Many economists say one of the key triggers for the credit markets’ near collapse was the fall of Lehman Brothers. The government’s choice to let the firm fail has therefore been a main point of criticism, but in an interview with the New York Times, Treasury Secretary Henry Paulson says he had no choice.

The reason, he says, is that the government at the time didn’t have the power to save Lehman. The firm was in such poor financial shape that the Federal Reserve couldn’t legally put up the money to guarantee a sale. According to Paulson, AIG and Bear Stearns were salvageable because they had sufficiently trustworthy collateral; by contrast, Lehman’s bad assets created “a huge hole” on its balance sheet.

In the interview, Paulson holds former Lehman CEO Dick Fuld personally responsible for the fall: “Lehman announced bad earnings around the middle of June, and we told Fuld that if he didn’t have a solution by the time he announced his third-quarter earnings, there would be a serious problem. We pressed him to get a buyer.”

Neither Paulson nor other officials have previously asserted that they couldn’t save Lehman because of a lack of collateral.  And “people close to Lehman” insist in the Times that the government never talked to them about it. Says one such source: “The government saw everything in real time involving Lehman’s liquidity, funding, capital, risk management and marks — and never expressed any concerns about collateral or a hole in the balance sheet.”

Also, the Times reports that government officials seemed to give mixed messages to Lehman’s two potential buyers, Bank of America and Barclays, as to whether federal aid might be forthcoming. The two banks eventually walked away “frustrated by the government’s unwillingness to commit to a deal,” leaving Lehman to slide into bankruptcy.

At the time of the collapse, Paulson was blunt: “I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers.” He did not say that his hands had been tied.

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