Did Lehman Need to Die?

On Sunday, Mr. Bernanke was in Washington awaiting the New York Fed’s verdict. In a phone call, Mr. Geithner said Lehman could not be saved.

The Fed would be lending into a run, Mr. Geithner told Mr. Bernanke, according to both men’s accounts. In a recent interview, Mr. Bernanke said, “Knowing the potential consequences of Lehman’s failure, I was 100 percent committed to doing whatever could possibly and legally be done to save the company, as were Tim and Hank.” Mr. Paulson has concurred, saying, “Although it was Ben and Tim’s decision to make, I shared their view that Lehman was insolvent, and I know the marketplace did.”

Six years ago, Lehman Brothers was allowed to become the largest bankruptcy in history. I say “allowed” because it definitely could’ve been stopped. The quote above comes from a very interesting piece at the New York Times that reconstructs what led to the decision.

And yes, it was a decision. Not a force of nature or an act of god. Some say that AIG, Fannie and Freddie took precedence (given their systemic ties to everything), and it was too many bailouts at once. Others say Hank Paulson was under tremendous pressure and, in the end, he reverted to Goldmanite thinking – and Goldman never thought much of Lehman. We may never know the whole truth, but the above-referenced link gets pretty close.

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