In the latest variation on the theme that the September 2008 Lehman Brothers bankruptcy was in reality a calamity for civilization, and perhaps would have been better avoided, the Financial Crisis Inquiry Commission has published a series of emails revealing that officials faced heated debate and high uncertainty over what to do about the failing investment bank even as it began to file for bankruptcy.
The FCIC’s hearings last week had already revealed some cracks in Federal Reserve Chairman Ben Bernanke’s heretofore oft-repeated contention that an intervention by his agency to prevent a Lehman failure was illegal and therefore impossible. Last week, Bernanke added that, even taking into account extralegal measures, the Fed was powerless to prevent Lehman from going belly up.
Some emails published and excerpted over at The New York Times‘ DealBook bolster the case that Bernanke, then-Treasury Secretary Henry Paulson, then-New York Fed chief Tim Geithner and others faced some political pressure to hang Lehman out to dry. Ex-Lehman CEO Dick Fuld has emphatically voiced his suspicions that Lehman was singled out by officials as sacrifice to public anti-bailout sentiment.
The emails reveal some discussion of public perception of a prospective Lehman intervention, but perhaps the biggest bomb from the meeting is an email from Bernanke, which says, “In case I am asked: How much capital injection would have been needed to keep LEH alive as a going concern? I gather $12B or so from the private guys together with Fed liquidity support was not enough.” As Lehman sunk, top officials whose job it was to ensure the stability of the financial system, had little idea what the cost of saving Lehman would ultimately be.
In hindsight, we know that the added market dysfunction created by the Lehman blowup imposed tremendous costs to the economy, and there’s a growing consensus that extraordinary measures to save it were probably justified. At the time, though, policymakers were mainly confused and indecisive in the face of the tremendous crisis.