Understanding why Lehman was allowed to die goes beyond apportioning responsibility for the financial crisis and the recession that cost millions of ordinary Americans jobs and savings. Today, long after the bailouts, the debate rages over the Fed's authority to bail out failing firms. Some Fed officials worry that when the next financial crisis comes, the Fed will have less power to shield the financial system from the failure of a single large bank.
After the Lehman debacle, Congress curbed the Fed's ability to rescue a bank in trouble. Whether to save Lehman came down to a crucial question: Did Lehman have enough solid assets to back a loan from the Fed?
Finding the answer fell to two teams of financial experts at the New York Fed. Those teams had provisionally concluded that Lehman might, in fact, be a candidate for rescue, but members of those teams said they never briefed Mr. Geithner, who said he did not know of the results. Bernanke and Mr. Paulson said in recent interviews with The Times that they did not know about the Fed analysis or its conclusions. Interviews with half a dozen Fed officials, who spoke on the condition they not be named, so as not to breach the Fed's unofficial vow of silence, suggest some Fed insiders believed that the government had the authority to throw Lehman Brothers a lifeline, even if the bank was nearly broke.
The Fed earlier came to the rescue of Bear Stearns, after doing little analysis, and only days later saved the American International Group. Ultimately, whether Lehman should have gotten Fed support was a judgment call, not a matter of strict statute, these people said.
But they never said we couldn't do it. As another participant put it, "It was a policy and political decision, not a legal decision.
The account from the New York Fed officials provides new insight into a dangerous moment in Wall Street history. Countless financial figures — from Wall Street chiefs to government policy makers — have said that allowing Lehman to die the way it did was a misjudgment that inflicted unnecessary pain.
Blinder, an economics professor at Princeton and former vice chairman of the Fed, wrote in his history of the financial crisis, "After the Music Stopped.
Read More Why astrong dollar is scarier than taper tantrum. Blinder said in an interview. Is it enough? Those are important questions. Whether the Fed should have tried to save Lehman is still a subject of heated debate. And it is unclear whether the firm could have been rescued at all. What happened that September was the culmination of circumstances reaching back years — of ordinary people too eager to borrow, of banks too eager to lend and of Wall Street financial engineers reaping multimillion-dollar bonuses.
Even so, saving Lehman from complete collapse might have shielded the economy from what turned out to be a crippling blow. And as the subsequent rescue of A. Back in , the Fed possessed broad authority to lend to banks in trouble. Section of the Federal Reserve Act provided that "in unusual and exigent circumstances" the Fed could lend to any institution, as long as the loan was "secured to the satisfaction of the Federal Reserve Bank.
What happened when there was no guarantee of a government loan for Lehman Brothers? What happened to make the firm Bear Stearns collapse? How much money did Lehman Brothers lose? How did Lehman Brothers collapse affect the economy?
Was letting Lehman fail a mistake? What does it mean to be too big to fail? Which banks were bailed out in ? Why did the government bail out Bear Stearns? Why did the government bail out banks?
Did Lehman Brothers clients lose money? Similar Asks. As I have argued on this site previously, 19 the proposed legislation would significantly improve the effectiveness of bankruptcy by facilitating SPOE-style transactions. Under SPOE, shareholders would not be the only constituency that would bear losses. Bondholders and other holders of longterm debt would too, and they can be expected to argue vehemently that SPOE will unleash chaos if it is implemented, just as according to them bankruptcy would.
The shadow of Lehman could reinforce this reasoning. It could discourage regulators from invoking Title II, or could encourage them to delay intervention too long. If regulators and others do not believe bankruptcy can work, they may slack off in their preparations for its use. They may not oversee the living will process and stress tests as vigorously, and incorporate bankruptcy as fully, if they do not believe bankruptcy will actually be an option if a large financial institution falls into distress.
I do not want to exaggerate the significance of these consequences. Most do not seem to have materialized thus far, at least among those most involved in the design of the post-crisis financial architecture.
Ten years after Lehman, memories of are still vivid. Regulators have been energetically and creatively working to make the SPOE process and the bankruptcy alternative as effective as possible.
But as memories of the crisis grow dimmer, the conventional wisdom about Lehman could prove corrosive. The best antidote would be to pass the proposed bankruptcy for banks legislation, and to rethink the meaning of Lehman, so that a new narrative is in place when the next crisis hits.
The author did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article.
He is currently not an officer, director, or board member of any organization with an interest in this article. David Skeel S. Play Video. Brookings Now Bernanke on the causes of the financial crisis, questioning how we measure potential economic output, and more new research in economics Fred Dews.
Footnotes See, e. Too Big to Fail , pp. Too Big to Fail , p. See, e. See also Henry M. What if AIG fails? All of AIG's losses currently incurred by the government would not have disappeared if AIG had gone bankrupt: they would have simply occurred elsewhere in the financial system. But no one could have imagined where these losses went in the financial system.
Is AIG a Fortune company? The insurance giant continued to drop the list this year, with sales declining 6. What happened when there was no government credit guarantee to Lehman Brothers? As a result, the Lehman brothers went bankrupt and AIG nearly went bankrupt. What happened to take down Bear Stearns? Bear Stearns was a New York-based global investment bank and finance company that was founded in and went bankrupt during the financial crisis. Exposure to CDOs and toxic assets in the flagship hedge fund, which was bought with high leverage, resulted in his death.
How much money did Lehman Brothers lose?
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