Killing the Chicken to Scare the Monkey
Johns Hopkins economics professor
Laurence Ball has written an extraordinarily well-researched book on the demise
of Lehman Brothers. At the very least he seriously questions the official
response to the Lehman bankruptcy which states that Lehman was insolvent and
lacked adequate collateral on September 15, 2008 and at maximum he completely
debunks the Fed and the Treasury. Although I am not in the complete debunking
camp, Ball has certainly changed my views on the subject.
Specifically Ball calculates that Lehman
was borderline solvent at the time of the bankruptcy filing. In my own view
based on Ball’s numbers I would have them more in the insolvent category because
of the way Ball values Lehman’s Level 2 assets. Be that as it may, Ball is convincing
when he argues that Lehman had sufficient collateral for a loan under the Primary
Dealer Credit Facility (PDCF) at the time of the filing and it certainly had
the collateral when the requirements were eased two days later. Ball cogently
argues that Maiden Lane rescue of Bear Stearns and the subsequent AIG rescue
were far more risky for the Fed than a short-term loan to Lehman would have
been.
Then why didn’t the Fed at least
temporarily bail out Lehman. To Ball it was pure politics with Treasury
Secretary Hank Paulson leading the charge against any hint of a bailout. Put simply a Lehman bailout was viewed as politically
toxic. And in fact, the consequences of letting Lehman go allowed the Congress
to go forward with TARP and for the Fed to open the floodgate of cash under
Section 13(3) of the Federal Reserve Act. A year later New York Times columnist
wrote “Lehman Had to Die, So Global Finance Could Live” (September 11, 2009). Put
bluntly the chicken had to die.
Ball argues that if the Fed intervened
and kept Lehman alive, at least temporarily, the deluge that followed would
have been averted. Here I respectfully disagree. AIG was already a goner and
the markets would have immediately turned their attention to the severe
problems at Morgan Stanley and Citigroup. Clearly stated, there were too many
toxic assets awash in the system. All bailing out Lehman would have done would
have been to delay the inevitable, which in my mind would have been far worse.
Ball’s encyclopedic sources include all
of Lehman’s SEC filings, the Valukas report, testimony before the Financial
Crisis Inquiry Commission, the books by Bernanke, Paulson and Geithner and Andrew
Ross Sorkin’s “Too Big To Fail.” One failing is that he should have talked to
Lehman’s CEO Dick Fuld. In my view Fuld was so full of himself that he refused
to see the writing on the wall and held out for too high of a price in his
failed attempt secure financing for Lehman in 2008. Further exacerbating the
situation is that Fuld was hardly the most agreeable person around and likely
rubbed his regulators and the other major firms the wrong way. In the interest
of full disclosure I was a managing director at Lehman from 2000 – 2005.
Ball’s book is very detailed and the
writing leaves out the high drama of the situation making it very text bookie
and slow going. Nevertheless the facts speak for themselves.
The full Amazon URL appears at: https://www.amazon.com/review/R61722ZNJ3XFH/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv
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