Perhaps it is explained further in the book but what brings up questions more than anything is what prompted them to save AIG 2 days after Lehman's bankruptcy. A cynical person looks at the circumstances and says that AIG owed Goldman Sachs a ton of money on credit default swaps and since Hank Paulson, the Treasury secretary, was the former CEO of Goldman he was sympathetic to that situation.
The stated reason is often that AIG was so huge that it had to be saved to avoid disaster. Yet, this article seems to argue that the exact reason Lehman wasn't saved 2 days earlier was because it was just too large for the government to handle and that it didn't have the authority to do so until a month later when TARP was passed.
You have to wonder how candid memoirs by former officials are vs attempts to influence the historical record. Wikipedia says that Bernanke now advises Citadel which benefited to the tune of $200 million from the bailout of AIG.
Geithner talked about this in his book and basically said that they wanted to do something for Lehman but couldn't and only after that collapse was everyone aware of how serious the situation was and the rules changed. The Fed was operating in no man's land and didn't have the authority to do what it needed to do. This is pretty clear in hindsight with the huge AIG lawsuit. They stretched the rules for AIG because they were staring into the abyss.
That is, the unwritten rules about what was politically possible. The regulations didn't change in that time. But after Lehman, there was the political cover to save AIG. Before Lehman, there wasn't the political cover to save Lehman.
>That is, the unwritten rules about what was politically possible.
I've spoken with some of the people named in this thread and I think this is probably the most concise explanation for some of the questions being raised on Lehman v AIG.
Perhaps there's a more benign explanation for the AIG bailout. It was quicker and more efficient to give the money to AIG and let them pay their failing counterparties (all those crooked investment banks holding the credit default swaps) than it was to negotiate a bailout for each counterparty separately.
The paperwork for a first round startup financing is so complex and expensive a lot of investors can't afford a deal below a few megabucks. Can you imagine the paperwork to bail out an investment bank, multiplied by dozens and dozens, that had to get done in a few days.
Once the govt and the fed had decided to intervene, they needed to get it done. This got it done.
I'm afraid this is a case where justice for a few hundred bad actors took a back seat to righteousness for the whole economy.
Can you explain? If I know that I will recover less than expected if a counterparty defaults, I'm going to diversify my counterparties. That reduces moral hazard.
Fraud and gross negligence. There's evidence that banks and other players knowingly or negligently failed to do proper due diligence on the mortgages that they packaged into bonds and sold off to investors, the subsequent deterioration of which started the chain of events. http://www.economist.com/blogs/democracyinamerica/2010/10/fi...
This is the explanation we were given as employees: That the federal government helped us meet our contractual obligations to our policy holders. And, that we would have to work very hard to pay back the taxpayers.
It's worth reading what was written immediately after Paulson decided to let Lehman fail, but before the ramifications were known.
Paul Krugman, Sept. 14 2008: " Mr. Paulson seems to be betting that the financial system — bolstered, it must be said, by those special credit lines — can handle the shock of a Lehman failure. We’ll find out soon whether he was brave or foolish...And so here we are, with Mr. Paulson apparently feeling that playing Russian roulette with the U.S. financial system was his best option. Yikes. "
Larry Kudlow, September 16, 2008: "Treasury Secretary Henry Paulson is the man of the hour. This weekend he drew a clear line in the sand: no more federal bailouts. Not for Lehman Brothers. Not for global insurer AIG. Not for Merrill Lynch. Not for anyone, at least as of this writing...Mr. Paulson talks about a housing and financial recovery in terms of months, not years. And I think he’s right."
Agree! This whole narrative that the govt couldn't save Lehaman's doesn't even touch the fact that:
a) Hank Paulson and Dick Fuld are arch enemies, have been vicious rivals for all of the prominent careers and this was an opportunity for Paulson to destroy Fuld utterly.
b) AIG's instability was in fact because of its ties to the very markets that Lehman's was a major pendentive for. If Lehman's went down AIG would be next and everyone knew this.
Even today many people believe that all the banks should have been allowed to fail.
Easy to see how people in 2008 could decide to let one bank fail. Many felt that 'bailout capitalism' was a bad idea in the first place, and that the system should just learn to absorb the shock. Only a small minority had any idea what was coming. People at the top "should have known", but the history of finance has no shortage of examples where foolish economic beliefs overrides common sense.
