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SEPTEMBER : THE BANKRUPTCY OF LEHMAN
Lehman’s unreliable valuation methods, the bankers had good reason for their
doubts. None of the bankers at the New York Fed that weekend believed the bil-
lion in real estate assets (excluding real estate held for sale) on Lehman’s books was
an accurate figure. If the assets were worth only half that amount (a likely scenario,
given market conditions), then Lehman’s billion in equity would be gone. In a
fire sale, some might sell for even less than half their stated value.
“What does solvent mean?” JP Morgan CEO Jamie Dimon responded when the
FCIC asked if Lehman had been solvent. “The answer is, I don’t know. I still could
not answer that question.” JP Morgan’s Chief Risk Officer Barry Zubrow testified be-
fore the FCIC that “from a pure accounting standpoint, it was solvent,” although “it
obviously was financing its assets on a very leveraged basis with a lot of short-term fi-
nancing.”
Testifying before the FCIC, former Lehman Brothers CEO Richard Fuld insisted
his firm had been solvent: “There was no capital hole at Lehman Brothers. At the end
of Lehman’s third quarter, we had . billion of equity capital.” Fed Chairman Ben
Bernanke disagreed: “I believe it had a capital hole.” He emphasized that New York
Federal Reserve Bank President Timothy Geithner, Treasury Secretary Henry Paul-
son, and SEC Chairman Christopher Cox agreed it was “just way too big a hole. And
my own view is it’s very likely that the company was insolvent, even, not just illiq-
uid.” Others, such as Bank of America CEO Ken Lewis, who that week considered
acquiring Lehman with government support, had no doubts either. He told the FCIC
that Lehman’s real estate and other assets had been overvalued by to bil-
lion—a message he had delivered to Paulson a few days before Lehman declared
bankruptcy.
It had been quite a week; it would be quite a weekend. The debate will continue
over the largest bankruptcy in American history, but nothing will change the basic
facts: a consortium of banks would fail to agree on a rescue, two last-minute deals
would fall through, and the government would decide not to rescue this investment
bank—for financial reasons, for political reasons, for practical reasons, for philo-
sophical reasons, and because, as Bernanke told the FCIC, if the government had lent
money, “the firm would fail, and not only would we be unsuccessful but we would
have saddled the taxpayer with tens of billions of dollars of losses.”
“GET MORE CONSERVATIVELY FUNDED”
After the demise of Bear Stearns in March , most observers—including
Bernanke, Paulson, Geithner, and Cox —viewed Lehman Brothers as the next big
worry among the four remaining large investment banks. Geithner said he was “con-
sumed” with finding a way that Lehman might “get more conservatively funded.”
Fed Vice Chairman Donald Kohn told Bernanke that in the wake of Bear’s collapse,
some institutional investors believed it was a matter not of whether Lehman would
fail, but when. One set of numbers in particular reinforced their doubts: on March
, the day after JP Morgan announced its acquisition of Bear Stearns, the market
