The New Yorker‘s John Cassidy has an exceedingly good take on Ben Bernanke’s performance today in front of the Financial Crisis Inquiry Commission.
Part of his testimony was nothing new. “The only way we could have saved Lehman would have been by breaking the law,” he said, using the old reference to the Federal Reserve Act of 1934, which said money could be lent to a firm only if it could post enough collateral. And Lehman didn’t have enough. “I was not prepared to go beyond my legal authorities,” said Mr. Bernanke.
But things get more interesting from there. Today, for the first time, Bernanke conceded that the real problem wasn’t an obscure provision of a 74-year-old law about collateral. “Any attempt to lend to Lehman would be futile,” he said. “It wasn’t just a question of legality. It was a question of whether there was any conceivable option that would work.” The official view was that Lehman’s failure “was essentially certain in either case.”
That disclosure, as Mr. Cassidy says, could be very bad for Mr. Bernanke. “As long as he stuck to his story that saving Lehman was legally proscribed, there wasn’t very much more to be said,” he writes. “Now, though, Bernanke has shifted the debate onto the issue of whether saving Lehman would have been a practical option.” As the next drafts of the crisis’ story get written, this chapter is only going to get more interesting.
One tome that didn’t help was Henry Paulson’s On the Brink, in which the former treasury secretary said that he and his colleagues agreed just before the bankruptcy that “a Lehman failure would be more expensive for the taxpayers.” And so he would have liked to have helped Lehman Brothers, he says, by supporting a Bear Stearns-like takeover, but his “hands were tied” because no suitors wanted it. (As I wrote in February, that makes no sense.)
So what was the real reason? In his book last year, Mr. Cassidy called it self-deception and inconsistency. “In rescuing Bear, they had acknowledged the reality that, in a world of highly leveraged, massively interconnected financial capitalism, firms at the hub of the system can’t be allowed suddenly to implode,” he wrote. When the Lehman crisis came along, “Paulson and Bernanke had allowed themselves to imagine they were back in a simpler, more just world, one in which the financially irresponsible were held accountable. How else to explain the quixotic decision to let Lehman, a bigger and more interconnected firm than Bear, come crashing down in a single weekend?”
