
In Ben Bernanke’s Memoir, a Candid Look at Lehman Brothers’ Collapse - svtrent
http://www.nytimes.com/2015/10/06/business/dealbook/in-ben-bernankes-memoir-a-candid-look-at-lehman-brothers-collapse.html?_r=0
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pmorici
Perhaps it is explained further in the book but what brings up questions more
than anything is what prompted them to save AIG 2 days after Lehman's
bankruptcy. A cynical person looks at the circumstances and says that AIG owed
Goldman Sachs a ton of money on credit default swaps and since Hank Paulson,
the Treasury secretary, was the former CEO of Goldman he was sympathetic to
that situation.

The stated reason is often that AIG was so huge that it had to be saved to
avoid disaster. Yet, this article seems to argue that the exact reason Lehman
wasn't saved 2 days earlier was because it was just too large for the
government to handle and that it didn't have the authority to do so until a
month later when TARP was passed.

You have to wonder how candid memoirs by former officials are vs attempts to
influence the historical record. Wikipedia says that Bernanke now advises
Citadel which benefited to the tune of $200 million from the bailout of AIG.

~~~
OliverJones
Perhaps there's a more benign explanation for the AIG bailout. It was quicker
and more efficient to give the money to AIG and let them pay their failing
counterparties (all those crooked investment banks holding the credit default
swaps) than it was to negotiate a bailout for each counterparty separately.

The paperwork for a first round startup financing is so complex and expensive
a lot of investors can't afford a deal below a few megabucks. Can you imagine
the paperwork to bail out an investment bank, multiplied by dozens and dozens,
that had to get done in a few days.

Once the govt and the fed had decided to intervene, they needed to get it
done. This got it done.

I'm afraid this is a case where justice for a few hundred bad actors took a
back seat to righteousness for the whole economy.

~~~
whatok
Still no good reason for counterparties not even taking a minor haircut on
CDS.

~~~
cmurf
It encourages moral hazard.

~~~
whatok
Can you explain? If I know that I will recover less than expected if a
counterparty defaults, I'm going to diversify my counterparties. That reduces
moral hazard.

~~~
cmurf
I'm agreeing. Not taking haircuts encourages moral hazard.

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zeeshanm
Going a little bit off on a tangent here but this article reminded me of how
the gold price against the dollar has historically been set:

>Every morning at nine o'clock, [acting treasury secretary] Morgenthau; Jesse
Jones, the head of the RFC; and George Warren would meet with the president
over his breakfast of soft-boiled eggs, to determine the price of gold for
that day. They began at $31.36 an ounce. The next morning this increased to
$31.54, then $31.76 and $31.82. No one had a clue how they went about setting
the price, although everyone presumed that some subtle analyses of the world
bullion and foreign exchange markets went into the calculations. In fact, the
choice of price was completely random. All they were trying to do was to push
the price a little higher than the day before. The exercise brought out the
juvenile in Roosevelt. One day he picked an increase of 21 cents, and when
asked why, replied that it was a lucky number, three times seven.

Source: "Lords of Finance"

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slavik81
When I was visiting Hiroshima in 2010, I stopped at a 'Japanese pizza' shop.
It was nothing like actual pizza, but the staff and other customers in there
were incredibly friendly, and we ended up trying to explain to each other
where we from and what our hobbies were, among other things.

One of them was a man who sat down at the table next to me. We talked for a
bit, and he explained that he worked at the Bank of Tokyo. I think he was
trying to practice his English. He asked me 'What is the most famous bank in
Canada?'

After thinking about the most famous Canadian bank for a bit, I told him it
was probably Toronto Dominion (TD). Or maybe the Royal Bank of Canada (RBC).
Then I thought for a moment and said 'Though, the bank most famous in Canada
is probably Lehman Brothers.'

He had such a look of sadness on his face when I said that.

~~~
drak0n1c
In Japan, the popular noun for the economic crisis is "Lehman-shock". A lot of
weight is attached to Lehman - appropriately so, but it has the effect of
sticking around in Japanese memory.

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chollida1
The Lehman brothers bankruptcy was a huge cluster fuck! I don't think most
people realize just how close it came to stopping the entire worlds economy.

The problem with Lehman was that it was a large prime broker for many hegde
and pension funds. That essentially means its a bank that holds the
holding(cash, stock and bonds) of these funds.

When it went bankrupt in the US, what was expected was that each of the funds
would pull out their holdings and move them to healthier prime brokers.

This would have the double bonus of removing one unhealthy company(Lehman) and
at the same time propping up other healthier companies by having them handle
the assest of the funds pulling their holdings out of Lehman( sort of like
letting a bank fail and having deposits put into other banks.

Unfortunately the British financial regulators, who built London on a program
of pretty much anything goes style regulation, woke up that day and decided
that for the first time ever they needed to actually regulate and they
declared Lehman's assets frozen, meaning that otherwise healthy funds
(including pension, mutual, and hedge) now had no access to their own assets.

