The Daily Bail

Before we even get started down this line of questioning, letting Lehman Brothers go into bankruptcy was one of the few intelligent decisions made last Fall.  Markets needed reminding that capitalism still existed and that bad balance-sheet decisions would not be rewarded.  

Tangentially, has anyone stopped to consider that Lehman said it was fine and just needed $30 billion to get through the crisis, yet when all was revealed in bankruptcy court, there was a $613 billion-dollar hole in its balance sheet? This should provide some indication of the level of insolvency that permeates our nation's banking system.  Most banks are massively insolvent if forced to value assets honestly. Nothing has changed except the accounting rules.

So back to Hank Paulson.  At the time of Lehman's failure, he, Geithner and Bernanke all said that Lehman was let go because it could not be saved.  Literally.  They made the claim that the law didn't allow for a rescue, since Lehman wasn't a commercial bank. (Yet Bear Stearns was kept alive through extraordinary intervention, and it wasn't a commercial bank.)

So with the background in place, take a look at this excerpt from Andrew Ross Sorkin's new book on the crisis:

• When Paulson was finally connected to Wang, he moved quickly to the topic at hand, Morgan Stanley. “We’d welcome your investment,” Paulson told Wang. He also suggested that one of China’s biggest banks, such as the Industrial and Commercial Bank of China, should participate, making the investment a strategic one. Wang, however, expressed his anxiety about C.I.C.’s becoming involved with Morgan Stanley, given Lehman Brothers’ bankruptcy.

• “Morgan Stanley is strategically important,” Paulson said, suggesting he would not let it fail.

• Wang remained unimpressed, asking for a commitment that the U.S. government would guarantee any investment. Paulson, trying to avoid making an explicit promise but also trying to assuage him, said, “I can assure you that an investment in Morgan Stanley would be viewed positively.”

Morgan Stanley would not be allowed to fail because it was strategically important.  Lehman Brothers was not strategically important (but a huge Goldman competitor in most markets) and so they were not offered the option of becoming a bank holding company (but MS and GS were given this option), and Lehman was allowed to fail.  Sending a 2-day message that capitalism still existed at least until the AIG blow-up a few days later.

Take a few minutes and read the entire article from Sorkin.  It has more minute-to-minute detail than anything else I've read on last year's crisis.

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