Lehman's Failure: Did Paulson and Bernanke Lie?

Before we even get started down this line of questioning, letting Lehman Brothers go into bankruptcy was one of the few intelligent decisions made last Fall. Markets needed reminding that capitalism still existed and that bad balance-sheet decisions would not be rewarded.

Tangentially, has anyone stopped to consider that Lehman said it was fine and just needed $30 billion to get through the crisis, yet when all was revealed in bankruptcy court, there was a $613 billion-dollar hole in its balance sheet? This should provide some indication of the level of insolvency that permeates our nation's banking system. Most banks are massively insolvent if forced to value assets honestly. Nothing has changed except the accounting rules.

So back to Hank Paulson. At the time of Lehman's failure, he, Geithner and Bernanke all said that Lehman was let go because it could not be saved. Literally. They made the claim that the law didn't allow for a rescue, since Lehman wasn't a commercial bank. (Yet Bear Stearns was kept alive through extraordinary intervention, and it wasn't a commercial bank.)

So with the background in place, take a look at this excerpt from Andrew Ross Sorkin's new book on the crisis:

• When Paulson was finally connected to Wang, he moved quickly to the topic at hand, Morgan Stanley (MS). “We’d welcome your investment,” Paulson told Wang. He also suggested that one of China’s biggest banks, such as the Industrial and Commercial Bank of China, should participate, making the investment a strategic one. Wang, however, expressed his anxiety about C.I.C.’s becoming involved with Morgan Stanley, given Lehman Brothers’ bankruptcy.

• “Morgan Stanley is strategically important,” Paulson said, suggesting he would not let it fail.

• Wang remained unimpressed, asking for a commitment that the U.S. government would guarantee any investment. Paulson, trying to avoid making an explicit promise but also trying to assuage him, said, “I can assure you that an investment in Morgan Stanley would be viewed positively.”

Morgan Stanley would not be allowed to fail because it was strategically important. Lehman Brothers was not strategically important (but a huge Goldman competitor in most markets) and so they were not offered the option of becoming a bank holding company (but MS and GS were given this option), and Lehman was allowed to fail. Sending a 2-day message that capitalism still existed at least until the AIG blow-up a few days later.

Take a few minutes and read the entire article from Sorkin. It has more minute-to-minute detail than anything else I've read on last year's crisis.

Comments

[HBWOW:]

Is this confirming that Goldman and alumni are only promoting their
plan and are at the top of this whole "X?O?X@?+#@ situation"?

Oct 09 10:20 AM

[BRUCE E. W.:]

Sorkin's accounting is a fascinating chronology that seems to run all too smoothly as a defense teams' public relation spreadsheet (of sorts). At one poing in his narrative, if you accept all he presents as truely non-fiction) the entire world economy rested upon the shoulders of one single man and his insider connection to Goldman: Hank Paulson. This also goes on to reveal that the seemingly unethical connection between Goldman & Paulson were actually worked out 6 months earlier (under speculative "what if ...." considerations) so that the ethical waivers were all in place when the "Economic 9/11" events did actually take place (with perfect coincidental timing to the real 9/11 tragic National & Global crisis).

There is a very fascinating chronology in the workup of the story, but it remains to be tested by a greater objectivity. In reading this account you would think that all these guys were monumental heros and they had nothing at all to do with putting the entire system in danger in the first place. I think I would wait for the Michael Moore movie version of this book; or at least for some critical whistle blower to show up from Lehman to get a second opinion on this official "inside" defense team version. Any takers from LEHMAN BROTHERS?

Oct 09 11:07 AM

[The Daily Bail:]

Nice comment Bruce...

I will admit that i am obsessed with finding lies from the dynamic duo of Paulson and Bernanke...

I'm plotting some fantastic Nuremberg-style trials in my head...a man can dream...

Happy Friday everyone...thanks for reading our stories...

And if you like this stuff, we cover it every day all day at the Bail...

Thanks again,

steve

Oct 09 01:46 PM

[Anthony Har...:]

Capitalism has been the heart of the American economy. Favoritism has been quite obvious when the Fed and the US government allowed Goldman Sachs and Morgan Stanley. It is also becoming all the more evident in the case of JPMorgan, with its status as a commercial bank, and the largest one at that. The Fed cannot allow JPM to trip even over the smallest hurdle because of its “strategic importance”. But the bank’s health has been a cause for concern for a few. In a bid to bolster non-interest revenues (trading revenues) JPM assumed leverage far in excess of its optimum capacity. Its oversized derivative exposure (notional value) has exploded to almost $80 trillion – a staggering 5-6 times the size of the US GDP. What’s more, the market exposure it had so far has been hedged among the coterie of large banks, exchanging the market risk for counterparty risk! The slightest disturbance could cause a financial storm within these banks. Will the Fed be in a position to cover up such a gargantuan hole in JPM’s balance sheet (which I believe is even bigger than Lehman’s and Bear Stearns’)? There are other large hurdles that JPM faces which, under normal circumstances (without excessive government support), could very well spell doom for a bank. Here’s the link to the public excerpt of our proprietary research that throws light on JPM’s unconsolidated off balance sheet VIEs, its deteriorating loan exposure, skyrocketing charge-offs, compressing net interest margins, volatile trading revenues, rising VaR and many other insights: boombustblog.com/index...

Oct 14 09:20 AM

[copticpeter:]

The whole fed is a sham. Paulson, Bernanke, Geithner- they're all cheats and I hope that they get investigated. The failure of Lehman literally sent the entire global market system into a deep crench (term for constipation). Allowing this firm to go under was a giant mistake.

Oct 14 07:12 PM

[shaw:]

Even Wamu was seized in and literally given almost free to the JPM.I feel that we should investigate the reasons.

On Oct 14 07:12 PM copticpeter wrote:

> The whole fed is a sham. Paulson, Bernanke, Geithner- they're all
> cheats and I hope that they get investigated. The failure of Lehman
> literally sent the entire global market system into a deep crench
> (term for constipation). Allowing this firm to go under was a giant
> mistake.

Oct 15 08:14 AM