So now hedge funds can't trade, pension funds can't pay people and mutual
funds can't allow redemption's and the other banks can't take in these assets
to prop themselves up. The equity markets started to seize up as funds had no
assets to trade.

The capital markets nearly seized up. Repo desks are the portion of banks that
lend money to each other to ensure everyone has the money they need to
operate, suddenly couldn't get money and weren't allowed to lend out money for
fear of lending to a company who might go bankrupt.

Almost all large companies these days operator on this over night borrowing,
using this to smooth out cash flows, similar to using a line of credit.

General Electric had 2 days of cash before they couldn't continue operations.
We came really, really close to having the entire world stop working!

Andrew Ross Sorkin has a great book called Too Big to Fail that goes into
this. House of Cards is also a great book on the 2008 crash.

The other big firm to go under in 2008 was Bear Sterns. If you like finance
read "When Genius Failed" its the history of the rise and fall of Long Term
Capital Management. In the book they detail how everyone except for Bear
Sterns pitches in to bail out the fund. In 2008 Bear Sterns was the one who
needed the bail out and the same people who pleaded with Bear to help with the
LTCM bailout just turned their bask of Bear and let them go bankrupt and then
get bought for $172 a share at the end of 2006 to being bought for $2 a share
in 2008.

~~~
PhantomGremlin
_General Electric had 2 days of cash before they couldn 't continue
operations. We came really, really close to having the entire world stop
working!_

People are debating this in other responses to you, but you're absolutely
right. E.g.:[1]

    
    
       The Fed then purchased commercial paper issued
       by GE 12 times for a total of $16 billion.
       It bought paper from Harley-Davidson 33 times,
       for a total of $2.3 billion. It picked up debt
       issued by Verizon twice, totaling $1.5 billion.
       ...
       Verizon spokesman Robert A. Varettoni said
       that it was "an extraordinary time," adding
       that there was no credit available otherwise
       at the time.
    

Forget the debate of whether GE is an industrial or a financial, etc. Verizon
was the 2nd largest telco in the USA, and if they needed money from the Fed
then yes WE CAME REALLY REALLY CLOSE to having (much of the) world stop
working.

If people are still not convinced, and they think that it was all financials,
consider that McDonalds also needed money from the Fed.[2]

[1] [http://www.washingtonpost.com/wp-
dyn/content/article/2010/12...](http://www.washingtonpost.com/wp-
dyn/content/article/2010/12/01/AR2010120106870.html) [2]
[http://www.asphaltandrubber.com/news/harley-davidson-
federal...](http://www.asphaltandrubber.com/news/harley-davidson-federal-
reserve-cpff-loan/)

~~~
Scoundreller
I think the actual scenario was that there was no credit available at rates
they were hoping to pay.

The fact that these situations happened 12 and 33 times suggests that
management had some structural disability in facing reality rather than
needing a short-term boost until they could go shopping for what they needed.

