ProPublica

Journalism in the Public Interest

Why Did Treasury Allow Lehman to Fail?

Getty ImagesMany 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.

In US bankruptcy history, Lehman Brothers is the largest bankruptcy. Because of continuous subprime mortgage crisis, Lehman faced record loss. Its loss had a big impact to investors. Jim Cramer got himself into a lot of hot water.  CNBC is the network home of Mad Money, the stock show hosted by Jim Cramer.  Likewise bear stearns, which also went to bankruptcy.  Nevertheless, Cramer has been subject to a good old fashioned public whipping by Jon Stewart for advocating people to sell their stock or pull any of their hedge funds or 401(k) plans investments in Bear Stearns. Cramer has also advocated the cash advance packages given to failing Wall Street firms.  Rick Santelli has also been pilloried for his diatribes on CNBC. Market experts such as Jim Cramer are coming under an increasing amount of fire.

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