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In Ben Bernanke’s Memoir, a Candid Look at Lehman Brothers’ Collapse

Lehman’s headquarters on its bankruptcy day in 2008.
Revisiting the Lehman Brothers Bailout That Never WasSEPT. 29, 2014
The players in a Wall Street flameout in 2008. From top, Kenneth D. Lewis, of Bank of America; John J. Mack, of Morgan Stanley; Richard S. Fuld Jr., of Lehman Brothers; and Timothy F. Geithner, president of the Federal Reserve Bank of New York.
Holding Off Disaster: The Race to Save LehmanOCT. 20, 2009
Leslee Gelber has been at loose ends since losing her job. Ken Linton, center, was ousted before the firm collapsed, and he began shorting its stock. Tom Ollquist, right, sold packages of mortgages and other financial products for Lehman

It is astonishing to hear a former Federal Reserve chairman acknowledge that he may have misled the public as part of an agreement with another senior government official about one of the most crucial moments in recent financial history — and that he now questions whether he should have “been more forthcoming.” But that is what Ben S. Bernanke says in his new memoir, “The Courage to Act: A Memoir of a Crisis and Its Aftermath.”

That crucial moment? The bankruptcy of Lehman Brothers. Mr. Bernanke, in perhaps in the most candid explanation of Lehman’s 2008 collapse, writes that he and Henry M. Paulson, then the treasury secretary, purposely obfuscated when asked about Lehman’s demise early on, allowing a narrative to develop that the government had purposely let the firm fail.

“In congressional testimony immediately after Lehman’s collapse, Paulson and I were deliberately quite vague when discussing whether we could have saved Lehman,” Mr. Bernanke writes. “But we had agreed in advance to be vague because we were intensely concerned that acknowledging our inability to save Lehman would hurt market confidence and increase pressure on other vulnerable firms.”

The former chairman of the Fed said that a rate hike should be the last resort. “It’s self-defeating to use the wrong monetary policy,” Mr. Bernanke said. By CNBC on Publish Date October 5, 2015.

Now, however, he appears to have some misgivings about some of those early statements. “I wonder whether we should have been more forthcoming, and not only because our vagueness has promoted the mistaken view that we could have saved Lehman.”

The admission helps fill in a crucial gap in the public’s understanding of Lehman’s failure, perhaps the most debated moment in the financial crisis and long considered the tipping point. Mr. Bernanke has tried to make a similar argument in interviews before, but never so clearly or emphatically, nor has he acknowledged so directly that he and Mr. Paulson agreed on what to say publicly in the days after Lehman’s collapse.

Speculation has swirled for years about whether the government could have saved the firm and whether its failure was a political choice. The flames were fanned by leaks from Mr. Paulson’s office before the rescue efforts began for Lehman — saying that the government would not put taxpayer money into the firm — and by comments from both Mr. Paulson and Mr. Bernanke in the weeks after the collapse.
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Financial Turmoil in 2008 …

March 14, 2008

The Federal Reserve provides financial backing

to JPMorgan Chase’s purchase of Bear Stearns.

June 9

Lehman Brothers reports a second-quarter

loss of $2.8 billion.

July 11

The Treasury Department general counsel writes in

an email that the Fed has “plenty of legal authority to

provide liquidity” to Lehman.

July 15

In an email, William C. Dudley of the Federal Reserve

Bank of New York outlines a plan for the Fed to take

$60 billion of assets off Lehman’s balance sheet.

… and Crisis

September

The federal government bails out

Fannie Mae and Freddie Mac.

7

The heads of Wall Street firms gather at the

New York Fed to look for ways to end the

Lehman crisis. The Treasury secretary tells

the participants that no government money

can be used in any rescue.

12

Attempts are made to arrange a Barclays

purchase of Lehman, but fall through the

next day.

13

Lehman files for bankruptcy.

15

The Fed announces an $85 billion bailout of

the American International Group.

16

Oct. 3

Congress passes the Troubled Asset Relief

Program, enabling the government to take big

equity stakes in banks.

Oct. 8

The Fed creates a second bailout facility for

A.I.G., worth $38 billion.

“Paulson’s declaration that no government money would be used to save Lehman, both before and during the weekend, also understandably fueled the belief that we chose to let Lehman fail,” Mr. Bernanke writes, recalling the crucial weekend in mid-September 2008 when it became apparent that no one would rescue Lehman. “Hank had various reasons for saying what he said, including his personal and political discomfort with the face of unpopular bailouts of too-big-to-fail institutions.”

But crucially, Mr. Bernanke writes: “Hank’s statements were to some extent beside the point, in that the Fed loans were the only government funds available. It would have been the Federal Reserve’s decision — not Hank’s or the Treasury’s — whether to make a loan, had a loan of sufficient size to save the firm been judged feasible.”

Mr. Paulson has long maintained that his statements were tactical, aimed at trying to pressure the other banks to put up their own money to save Lehman. “We didn’t want them to arrive thinking that we would be there waving a government checkbook,” Mr. Paulson said in his own memoir, “On the Brink: Inside the Race to Stop the Collapse of the Global Financial System,” published in 2010.
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Mr. Bernanke writes in his own book about the events surrounding Lehman’s failure that he was worried that Goldman Sachs and Morgan Stanley could have been next in line and that if the public thought the Federal Reserve couldn’t save those firms it would have only hastened the crisis.

“Our caginess about the reasons for Lehman’s failure created confusion about the criteria for any future rescues. Would it have been better for market confidence to have admitted that we were unable to save Lehman? Or was it better to maintain ambiguity, as we did, which suggested we still had the capacity to carry out future interventions? I don’t know.”

Of course, there will always be those who believe that the decision was a political one. “I understand why some have concluded that Lehman’s failure was a choice,” Mr. Bernanke writes. “In a way, it is a backhanded compliment: We had shown such resourcefulness to that point, it is hard to imagine that we could not have come up with some solution to Lehman.”

He writes that it was simply impossible to save Lehman, pointing to the nearly $200 billion of losses that Lehman’s creditors have since suffered. No one has come forward on the record, nor has any contemporaneous document been produced in the past seven years that said the government had found a way to save the company and specifically chose not to do so for political reasons, a point Mr. Bernanke alludes to in his book. “I do not want the notion that Lehman’s failure could have been avoided, and that its failure was consequently a policy choice, to become the received wisdom, for the simple reason that it is not true,” he writes. “We did everything we could think of to avoid it.”


http://www.nytimes.com/2015/10/06/business/dealbook/in-ben-bernankes-memoir-a-candid-look-at-lehman-brothers-collapse.html