Page 370 - untitled

SEPTEMBER : THE BANKRUPTCY OF LEHMAN 

bank.”  Indeed, in March , Federal Reserve General Counsel Scott Alvarez con-
cluded that requiring loans under () to be fully secured would “undermine the
very purpose of section (), which was to make credit available in unusual and ex-
igent circumstances to help restore economic activity.” 
To CEO Fuld and others, the Fed’s emergency lending powers under section ()
provided a permissible vehicle to obtain government support. Although Fed officials
discussed and dismissed many ideas in the chaotic days leading up to the bankruptcy,
the Fed did not furnish to the FCIC any written analysis to illustrate that Lehman
lacked sufficient collateral to secure a loan under (). Fuld asserted to the FCIC
that in fact, “Lehman had adequate financeable collateral. . . . [O]n September , the
Friday night preceding Lehman’s bankruptcy filing, Lehman financed itself and did
not need access to the Fed’s discount window. . . . What Lehman needed on that Sun-
day night was a liquidity bridge. We had the capital. Along with its excess available
collateral, Lehman also could have used whole businesses as collateral—such as its
Neuberger Berman subsidiary—as did AIG some two days later.” Fuld also rejected
assertions about Lehman’s capital hole. He told the FCIC, “As of August , , two
weeks prior to the bankruptcy filing, Lehman had . . . . billion in equity capital.
Positive equity of . billion is very different from the negative  or  billion
‘holes’ claimed by some.” Moreover, Fuld maintained that Lehman would have been
saved if it had been granted bank holding company status—as were Goldman Sachs
and Morgan Stanley the week after Lehman’s bankruptcy. 
The Fed chairman denied any bias against Lehman Brothers. In his view, the only
real resolution short of bankruptcy had been to find a buyer. Bernanke said: “When
the potential buyers were unable to carry through—in the case of Bank of America,
because they changed their minds and decided they wanted to buy Merrill instead; in
the case of Barclays, [because they withdrew] . . . we essentially had no choice and
had to let it fail.” 
During the September , , meeting of the Fed’s Federal Open Market Com-
mittee, some members stated that the government should not have prevented
Lehman’s failure because doing so would only strengthen the perception that some
firms were “too big to fail” and erode market discipline. They noted that letting
Lehman fail was the only way to provide credibility to the assertion that no firm was
“too big to fail” and one member stated that the market was beginning to “play” the
Treasury and Federal Reserve. Other meeting participants believed that the disor-
derly failure of a key firm could have a broad and disruptive effect on financial mar-
kets and the economy, but that the appropriate solution was capital injections, a
power the Federal Reserve did not have. Bernanke’s view was that only a fiscal and
perhaps regulatory response could address the potential for wide-scale failure of fi-
nancial institutions. 
Merrill’s Thain made it through the Lehman weekend by negotiating a lifesaving
acquisition by Bank of America, formerly Lehman’s potential suitor. Thain blamed
the failure to bail out Lehman on politicians and regulators who feared the political
consequences of rescuing the firm. “There was a tremendous amount of criticism of
what was done with Bear Stearns so that JP Morgan would buy them,” Thain told