When the worst could have been avoided
It is said that “the global economy experienced a sudden stop after September 15.” That was the day that Lehman Brothers was forced to file for bankruptcy, which shut down the flow of funds among banks around the world, the very lifeblood of modern economies. The WSJ has a lengthy article on the Lehman failure and related events, which includes this vignette from the afternoon of September 14:
Mr. Fuld told his board of directors to gather at the firm’s offices. By noon, he expected, the board would be able to approve Lehman’s sale to Barclays. One hurdle remained: To ink a Lehman deal, Barclays needed a shareholder vote. There was no way to get one on a Sunday. Barclays would need the U.S. or British government to back Lehman’s trading balances until a vote could be held.
Government approval never came, though there are diverging views on why. Some blame the U.S. government for refusing to commit resources. Others say the British government refused to entertain a deal they worried would expose England to unnecessary risk.
Lehman’s president, Mr. McDade, and Mr. Cohen, the attorney, called Mr. Fuld from the New York Fed. Passing Mr. McDade’s cellphone back and forth, they broke the Barclays news. Mr. Fuld postponed his board meeting.
It appears from the WSJ article that the US and British governments could indeed have prevented a Lehman failure by facilitating the Barclays merger, though the Fed Chairman denies this. In its way, the decision to let Lehman fail was as bad as the decision to let the Bank of the United States fail in 1930 — arguably the event that turned the recession of 1929 into the Great Depression.
All the scurrying around, creating TARP and other makeshift solutions, has been an attempt to recover from this calamitous decision. And today we are told that the chaotic nature of Lehman’s Chapter 11 filing wiped out $75 billion that would have been available to creditors, another ridiculous footnote to this sad tale.
December 30th, 2008 at 1:39 am
I’m not sure I believe that “the worst could have been avoided”. The deep rot in the system had built up to the point so that something was going to set it off eventually. For instance, the collapse of the Madoff Ponzi scheme could have done it. GM bankrupcy could have done it.
It’s kind of like the way WWI started. If you look at the history books and don’t delve deeply it will seem as if it all started with an assassination in Sarajevo. But in fact the entire place was primed for war; that pistol shot was just the spark that started the conflagration. If it hadn’t been that, it would have been something else.
December 30th, 2008 at 12:07 pm
There is a good article about this over at Naked Capitalism. The key premise is one of corporate/personal liability on the part of Lehman & it’s officers and directors. Clearly Lehman had significant problems that was going to kill it. Could Fuld et al speak a story line that differed from that portrayed in their financial statements without assuming significant liabilities?
I suspect everyone in the room was speaking past one another saying prepared speaking note bullets. I’m sure once Barclay’s applied their banking experience to the situation, their due diligence showed they needed a Government to step in and take the toxic assets that would be found once they owned Lehman. If that didn’t happen, there would be no deal as Barclay’s would likely fail with Lehman’s toxic debt.
No Central Bank could know the extent of the mess Lehman had created. That was something for discovery in the marketplace. Their pass on assuming unknown levels of toxic debt was the right decision.