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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
this Lehman mess,” Wilkinson wrote that he still “[couldn’t] imagine a scenario
where we put in [government] money . . . we shall see.” That afternoon, Fed Gover-
nor Warsh wrote, in response to a colleague’s hope the Fed would not have to protect
some of Lehman’s debt holders, “I hope we don[’]t protect anything!” But on Friday,
Fed Chairman Bernanke was taking no chances. He stayed behind in Washington, in
case he had to convene the Fed’s board to exercise its emergency lending powers.
Early Friday evening, Treasury Secretary Paulson summoned the “heads of fam-
ily”—the phrase used by Harvey Miller, Lehman’s bankruptcy counsel, to describe the
CEOs of the big Wall Street firms —to the New York Fed’s headquarters. Paulson told
them that a private-sector solution was the only option to prevent a Lehman bank-
ruptcy. The people in the room needed to come up with a realistic set of options to
help limit damage to the system. A sudden and disorderly wind-down could harm the
capital markets and pose the significant risk of a precipitous drop in asset prices, re-
sulting in collateral calls and reduced liquidity: that is, systemic risk. He could not of-
fer the prospect of containing the damage if the executives were unable to fashion an
orderly resolution of the situation, as had been done in for Long-Term Capital
Management. Paulson did offer the Fed’s help through regulatory approvals and access
to lending facilities, but emphasized that the Fed would not provide “any form of ex-
traordinary credit support.” As New York Fed General Counsel Tom Baxter told the
FCIC, Paulson made it clear there would be no government assistance, “not a penny.”
H. Rodgin Cohen, a veteran Wall Street lawyer who has represented most of the
major banks, including Lehman, told the FCIC that the government’s “not a penny”
posture was a calculated strategy: “I don’t know exactly what the government was
thinking, but my impression was they were playing a game of chicken or poker or
whatever. It was said on more than one occasion that it would be very politically diffi-
cult to rescue Lehman. There had been a lot of blowback after Bear Stearns. I believe
the government thought that it could, with respect to a game of chicken, persuade the
private sector to take a big chunk” of Lehman’s liabilities.
The Fed’s internal liquidation consortium game plan would seem to confirm Co-
hen’s view, given that it contemplated a financial commitment, even though that was
not to be divulged. Moreover, notwithstanding Paulson’s “not a penny” statement,
the United Kingdom’s chancellor of the exchequer, Alistair Darling, said that Paulson
told him that “the FRBNY might be prepared to provide Barclays with regulatory as-
sistance to support a transaction if it was required.”
At that consortium meeting on Friday night, Citigroup CEO Vikram Pandit asked
if the group was also going to talk about AIG. Timothy Geithner said simply: “Let’s
focus on Lehman.”
“TELL THOSE SONS OF BITCHES TO UNWIND”
What would happen if JP Morgan refused to provide intraday credit for Lehman in
the tri-party repo market on Monday, September ? The Fed had been considering
this possibility since the summer. As Parkinson noted, the fundamental problem was
that even if Lehman filed for bankruptcy, the SEC would want Lehman’s broker-
