Why did the Treasury let Lehman Brothers go under??

[kentuck]

Many people say that was the catalyst that created the credit freeze. Why did they choose to let Lehman Brothers go under? Perhaps we could ask Hank Paulson?

Lehman Brothers and Goldman-Sachs were hated rivals in the investment banking business. Once Paulson had the power to let Lehman survive or go under, he did not hesitate to put them under. When Paulson became the Secretary of the Treasury, he was holding all the cards and Lehman was at his mercy. Unfortunately, he had none. Someday the truth will emerge. Perhaps?

[Mike 03]

1. The FED took the more active role, and they tried to find buyers but nobody would

touch Lehman.

This has been testified to over and over. There was the usual weekend emergency meetings but there were simply no suitors.

[Zynx]

2. Largely because we had been through the bailouts of Bear, Fannie, and Freddie.

People were pissed off. We had gotten to the point where a lot of commentators were saying we had to prove we were willing for something to fail.

[truedelphi]

3. They use Lehman Brothers as the excuse but the real reason for the

Depression that we are entering is the derivatives.

[ljm2002]

12. Agreed, it's the derivatives...

...and it's a shame that hardly anyone will come right out and say so.

You can't have side bets representing 100 times any actual value that's out there, many made by people with no standing in the original transactions, without having huge exposure.

Once the value of the underlying assets plummeted, agents like AIG were totally exposed. No way they could make good on all those bets. But why are such bets allowed in the first place? Should I be allowed to take out life insurance on just any random person, or bet on their demise? How does that make any sense?

Think about it: if the value of the bets was hundreds of times any real value, just speculative bets, and yet the bets have to be made whole at 100% -- the only way to do that is to create new money, which means devaluation and inflation.

[BelgianMadCow]

15. Diiiing - you explained that very concisely

I always end up winded..

:thumbsup:

One of my earlier attempts: Fed reserve vs European central bank
http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=5293834&mesg_id=5293834

[ljm2002]

18. Thanks...

...I'm no economist, but it seems pretty straightforward once you cut through the jungle of obfuscatory jargon these people like to hide behind -- trying to convince us that only they, and not us peasants, can possibly understand the magnificent complexity of it all.

Horseshit. They're thieves and gamblers who got caught with their pants down. Unfortunately for all of us, they were also in charge of the world's finances, and the whole edifice is coming down with them.

Oh well, time for a change...

[barbtries]

4. well, i think you have the answer

henry paulson decided they would go under, and they were fucked.

[Mike 03]

5. Paulson didn't yet "have the power" to do anything. That power came later.

BTW.

[truedelphi]

8. If you watch "Frontline" they explain it exactly opposite to your explantion

Of course, I thought that Frontline really was almost being an apologist for the In Crowd of Paulson, Geithner and Summers. But they seemed to imply that because of his past relationship as a rival of Lehman, and also because he didn't want to look like he was overly generous in bailing entities out, Pualson hesitated about letting Lehman sink. Then decided to let them sink. And the rest is history.

[Mike 03]

9. Thank you. I will check this out, believe me. NT

[truedelphi]

It's broken in segments and can be found here

http://www.pbs.org/wgbh/pages/frontline/meltdown/view/

Of course, had they bailied Lehman out, we still would be underwater. A global economy can not survive 550 Trillion bucks worth of derivatives.

[Mike 03]

10. In a sense, I agree...

To this extent:

Theoretically, the Federal Reserve (I don't think Treasury) could have saved Lehman, but I think they could not find, in time, anyone to assist them. Like LONG TERM CAPITAL MANAGEMENT, Fed needs some banks to come on board and help rescue these disasters.

Secondly, I think they were worried about the moral hazzard issue (but that is speculation on my part).

I just know that Bernanke is being honest when he says they desperately tried to find partners in an effort to save the institution and could find nobody.

[truedelphi]

11. Well Bernanke probably is being honest (I finally found something he's honest about!)

Stocks were still being shorted - and the game insiders play in Wall Street is to create rumors about a firm that put the firm at risk, and then they short their holdings in that stock and those day trader/insiders come out winners.

It is said that had there been no rumor mill circulating items about Bear Stearns, BS would have been okay or at least lasted longer. In any case, the rumors not only helped out those holding "shorts" on Bear Stearns, but helped the incoming Buyer of Bear Stearns to be able to purchase BS more cheaply.

So that ended well for J P Morgan. J P Morgan Bought out BS for $ 2 a share.

And readers of Howard Zinn's history of America know that the "original" J P Morgan came about his first fortune by buying up guns for $ 5 a piece and selling them to the Union Army for $ 22 a piece. No matter to Morgan that the guns misfired and bleew off the fingers of those soldiers using them.

the more things change, the more they remain the same.

[Junkdrawer]

6. Object Lesson...

Lehman provided the urgency for the multi-trillion dollar ripoff to follow...

[BelgianMadCow]

16. what, a financial pearl harbor? Biggest bank heist in history.

I don't believe in coincidence much.

Insane amounts are being doled out behind a curtain (TARP etc, who knows/follows?).

It's really simple why the recipients of the Fed loans remain largely unknown, as are the assets given as collateral and their value.

Otherwise you'd have a revolution. Just look at all the anger over the bonuses - people would really rise up if they understood the REAL scale of theft is a couple hundred times bigger.

The bonus flap is nothing more than a perfect pressure relieve valve - everybody can say nyah nyah them über-rich won't get away with that sack of money, while the robber barons keep filling trucks at the back.

[Mike 03]

7. Fairly accurate summation from Wiki

"On Saturday September 13, 2008, Timothy F. Geithner, the president of the Federal Reserve Bank of
New York called a meeting on the future of Lehman, which included the possibility of an emergency liquidation of its assets.<52> Lehman reported that it had been in talks with Bank of America and Barclays for the company's possible sale. However, both Barclays and Bank of America ultimately declined to purchase the entire company.<52><53>

The International Swaps and Derivatives Association (ISDA) offered an exceptional trading session on Sunday, September 14, 2008, to allow market participants to offset positions in various derivatives on the condition of a Lehman bankruptcy later that day.<54><55> Although the bankruptcy filing missed the deadline, many dealers honored the trades they made in the special session.<56>


Lehman Brothers headquarters in New York City on September 15, 2008In New York, shortly before 1 a.m. the next morning, Lehman Brothers Holdings announced it would file for Chapter 11 bankruptcy protection<57> citing bank debt of $613 billion, $155 billion in bond debt, and assets worth $639 billion.<58> It further announced that its subsidiaries will continue to operate as normal.<59> A group of Wall Street firms agreed to provide capital and financial assistance for the bank's orderly liquidation and the Federal Reserve, in turn, agreed to a swap of lower-quality assets in exchange for loans and other assistance from the government.<60>"


In other words, they tried to coerce some institutions into saving the institution and to their credit they were smart enough to decline.

ON EDIT:

Also, there is the moral hazard conundrum:

"If we save Lehman, will other endangered institutions behave irresponsibly in order to get government assistance."

[Gin]

14. (IMO) Paulson had a personal grudge against Lehman....he had a choice

to help or not...and he chose to let it fail...at least that's what I read...also read ...he wondered about his reasoning (grudge)also...of course after the fact.

[dkofos]

13. They didn't pay to play.

[On the Road]

17. Bear Stearns Had a White Knight in JP Morgan

Paulsen might have bailed out Lehman if there had been a comparable buyer waiting in the wings.

There was also more criticism of the Bear bailout and less panic about the possibility of complete financial collapse. Lehman changed that.