“I agree with all of this…but for me, these lines are particularly important: “He seizes upon the fact that, in Lehman’s subsequent bankruptcy, creditors took sizable losses, so the Fed would have had to court losses it supposedly was legally prohibited from courting. First, it doesn’t follow that the Fed would have taken losses. Lehman, after all, was liquidated in a world in which Lehman had been allowed to fail.”…

…As I have said many times before on this blog, IndyMac was liquidated (a few months after Lehman failed) at the very bottom of the market by the FDIC. Lehman’s bankruptcy trustee took years to liquidate their assets. At the time the FDIC sold IndyMac…..late 2008 sales-date and early 2009 closing date……as then FDIC Chair Sheila Bair said herself in the New York Times, “asset prices are irrational’…so why did the FDIC liquidate Indymac Bank into the teeth of that irrationality and illiquidity, when they could have easily borrowed on their line of credit with the U.S. Treasury (at very low rates) and more prudently sold IndyMac Bank’s assets over a longer period…..like everyone else (the Lehman BK trustee, the Federal Reserve with Bear Stearns and AIG assets, and the U.S. government with GM and other assets)? Either one of two reasons (both of which I have discussed previously on this blog): 1) They pulled out their late 1980’s playbook and irrationally (Sheila Bair’s word, not mine) just sold. (I sat on a Fed committee, where Sheila Bair spoke to us in early 2008 and made clear she had no idea a banking crisis was coming.) Or 2) Bair’s well-known hatred of Treasury Secretary Tim Geithner prevented her from asking to draw on the FDIC’s line-of-credit with Treasury, forcing the FDIC to irrationally fire-sell IndyMac Bank and others. Either way, the FDIC had a lot of nerve suing me for negligence, because in early 2007, I did not foresee an unprecedented collapse in housing prices, the private MBS market, and the financial crisis coming….when all they had to do to avoid tens of billions in unnecessary losses to the insurance fund was operate with some common sense and not rapidly and irrationally liquidate the banks they had seized in the crisis.”, Mike Perry, former Chairman and CEO, IndyMac Bank

“Let’s try a thought experiment: Suppose President Bush, Candidate Obama, Nancy Pelosi and Harry Reid had all taken to their respective soapboxes and demanded that the Fed stop a Lehman crash. Would Mr. Bernanke have failed to bail out Lehman over a legalism? Of course not. He seizes upon the fact that, in Lehman’s subsequent bankruptcy, creditors took sizable losses, so the Fed would have had to court losses it supposedly was legally prohibited from courting. First, it doesn’t follow that the Fed would have taken losses. Lehman, after all, was liquidated in a world in which Lehman had been allowed to fail. Second, who cares? The Fed can print money. Less spin would be useful right now for one important reason: Politicians and the public still haven’t grown up about the too-big-to-fail problem. Mr. Bernanke says CEOs and shareholders won’t be eager to repeat the experience of Bear Stearns, Lehman, etc. If only it were so. Creditors were largely bailed out. That means, in the quest for competitive returns, shareholders and CEOs in the future inevitably will be led to press the limits on leverage because lenders believe them implicitly government-backed. Mr. Bernanke is correct when he says the Lehman panic, not the relatively modest losses on subprime mortgages, caused the global crash. But let’s spell it out. Since the Great Depression, largely due to the scholarship of people like Mr. Bernanke, investors and savers were conditioned to believe the U.S. government would not let the failure of a mere financial institution crater the world economy. Now their confidence in the safety net was mortally shaken. To paraphrase Mr. Bernanke paraphrasing this column, the time to worry about moral hazard is before a crisis, not in the middle of one.”, Holman W. Jenkins, Jr., “Bernanke and Lehman, Revisited”, The Wall Street Journal, October 24, 2015

Opinion

Bernanke and Lehman, Revisited

Had the politicians wanted Lehman saved, would the Fed have refused because of a legalism?

Former Federal Reserve Chairman Ben Bernanke in an interview on Fox Business Network, Oct. 6.

