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« Charlie Rose: A Conversation With Elizabeth Warren (PBS Video) | Main | In A Sign Of Things To Come For The United States: S&P Threatens To Slash Britain's AAA Rating »
Thursday
May212009

Henry Paulson Breaks With Conventional Wisdom: "It Is Absolutely A Fiction That Lehman Was Anything More Than A Symptom"

This is big.  Several of us have been making the argument for months that the collapse and bankruptcy filing of Lehman Brothers last Fall was NOT the cause of the financial panic that ensued shortly after. (John Carney of Clusterstock has also written repeatedly on this subject and his thoughts are important to hear.)

Paulson's admission might appear inconsequential on the surface, but it's of paramount importance to the larger debate of taxpayers vs. bond-holders regarding the absorption of bank losses and writedowns. 

It's simple.  Existing bank debtholders and their K Street lobbyists (the institutions who lent money to reckless and over-leveraged banks) make the claim that to force a haircut (or debt-to-equity conversion) would precipitate another round of financial bloddletting.  This group cites the bankruptcy of Lehman (and the losses borne throughout the system on Lehman debt) as the sole and unique reason for the crisis last September.

Meanwhile, a gang of financial writers and Nobel Laureates from Stiglitz to Krugman have been clamoring for the losses to be incurred by those who bore the risk--the bondholders. 

Thus this somewhat startling admission from former Treasury Secretary Hank Paulson gives some decent ammunition to our side.  He is another name.   Wait that's wrong.  HE IS THE GUY.  Paulson was in the heart of the financial crisis, got covered in blood, lived to fish again and now is saying that IT WASN'T LEHMAN.

Instead he says to Newsweek that "a perfect storm of other near failures caused the financial crisis—the troubles at Fannie and Freddie, the news that AIG faced huge liabilities from its financial insurance gambles, the teetering of giant mortgage lender Washington Mutual on the edge."

Paulson insists that he did not turn his back on Lehman. "There's no company that I spent more time with and worked harder to save. That's sort of the irony of the narrative that we wanted them to go under," he told NEWSWEEK in one of his first extended interviews since leaving office. He also dismisses the argument that the fall of Lehman provoked a panic. "It is absolutely a fiction that Lehman was anything more than a symptom."

More from Newsweek writers Evan Thomas and Michael Hirsh: "Paulson began having his doubts about Fuld—and the future of Lehman—as early as October 2007, when Lehman made a big bet on commercial real estate even though there were signs the deal was unwise. Paulson remained dubious about Lehman's rosy earnings reports for the first half of 2008, and when the red ink began to show in June, he began urging Fuld to scale back Lehman's leverage and find a buyer or a fresh infusion of capital. He was frustrated, say these knowledgeable sources, when Fuld stubbornly demanded terms that were too favorable to Lehman to attract any buyers or investors."

Read the entire piece HERE.

 

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Reader Comments (11)

The Madoff Affair

PBS Frontline

http://www.pbs.org/wgbh/pages/frontline/madoff/
May 21, 2009 at 5:41 AM | Registered CommenterDailyBail
Thanks, Kojak!
May 21, 2009 at 8:11 AM | Unregistered CommenterJames H
This is huge. Paulson can forget about salvaging any part of his reputation.
May 21, 2009 at 1:55 PM | Unregistered CommenterBlankfein the Pompous Clown
I'm still waiting for someone to come out from behind a curtain, or closed door, with a videocam in hand and tell us,
"America, you got punked." Just to make it official, you know. And as stupid as the whole country seems to be, we'll all probably double over in laughter..."ahahaha you finanz boyz"
May 21, 2009 at 10:53 PM | Unregistered CommenterWizeUp
We are doubled over all right...but that hard thing sticking in your rear is NOT a camera!
May 21, 2009 at 11:28 PM | Unregistered CommenterAin't Bullshittin'
The April oversight report for COP is entitled Assessing Treasury’s Strategy: Six Months of TARP. In this report, COP offers a preliminary look at Treasury’s strategy and offers a comparative analysis of previous efforts to combat banking crises in the past.


Over the last six months, Treasury has spent or committed $590.4 billion of the TARP funds. Treasury has also relied heavily on the use of the Federal Reserve’s balance sheet which has expanded by more than $1.5 trillion (not including expected TALF loans) in conjunction with the financial stabilization activities it has undertaken beyond its monetary policy operations. This has allowed Treasury to leverage TARP funds well beyond the funds appropriated by Congress.
The total value of all direct spending, loans and guarantees provided to date in conjunction with the financial stability efforts (including those of the FDIC as well as the Treasury and the Federal Reserve) now exceeds $4 trillion. This report reviews in considerable detail specific criteria for evaluating the impact of these programs on financial markets.

THATS RIGHT YOU READ IT CORRECTLY-FOUR (4) TRILLION
May 21, 2009 at 11:49 PM | Unregistered CommenterAin't Bullshittin'
Yes that's right we are ALL up in arms over how the 750 BILLION dollar bailout bill was rushed through BOTH the CONgress and SATANete.....but who's bringing up the fact the Treasury has committed and ADDITIONAL 3 TRILLION on TOP of that clusterf/ck? Well......I AM!!!!!! OBAMA OWNS that additional money...I can fuss about W's idiotic team til the cows come home but Obama's team is THREE times WORSE.......Heaven help us all.....
May 21, 2009 at 11:53 PM | Unregistered CommenterAin't Bullshittin'
I haven't read the COP report, but why the 4T figure? What is the 12-13T figure that gets thrown around from time to time? (Obviously the 4T is scandalous enough.)

BTW, what happens if any of the various Fed loans go bad? Is the Fed made whole by Treasury or FDIC in order to protect the currency? LOL. I understand that with Pee-PIP, FDIC would guarantee the Fed loans, but what would the consequences be if the loans just went bad and no one paid back the Fed (and the assets turned out to be worth far less than Bubbles pretended to believe they were worth)?
May 22, 2009 at 12:10 AM | Unregistered CommenterJames H
They leveraged TARP funds...lol...so the country has one gigantic call option on itself, and of course we printed the money to pay the premium. It's a sure thing!
May 22, 2009 at 12:22 AM | Unregistered CommenterWizeUp
This Paulson pic is just begging to have some horns photo-shopped onto his head. Maybe some fangs. Anything you can do about this Daily Bail? It could be a regular feature.
May 22, 2009 at 12:40 AM | Unregistered CommenterJames H

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