Today is the anniversary of the financial meltdown kicked off by the Lehman Brothers bankruptcy and there has been a lot of second guessing of the actions taken by the Federal Reserve and Treasury Department following it.
We have pointed out here often that Sept. 15 was not the start of the credit crisis, but just an acceleration of it and the point when people took notice and leaders could no longer diminish its seriousness.
Six months earlier in March 2008, Bear Stearns was on the brink of bankruptcy when the Fed arranged for JP Morgan to acquire it in a sweetheart deal . The first announced deal had JP Morgan paying $2 per share with the taxpayers on the hook for $30 billion in questionable Bear Stearns debt. After shareholders complained the price was increased to $10 per share and JP Morgan would assume $1 billion of that questionable debt. A good deal for everyone except for taxpayers on the hook for the rest of the dodgy debt.
The Fed had already gone to extraordinary lengths—dropping the Fed Funds rate, opening up the discount window to investment banks and dealers and creating a myriad of special auction facilities to help the banking sector with its solvency crisis well before the Lehman implosion. In fact much of this activity dates back to the summer of 2007 when two Bear Stearns hedge funds went belly up. That was the true canary in the coal mine moment of the bank solvency crisis. Yet when questioned regarding the crisis prior to it going critical in September, both top money men, the Fed’s Ben Bernanke and Treasury’s Hank Paulson indicated the worst was over.
They are now being cited for bold leadership except for their one “so called” bungle of allowing Lehman to fail. They now claim that they did not have the authority to bail out Lehman. Perhaps that is true but they were quick to step in to save AIG once the magnitude of the Lehman bankruptcy was seen, and shortly thereafter TARP was passed providing $700 billion for them to solve the problem. And shortly after that Treasury changed on a dime its plan on how to use that $700 billion.
Jurisdictional boundaries and authorities didn’t seem like it would concern Treasury Secretary Hank Paulson, who had the chutzpa to go to Congress to ask (demand) $700 billion without providing many details and then turnaround a week later and change his plans on how to spend it.
A New York Times Web column also doubts the “no authority” excuse but suggests letting Lehman go might have been the correct move. The column cites a quote in a book on the collapse from a European banking official: “It never occurred to us that the Americans would let Lehman fail.”
That quote tells us a lot about what happened and how it happened. Remember the risk was out there and known for some time. We are supposed to be a free market economy but no one on the inside expected the Government to let Lehman collapse. The risk that was built up in the system was a direct result of this belief.
Fed chief Ben Bernanke and former Treasury chief Hank Paulson both like to say that they prefer to let the market work and not offer bailouts. That would be more believable if during this period there were one bailout and a half dozen big bankruptcies instead of the reverse.
In a free market the bailout not the bankruptcy should be the outlier.
Tags: bailout, Federal Reserve, TARP
