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 DISSENTING STATEMENT

• They were wrong to do so.
• They had a reason for choosing to allow Lehman to fail.

We have yet to find someone who can make a plausible case on all four counts. We
think that these three policymakers would have saved Lehman if they thought they
had a legal and viable option to do so. In hindsight, we also think they were right at
the time–they did not have a legal and viable option to save Lehman.
Many prominent public officials and market observers have accused these three of
making a mistake. These critics usually argue that these three should have saved Lehman.
When asked what else they could have done, the critic’s usual response is, “I don’t know,
but surely they could have done something. They chose not to and caused the crisis.”
Those who want to label Lehman’s failure a policy mistake are obliged to suggest
an alternate course of action.
The Fed’s assistance for Bear Stearns, and FDIC and Treasury’s assistance for Wa-
chovia, followed a pattern. In each case, the failing firm or the government found a
buyer, and the government subsidized the purchase. In the case of Bear Stearns, the
government subsidized the purchase, and in the case of Wachovia, the government
made clear that assistance would be available if it were needed. The specific mechan-
ics of the subsidy differed between the two cases, but in each bailout the key condi-
tion was the presence of a willing buyer.
Lehman had no willing buyer. Bank of America bought Merrill Lynch instead, and
no other American financial institution was willing or able to step up. For months,
government officials had tried and failed to facilitate transactions with possible
domestic and foreign purchasers. At the end of “Lehman weekend,” the most viable
candidate was the British bank Barclays. To make the purchase, Barclays needed either
a shareholder vote, which would take several weeks to execute, or the permission of
their regulator. They could get neither in the time available.
Lehman was therefore facing an imminent liquidity run without a path to success.
There was no buyer. There was the possibility that Barclays might be a buyer, some
weeks in the future. Bernanke, Geithner, and Paulson were then confronted with the
question of whether to provide an effectively uncapped loan to Lehman to supplant
its disappearing liquidity while Lehman searched for a buyer.
This loan would have to come from the Fed, since before the enactment of the
TARP legislation, Treasury had no authority to provide such financing. The law lim-
its the Fed in these cases. The Fed can only provide secured loans. They were able to
make this work for Bear Stearns and AIG because there were sufficient unencum-
bered assets to serve as collateral. Fed officials argue that Lehman had insufficient un-
pledged assets to secure the loan it would have needed to survive. Former Lehman
executives and Fed critics argue otherwise, even though private market participants
were unwilling to provide credit.
Was there another option? The Fed leaders would have had to direct the staff to
re-evaluate in a more optimistic way the analysis of Lehman’s balance sheet to justify
a secured loan. They then would have had to decide to provide liquidity support to