INVESTMENT BANKING | LEGAL/REGULATORY
By PETER EAVIS
Six weeks after Lehman Brothers filed for bankruptcy in September 2008, Ben S. Bernanke, then chairman of the Federal Reserve, gave his central bank colleagues an imitation of the people who were already criticizing the government’s decision to let the Wall Street bank collapse.
“What in the heck were you guys doing letting Lehman fail?” he said, according to minutes of a closed Fed meeting in late October 2008 that were released on Friday.
Mr. Bernanke did not debate whether it was right to let Lehman die at the Fed meeting held on Sept. 16, the day after the investment bank filed for bankruptcy, according to the newly released minutes. But from the comments in the October meeting, he appeared to have been aware that the government’s decision to let Lehman fail was coming under intense scrutiny from prominent financial figures around the world who said it was a huge and unnecessary mistake that caused global financial markets to freeze up.
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The Lehman decision is still fiercely debated today as politicians and regulators grapple with how to handle large banks in unstable times. In addition, the reputations of Mr. Bernanke and Henry M. Paulson Jr.,Treasury secretary at the time, rest heavily on the Lehman episode.
The transcripts of the 2008 Fed meetings that were published on Friday provide one of the fullest pictures yet of the thinking of top government officials on Lehman’s implosion. The documents will most likely prompt a fresh examination of the decisions made in that crisis year.
“For the equilibrium of the world financial system, this was a genuine error,” Christine Lagarde, France’s finance minister at the time, said in the days after Lehman’s demise.
In response to their critics, both Mr. Bernanke and Mr. Paulson have since said that they could not save Lehman because their hands were legally tied. Mr. Bernanke made that argument at the Oct. 29 meeting of the Federal Open Market Committee meeting. “The Fed and the Treasury simply had no tools to address both Lehman and the other companies that were under stress at that time,” he said.
But six months earlier, in March 2008, the Fed found the tools to bail out Bear Stearns, another Wall Street firm toppling under the weight of soured mortgages, and the Fed took all sorts of extraordinary steps to rescue the American International Group the day after Lehman filed for bankruptcy.
Some of those present during the 2008 decisions assert that Mr. Bernanke and Mr. Paulson either did not act because they expected Wall Street firms to rescue Lehman or because they feared that bailing it out would create an appetite for even more taxpayer largess.
Today, critics of the Treasury and the Fed say that the our-hands-were-tied argument may be an excuse, used after the fact, as a shield from criticism that they were negligent and miscalculated badly.
“It was a post-incident rationalization,” Harvey R. Miller, a partner at Weil, Gotshal & Manges, said in an interview on Friday.
Mr. Miller represented Lehman in its last-minute efforts to find a solution over the weekend of Sept. 13 and 14 that ended up with the bankruptcy filing the next day. “It was never mentioned during that fateful weekend.”
The meetings whose minutes were released on Friday were not the only forums for senior Fed officials to discuss how to deal with problems in the financial sector. Officials like Mr. Bernanke andTimothy F. Geithner, who was president of the Federal Reserve Bank of New York at the time, would have helped make momentous decisions at other types of meetings, whose proceedings remain under wraps.
Still, in the months before Lehman’s collapse, Fed officials in the Open Market Committee meetings did not voice concerns that Lehman was close to failing or posed a great danger to the wider system. Even though Lehman’s problems dominated the headlines during the summer of 2008, transcripts of the Fed meetings in July and August do not include mentions of Lehman at all. And in the June meeting, Fed officials said that Lehman was benefiting from being able to borrow from the central bank’s emergency credit lines.
The Fed and the Treasury tried in the days before Lehman’s collapse to get a consortium of Wall Street banks to participate in a bailout of the firm. That fizzled. At the same time, there were efforts to arrange for the British bank Barclays to buy Lehman. But the British government balked at approving the deal. Reports of the negotiations suggest that the British government would have allowed the purchase if the Treasury Department had agreed to cover losses at Lehman, but that apparently did not happen.
The newly released minutes hint at the Treasury’s actions in the Lehman saga.
At the Sept. 16, 2008, meeting, one senior Fed official, Eric S. Rosengren, president of the Federal Reserve Bank of Boston, speculated on whether it was wise to have let Lehman go. “Given that the Treasury didn’t want to put money in, what happened was that we had no choice,” he said.
Mr. Miller said that he now believed that events had made Mr. Paulson extremely reluctant to rescue Lehman.
“Post the Bear Stearns bailout, he was subjected to such criticism, both from various congressional personnel, from conservative groups, that he was actually scarred,” Mr. Miller said.
Mr. Paulson did not comment on Friday, but he has recently defended his Lehman actions. Last year, in a new prologue to his book on the financial crisis, “On the Brink,” Mr. Paulson wrote, “I continue to believe we did the only thing we could have done, legally, in that episode. We did not have the authority to save Lehman or to seize it and unwind it in an orderly fashion.”
Mr. Bernanke also did not comment on Friday.
While Lehman was not bailed out, A.I.G. was.
But according to Mr. Bernanke and others afterward, there was a crucial difference between A.I.G. and Lehman that allowed only the insurer to qualify for enormous Fed loans. Fed officials have said A.I.G. had sufficient assets to back loans from the central bank, whereas Lehman did not.
When the Financial Crisis Inquiry Commission, a government-appointed committee set up to examine the crisis, asked Mr. Bernanke in 2009 to explain the differences between A.I.G. and Lehman, he painted a particularly dire picture of Lehman’s financial standing.
“In the case of Lehman Brothers, there was just a huge hole. I mean, they were insolvent and they had a 30- to 40-billion-dollar hole in their capital structure,” he said.
But it is not clear what evidence Mr. Bernanke had for suspecting such a large hole. The crisis commission asked the Fed to supply the calculations and materials it used to support the view that Lehman lacked the collateral to back a loan. But the commission’s final report said the Fed did not meet that request.
“Although Fed officials discussed and dismissed many ideas in the chaotic days leading up to the bankruptcy, the Fed did not furnish to the F.C.I.C. any written analysis to illustrate that Lehman lacked sufficient collateral to secure a loan,” the report noted.
Back in October 2008, as criticism of the Fed’s handling of troubled banks was heating up, Mr. Geithner warned his fellow central bankers to watch their words. “But please be very careful, certainly outside this room, about adding to the perception that the actions by this body were a substantial contributor to the erosion in confidence,” he said in the minutes.
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