Former Federal Reserve Chairman Ben Bernanke in an interview on Fox Business Network, Oct. 6. PHOTO: RICHARD DREW/ASSOCIATED PRESS

By Holman W. Jenkins, Jr.

Though Ben Bernanke wishes otherwise, his historical reputation won’t rest only on his efforts to save the financial system, but on his contribution to the meltdown in the first place by letting Lehman fail. In a mute Freudianism, he calls his new memoir “The Courage to Act” but settles on legal pettifogging (we didn’t have authority!) to explain his failure to act in Lehman’s case.

He does so just pages after explaining: “We had little doubt a Lehman failure would massively disrupt financial markets and impose heavy costs . . . on millions of people around the world who would be hurt by its economic shockwaves. . . . I never heard anyone from the Fed or the Treasury suggest that letting Lehman fail would be anything other than a disaster, or that we should contemplate allowing the firm to fail. . . . Lehman needed to be saved. We lacked the means to do so.”

Just to rehash our own position on all this, six months earlier we had congratulated Mr. Bernanke on the Bear Stearns rescue, saying that, with luck, he had put a floor under the dangerously illiquid mortgage assets that were junking up bank balance sheets.

A second column, under the headline “More Bailouts, Please!,” suggested that the moral hazard attendant on the Bear rescue was preferable to the Fed’s habit of stoking economywide credit booms to keep the financial system afloat.

So when Lehman weekend rolled around in September 2008 and it wasn’t clear yet that even AIG would be saved, we were flummoxed. “Fed intervention seemed a no-brainer, given the assumptions and priorities that have driven such decisions in the past,” we wrote, and could only conclude that the Fed dithered because it feared exhausting the resources and political capital it might need to meet larger bailout demands down the road.

Guess what? We still prefer this explanation to Mr. Bernanke’s legalism. And, sure enough, a couple chapters later he switches gears and reveals that the Fed worried about the “end of our resources” and having to face the potential collapse of WaMu,Citigroup, Merrill Lynch and others with “no political support.”

Let’s try a thought experiment: Suppose President Bush, Candidate Obama, Nancy Pelosi and Harry Reid had all taken to their respective soapboxes and demanded that the Fed stop a Lehman crash. Would Mr. Bernanke have failed to bail out Lehman over a legalism? Of course not.

Maybe he and Hank Paulson were right: The highly political moment would have produced a populist backlash that would have inhibited their future rescue efforts. In his book, though, Mr. Bernanke resorts to talking pointism. He seizes upon the fact that, in Lehman’s subsequent bankruptcy, creditors took sizable losses, so the Fed would have had to court losses it supposedly was legally prohibited from courting.

First, it doesn’t follow that the Fed would have taken losses. Lehman, after all, was liquidated in a world in which Lehman had been allowed to fail. Second, who cares? The Fed can print money.

Less spin would be useful right now for one important reason: Politicians and the public still haven’t grown up about the too-big-to-fail problem. Mr. Bernanke says CEOs and shareholders won’t be eager to repeat the experience of Bear Stearns, Lehman, etc. If only it were so. Creditors were largely bailed out. That means, in the quest for competitive returns, shareholders and CEOs in the future inevitably will be led to press the limits on leverage because lenders believe them implicitly government-backed.

Mr. Bernanke is correct when he says the Lehman panic, not the relatively modest losses on subprime mortgages, caused the global crash. But let’s spell it out. Since the Great Depression, largely due to the scholarship of people like Mr. Bernanke, investors and savers were conditioned to believe the U.S. government would not let the failure of a mere financial institution crater the world economy. Now their confidence in the safety net was mortally shaken.

To paraphrase Mr. Bernanke paraphrasing this column, the time to worry about moral hazard is before a crisis, not in the middle of one.

Posted on October 27, 2015, in Postings. Bookmark the permalink. 1 Comment.

  1. And there’s always the possibility that cronyism was a factor in selling assets at irrational levels to buddies, such as those of Schumer, during the fog of war, so that the smoke would help provide cover….

    Mark Nelson 3256 Sitio Tortuga Carlsbad, CA 92009 760.473.7558 mnelson.doit@gmail.com

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