Just like shortages of profession X in geography Y, if you're not willing to
pay the price...

~~~
parasubvert
"I think the actual scenario was that there was no credit available at rates
they were hoping to pay."

Not on the traditional market from banks (i.e. commercial paper and repo) --
banks weren't lending money at any rate at the time as they really couldn't.
Keep in mind that bank loans are basically "money printing", something that
can't be done when your reserve ratio is already illiquid, as it was for most
in mid-late 2008.

Individuals and holding companies like Buffet/Berkshire with actual reserves
OTOH were giving high interest rate loans out (i.e. to Goldman), but those
were bespoke negotiations.

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snake_plissken
If you remove the Goldman Sachs alumni connections, and look at it from the
perspective that the Fed and Treasury really did not want to perform any bail
outs or rescues unless absolutely necessary, then the whole thing (sort of)
makes sense. The tentacles of AIG reached far and wide, to such things as
insurance on commercial jet liners and if AIG had gone under, those planes
would have contractually been not allowed to fly.

Yet it's incredibly difficult to believe the Fed and Treasury were completely
against any bailouts, considering that 6 months before, a rescue package was
offered to Bear Stearns, and the eventual purchase of Bear by JP Mogran was
effectively guaranteed via the NY Fed's backing.

I want to believe it was for reasons other than influence by GS and their
alumni, but that is a hard sell.

------
roymurdock
Here is the Treasury's Assistant Secretary for Economic Policy on why the Fed
bailed out plenty of other institutions, but did not bail out Lehman:

 _The reluctance of the Federal Reserve to lend to Lehman contrasts with its
actions regarding Bear Stearns and A.I.G. The difference is that in the other
two cases, the Fed saw itself as lending against reasonable collateral.

In the case of the Fed’s loans that facilitated the acquisition of Bear
Stearns by JPMorgan Chase, $29 billion of Fed money was at risk against a
collection of Bear Stearns assets thought to be worth $30 billion. JPMorgan
would absorb the first $1 billion if the value of those assets declined,
providing a cushion ahead of the Fed (that is, ahead of taxpayers). Those
assets were good in the end, with the Fed fully repaid with interest.

In the case of A.I.G., the Fed’s loans were collateralized by the entire
assets of the firm, based on the observation that A.I.G. had potentially huge
losses at its unit that sold credit default swaps but the rest of the firm was
a successful insurer. The latter parts — the rest of the company — provided
the collateral for the Fed’s initial loans, and eventually TARP funds were
substituted for the Fed resources to provide the company with a better capital
base rather than Fed loans. To be sure, it was hard to know in September 2008
that the value of the company would offset the potential losses in A.I.G.’s
financial products division, but this turned out to be the case, with both the
Treasury and the Fed turning considerable profits on their investments in
A.I.G.

Such a successful outcome was simply less imaginable with Lehman than with
either Bear Stearns or A.I.G. To all eyes, the problem at Lehman was one of
solvency while the issue in the other two cases was liquidity. The Fed’s
actions on Bear and A.I.G. were thus appropriate in its role as a lender of
last resort and the same with its caution at Lehman. Indeed, after Lehman had
filed for bankruptcy, the Fed did extend loans to allow the firm’s broker-deal
subsidiary to function, but in bankruptcy these loans could be fully
collateralized by assets within the brokerage subsidiary and not encumbered by
obligations in other parts of the larger firm._ [1]

Basically, Bernanke knew that Lehman owned a bunch of worthless paper whereas
firms like AIG, GM, Fannie Mae + Freddie Mac, Goldman, etc. owned actual
valuable assets that they could use as collateral against taxpayer loans, and
operated in profitable segments outside of risky IB and junk-debt
securitization. He was tight-lipped about saving Lehman Bro's because he
wanted the private sector to step up and do it themselves, and also so that
they wouldn't know whether or not to expect handouts from the Fed down the
road.

Although I disagree with Bernanke's decision to adhere to Keynesian economics
during the economic crisis, valuing short-term stability over properly setting
precedents for long-term prosperity and growth, I have to respect the man for
his intelligence and thoughtfulness. Looking forward to reading his account of
the crisis and why he made the decisions that created the economic environment
as it currently stands.

[1] [http://economix.blogs.nytimes.com/2013/09/13/why-lehman-
wasn...](http://economix.blogs.nytimes.com/2013/09/13/why-lehman-wasnt-
rescued/)

~~~
qaqy
FED does not put money at risk since unlike every other institution they
create $ out of thin air

~~~
roymurdock
I'm tired of seeing this argument. What they are putting at risk is the faith
of investors who trade in USD and the belief that the US economy is robust and
healthy.

Creating $ out of thin air also creates inflation within the financial system,
benefitting debtor institutions and hurting creditors. It also sets a
precedent that the Fed will simply push the magic money button whenever
something goes wrong, which affects market behavior.

The Fed pays a price every time it takes any action - you just have to think
harder about what that price is.

~~~
qaqy
If FED takes a position on their balance sheet that get's wiped out (very
theoretical since cost of carry for FED is 0) This does very little to erode
investor confidence compared to having full blown meltdown. In any case FED
eventually increased it's balance sheet to almost 20% of GDP around 2012 so it
might have being cheeper to bail out lehman brothers

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peter303
I heard they wanted to see what would happen if they did NOT bail out a major
institution, as part of the mix of reasons.

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elevenfist
Want the real story?

Inside Job - Charles Ferguson

------
arca_vorago
Lehman didn't fall, it was pushed, by Goldman Sachs. A veritable scapegoat,
the meat of which was then eaten by the remaining players. Take a look at
Henry Paulsons activities surrounding them for more insight. Financial
terrorists, the bankers are.

~~~
arbitrage
When you're that overleveraged, a slight breeze is enough of a push to send
you over the cliff.

Nobody set out to snipe Lehman, it fell due to its own incompetence.

~~~
arca_vorago
So explain the difference between it and the other banks that were in the same
state, but the others got rescued...?

~~~
saryant
The other banks _weren 't_ in the same state as Lehman.

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blazespin
Pure and complete lying. The government could have rescued Lehman Brother's.
It would have created very bad problems with TBTF, but they could have rescued
them. He's just trying to make it seem as if all the things they did were
right by pretending he was wrong in this one narrow instance.

I'm not saying that what they did was wrong. But the guy here is just making
up this pretend honesty to solidify all the choices he made afterwards.

Anyone who swallows this self serving nonsense is naive.

~~~
roymurdock
> It would have created very bad problems with TBTF

That's one of the reasons that both Paulson and Bernanke cite for not bailing
out Lehman.

Technically the government can bail out whoever they want for whatever amount
they want. Bernanke isn't dumb - he knows this. He is saying that the bailout
was impossible from a cost-benefit perspective. Setting a TBTF precedent so
early on and putting the garbage debt-profile of Lehman's underlying assets on
the government's balance sheet were too risky to justify bailing the bank out.

I'm also willing to reserve judgement until I read the full book rather than a
few quotes picked out by the NYT.

