Via Bloomberg - here are some fascinating details about Lehman Brothers, Bernanke, Paulson in a book coming out Aug 4th apparently titled "In Fed We Trust" by a Wall Street Journal reporter.
It is almost laughable how we balked at $90 Billion for Lehman... hey that was nothing compared to what we did in the following months for AIG ($13B of course straight into Goldman Sachs pockets), Citigroup, and Bank of America. And how much we put in each quarter to subsidize Fannie and Freddie to continue to write bad loans so Americans who cannot afford mortgages can continue to get them.
Cmon Hank - what's $90 billion among friends? What's that? It was in Goldman's long term interest for Lehman to die? Mmmm... good point Hank.
Leaders of Wall Street’s biggest commercial and investment banks crafted a plan to bail out Lehman Brothers Holdings Inc. the weekend before it went bankrupt, only to see the deal die when U.K. regulators blocked a sale to Barclays Plc, according to a book on the Federal Reserve’s role in the financial crisis.The heads of Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase & Co. and five other banks agreed Sept. 14 to put up about $4 billion, with the Fed contributing an additional $6 billion, to indemnify Barclays against bad loans on Lehman’s books, according to “In Fed We Trust,” the book by David Wessel, a Wall Street Journal reporter, to be published Aug. 4.
The plan collapsed when Hector Sants, chief executive of Britain’s Financial Services Authority, refused to waive regulations requiring London-based Barclays to hold a shareholder vote before guaranteeing Lehman’s liabilities, as JPMorgan had done in the rescue of Bear Stearns Cos. in March 2008, Wessel wrote.
Without a buyer, the only alternative to bankruptcy was for the Fed to finance a takeover of Lehman, which might have cost as much as $90 billion, according to the book. U.S. Treasury Secretary Henry Paulson, who had been criticized for permitting the Bear Stearns deal, opposed that idea.
Fed Chairman Ben S. Bernanke thought that letting a major financial institution die in the middle of a crisis was “idiocy,” Wessel wrote. While Bernanke and then-New York Fed Bank President Timothy Geithner were unwilling to push a federal bailout without Paulson’s support, they had no fallback plan if a deal wasn’t reached, according to the book.
Financial officials around the world criticized the decision to let Lehman perish, including, privately, European Central Bank President Jean-Claude Trichet, Wessel wrote. Paulson and Bernanke’s explanation that they didn’t have legal authority to make a deal was “window-dressing” concocted after the fact to cover what former Fed Vice Chairman Alan Blinder called “a colossal error,” the author wrote.
Two days after Lehman declared bankruptcy, the U.S. government gave insurance company American International Group Inc. $85 billion to prevent its failure. Bernanke told Wessel that AIG was “bigger than Lehman,” and after Lehman’s collapse letting AIG go “would have been a major shock to the system.”
None of the senior government policy makers anticipated the credit-market collapse that followed Lehman’s bankruptcy filing in the early hours of Sept. 15, according to Wessel’s book.
On a conference call the previous week, Paulson, Bernanke, Securities and Exchange Commission Chairman Christopher Cox, and senior staff members from those agencies had agreed that companies and investors who did business with Lehman had learned from Bear Stearns and would have acted to protect themselves from a Lehman failure, Wessel wrote.
An unnamed senior Fed official told Wessel he had supported letting Lehman go because “it was time to find out what would happen” if the government didn’t backstop a troubled financial institution.
Following the conference call, Paulson, who “never thought much of Lehman,” flew to New York to demand that bank CEOs form a plan to save Lehman with private funds, Wessel wrote. Paulson had already told Bernanke and Geithner he would not back using tax money for Lehman, although neither believed him because Paulson frequently changed his mind, according to the book.
Geithner warned the bankers that if they couldn’t craft a deal, “we do not have the capacity to insulate you or the system from the consequences,” Wessel wrote. By Saturday night, the bankers had agreed to help fund a deal.
Barclays was the sole remaining bidder until the U.K. blocked the sale. Chancellor of the Exchequer Alistair Darling told Paulson in a telephone call, “We are not going to import your cancer,” Wessel wrote.
