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« Zingales On Breaking The Mega-Banks: "Yes We Can, Mr. Geithner" | Main | Guest Post From MSNBC's Dylan Ratigan: Corporate Communists Control (Own) The Economic & Political Structure Of America »
Thursday
Oct082009

Did Paulson & Bernanke Lie About Why Lehman Was Allowed To Fail

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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Reader Comments (10)

Oct 8, 2009 at 11:46 AM | Registered CommenterDailyBail
DailyBail:

I see Ron Paul & Alan Grayson have written Dodd & the Senate committee to withold approval of Bernanke's reappointment. The honorable gentlemen's letter is here:
http://www.zerohedge.com/sites/default/files/Senate%20Letter%20on%20Bernanke%20Nomination.pdf
Oct 8, 2009 at 12:47 PM | Unregistered CommenterCD
What did you call this, oh yeah, old news.
Oct 8, 2009 at 2:07 PM | Unregistered Commentergobias
CD

Thanks for the link...i actually posted it twice last night in the comments sections here...we will cover the letter, but in reality, they have no [pull in the Senate so I'm not holding my breath.

Gobias

The issues surrounding Paulson, Geithner and Lehman are still relevant...after all, the trials haven't even gotten started yet. :)
Oct 8, 2009 at 5:31 PM | Registered CommenterDailyBail
Gobias:

Ah, I did not read all the comments yesterday. As you say, they in fact have no drag in the Senate. However it's good to see that Ron Paul is no longer alone in questioning the financial chicanery of the Washington-Wall Street axis.

Trials ? Why in blazes haven't there even been hearings ? Why is Holder's DOJ doing nothing ? Why hasn't the president called for investigations ?

Oh, wait ... I seem to recall where a big slice of his campaign contributions originated.
Oct 8, 2009 at 8:07 PM | Unregistered CommenterCD
CD...the comment was actually from me...i was responding to Gobias in the top of the comment and then to you....

The hearings so far have been focused on Fuld and AIG...we can hope for more but they won't happen until the next round of bank bailouts...
Oct 8, 2009 at 8:22 PM | Registered CommenterDailyBail
Grass Root Protest "End the Fed" Nov22, 2009

Join in folks

November 22 - Nationwide End the Fed Action Day
http://www.youtube.com/watch?v=L-cR0i2YP3A&feature=player_embedded#November 22 - Nationwide End the Fed Action Day
Oct 9, 2009 at 3:29 PM | Unregistered CommenterKen
Kaptur has become something of a crusader for homeowners’ rights in the wake of the housing crisis, as well as a major critic of US banks. Moyers played a clip of her giving a speech this past January in which she urged homeowners to ignore eviction notices and become “squatters in [their] own homes” if they need to.

So why should any American citizen be kicked out of their homes in this cold weather? … Don’t leave your home. Because you know what? When those companies say they have your mortgage, unless you have a lawyer that can put his or her finger on that mortgage, you don’t have that mortgage, and you are going to find they can’t find the paper up there on Wall Street. So I say to the American people, you be squatters in your own homes. Don’t you leave. In Ohio and Michigan and Indiana and Illinois and all these other places our people are being treated like chattel, and this Congress is stymied.

Kaptur recounted an anecdote about inviting representatives of investment bank JPMorganChase, the largest forecloser of homes in Kaptur’s Ohio district, to a meeting, and then waiting around all day as no one from JPMorganChase showed up — until nearly the end of the day.

“That’s how they treat our people,” Kaptur said.

Asked what she thought of the Obama administration’s decisions to have in place many of the figures associated with the financial collapse — such as former Federal Reserve Bank of New York head Timothy Geithner, who is now treasury secretary, and Federal Reserve Chairman Ben Bernanke, a Bush administration appointee — Kaptur said: “I don’t think any individuals who had their hands in creating this mess should be in charge of cleaning it up. I honestly don’t think they’re capable of it.”

http://www.prisonplanet.com/top-economist-obama-refused-to-fix-bank-system-now-its-too-late.html
Oct 11, 2009 at 11:20 AM | Unregistered CommenterKen
I'm watching this, now, Ken. Just saw it on the Big Picture. Marcy Kaptur is one of the bright lights in these dark times. Simon Johnson isn't backing down from his earlier piece in the Atlantic, either. Good for him.

http://www.pbs.org/moyers/journal/10092009/watch.html
Oct 11, 2009 at 1:53 PM | Unregistered CommenterJames H
He said: "Paulson was finally connected to Wang" huh huh....huh huh huh

(Sorry, I'll finish reading the post now, but I just had to get that out of my system)
Oct 11, 2009 at 2:08 PM | Unregistered Commentermark mchugh

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