going on.

[crash2006]

http://www.nytimes.com/2009/09/12/business...ml?ref=business

More at the link.

Was Lehman allowed to go bust to save Goldman Sachs? Another competitor gone and that means more trade will go the GS and JP Morgan?

i would say so , back then i was suggesting GS and MS were gonna go under.

[godless]

http://en.wikipedia.org/wiki/Panic_of_1907

When the chaos began to shake the confidence of New York's banks, the city's most famous banker was out of town. J.P. Morgan, president of the eponymous J.P. Morgan & Co., was attending a church convention in Richmond, Virginia. Morgan was not only the city's wealthiest and most well-connected banker, but he had experience with crisis—he helped rescue the U.S. Treasury during the Panic of 1893. As news of the crisis gathered, Morgan returned to Wall Street from his convention late on the night of Saturday, October 19. The following morning, the library of Morgan's brownstone at Madison Avenue and 36th St. had become a revolving door of New York City bank and trust company presidents arriving to share information about (and seek help surviving) the impending crisis.[30][31]

J.P. Morgan, the dominant banker in New York City, had rescued the U.S. Treasury during the Panic of 1893.

Morgan and his associates examined the books of the Knickerbocker Trust, but decided it was insolvent and did not intervene to stop the run. Its failure, however, triggered runs on even healthy trusts, prompting Morgan to take charge of the rescue operation. On the afternoon of Tuesday, October 22, the president of the Trust Company of America asked Morgan for assistance. That evening Morgan conferred with George F. Baker, the president of First National Bank, James Stillman of the National City Bank of New York (the ancestor of Citibank), and the United States Secretary of the Treasury, George B. Cortelyou. Cortelyou said that he was ready to deposit government money in the banks to help shore up their deposits. After an overnight audit of the Trust Company of America showed the institution to be sound, on Wednesday afternoon Morgan declared, “This is the place to stop the trouble, then".[32]

As a run began on the Trust Company of America, Morgan worked with Stillman and Baker to liquidate the company's assets to allow the bank to pay depositors. The bank survived to the close of business, but Morgan knew that additional money would be needed to keep it solvent through the following day. That night he assembled the presidents of the other trust companies and held them in a meeting until midnight when they agreed to provide loans of $8.25 million to allow the Trust Company of America to stay open the next day.[33] On Thursday morning Cortelyou deposited around $25 million into a number of New York banks.[34] John D. Rockefeller, the wealthiest man in America, deposited a further $10 million in Stillman's National City Bank.[35] Rockefeller's massive deposit left the National City Bank with the deepest reserves of any bank in the city. To instill public confidence, Rockefeller phoned Melville Stone, the manager of the Associated Press, and told him that he would pledge half of his wealth to maintain America's credit.[36]

Central bank

Main article: History of the Federal Reserve System

A significant difference between the European and U.S. banking systems was the absence of a central bank in the United States. European states were able to extend the supply of money during periods of low cash reserves. The belief that the U.S. economy was vulnerable without a central bank was not new. Early in 1907, banker Jacob Schiff of Kuhn, Loeb & Co. warned in a speech to the New York Chamber of Commerce that "unless we have a central bank with adequate control of credit resources, this country is going to undergo the most severe and far reaching money panic in its history".[65]

Aldrich convened a secret conference with a number of the nation's leading financiers at the Jekyll Island Club, off the coast of Georgia, to discuss monetary policy and the banking system in November 1910. Aldrich and A. P. Andrew (Assistant Secretary of the Treasury Department), Paul Warburg (representing Kuhn, Loeb & Co.), Frank A. Vanderlip (James Stillman's successor as president of the National City Bank of New York), Henry P. Davison (senior partner of J. P. Morgan Company), Charles D. Norton (president of the Morgan-dominated First National Bank of New York), and Benjamin Strong (representing J. P. Morgan), produced a design for a "National Reserve Bank".[66]

[interestrateripoff]

Fuld was a knobhead who challenged the Giant Squid.

That's what you get for being a knobhead that challenges the Giant Squid.

He's gone - Giant Squid making record profits and shares back where they were before the collapse.

Simple.

Hilariously.

So taking on the giant squid if one is a knobhead isn't advisable?

Edited September 12, 2009 by interestrateripoff

[porca misèria]

Was Lehman allowed to go bust to save Goldman Sachs? Another competitor gone and that means more trade will go the GS and JP Morgan?

Nothing so direct. But the more good money gets poured after bad, the more it queers the pitch for the remaining players and any prospective newcomers.

Looking at our own crisis, what would've happened if NR had been put into administration rather than politically zombified? With hindsight, HBoS and B&B were almost certainly hopeless. But Lloyds should've been OK, Barclays might've been spared going for the Arab bailout, and at a stretch even RBS might just possibly have survived intact if the politicians had kept out. And Tescos banking et al could've been up-and-running by now.

[catmandu]

That will also apply, with even more piquancy, when Geitner, Paulson and various other Goldman Sachs executives get assassinated.

Good point! Though the risk of assassination didn't stop Fred Goodwin legging it with his millions instead of the 27,000 quid he was actually entitled to if RBS has gone bust.

[tomwatkins]

Fuld was a knobhead who challenged the Giant Squid.

That's what you get for being a knobhead that challenges the Giant Squid.

He's gone - Giant Squid making record profits and shares back where they were before the collapse.

Simple.

Truth is

Paulson-stock/pension in Lehman Bros-nil

stock/pension in GS-squillions.

[catmandu]

Oops - double post.

Edited September 13, 2009 by catmandu