Here's the evidence I remember, so this is primary information, no citation needed: I used to work for the Federal Reserve Bank. Every fiscal quarter we'd meet with the chair where he would give us the inside straight talk about policy and governance. In 2006 during one of these conferences, the chair mentioned (paraphrasing) "We continue to be very concerned about the rise in subprime mortgages as a percentage of the mortgage industry in general but we have no way from inside the fed to change this trend. We're currently working very hard to figure out some kind of policy measures we can implement to ameliorate this." In 2006 I had no clue about how dangerous this was but as a mere software engineer, I remember distinctly lifting my chin from my screen to mark this utterance, sadly in retrospect, only to wonder what I personally should be doing to help.
And the people that didn't advocate for sane economic policy were most definitely not told to shove their Keynesian beliefs where the sun doesn't shine.
[citation needed]
What measure evidence do you require? Methinks infinite.
Comparing Lehman's to AIG is like comparing a ocean tanker to the ocean it travels through (or at the least the port system it uses).
AIG was an assurer-of and garantier-on just about everything financially related. Even when not directly, everything came back to it indirectly.
If it went down, the entire system would have to follow, including the economic value of the average person's bank account.
The banks could have been failed to some extent, but that was never an option for AIG.
AIG was such a safe bet, that during the height of the financial meltdown, brokerage accounts for "risk averse" clients where purchasing high yielding AIG bonds without so much as breaking a sweat.
If the regulatory regime allows one insurance company to be responsible for underwriting so much of the economy's risk, then of course if regulators are wrong about the required amount of risk capital the firm should be required to hold, regulators are on the hook to nationalize it or to provide credit.
Most of the post-depression financial regulations were intended to put barriers in place to large firm size/share, and it wasn't until this was eroded by the financial modernization act of 1999/2000 that AIG's growth was even possible.
It's not that the outcome was a surprise, it was just low probability enough that everyone involved was willing to take the risk in exchange for the financial and career benefits that supporting the loosening of regulations offered.
There still exist many other low probability events that could cause a similar disruption, in spite of the regulatory response to the credit crisis.
I always understood it to be related to the fact that AIG was a major insurer of airplanes and cargo trucks. If they went bankrupt, all of those planes / trucks would have to stop until new insurance could be obtained.
The reluctance of the Federal Reserve to lend to Lehman contrasts with its actions regarding Bear Stearns and A.I.G. The difference is that in the other two cases, the Fed saw itself as lending against reasonable collateral.
See my comment below for further explanation. Of course, at the end of the day it's all somewhat arbitrary - the Fed was just placing (decently-educated) bets on risk-laden firms: "Hmmm...this bank is probably too important for us to let it fail, this one might pay us back if we pump money into it, this one looks rotten, if we let this one fail now it might trigger a death spiral..."
I don't think Bernanke's account is fully candid. Perhaps he is not even honest with himself. The impression I have (granted, a remote one) is that Paulson and other financial industry alumni within the administration convinced Obama that they needed a blank check to avoid collapse. They ignored long-standing policy, and arguably the law of the land, essentially to give money to companies they did not want to fail. To argue that they lacked authority to save Lehman seems disingenuous to me, because they lacked authority to do a lot of the things they did -- until Paulson went literally on bent knee to Congress to ask for that authority. He did not bend his knee for Lehman, and neither did Bernanke. Not that Lehman deserved a bailout -- perhaps none of them did!
Hank Paulson's brother worked for Lehman brothers. It may have been perceived as far too great a conflict of interest if the Treasury Secretary bailed out the company that hired a family member.
This, absolutely true. It's all self serving drivel. Shame on NYT for playing into it. Anyways, the real crime was that these bankers did not go to jail.
Fraud: every liar's loan which was sold on in a mortgage-backed security was a fraud. Arguably, any liar's loan, where the lending officer knew that it was a liar's loan, was a fraud.
Yes, liar's loans enabled a lot of fraud to be perpetrated against the banks. Apparently you believe we should jail bankers because the banks were the victims of fraud?
It seems like the right person to jail in this case is the person who lied to the bank.
You are absolutely right, and they should have been punished.
But those loans also shouldn't have been granted, which was the bank's responsibility. Most of them should have been caught during underwriting and verification. What, exactly, were they doing?
Did the banks know that these loans were fraudulent? Yes. Did they sell them on anyway? Yes. Did their executives encourage these fraudulent loans? Yes.
Going a little bit off on a tangent here but this article reminded me of how the gold price against the dollar has historically been set:
>Every morning at nine o'clock, [acting treasury secretary] Morgenthau; Jesse Jones, the head of the RFC; and George Warren would meet with the president over his breakfast of soft-boiled eggs, to determine the price of gold for that day. They began at $31.36 an ounce. The next morning this increased to $31.54, then $31.76 and $31.82. No one had a clue how they went about setting the price, although everyone presumed that some subtle analyses of the world bullion and foreign exchange markets went into the calculations. In fact, the choice of price was completely random. All they were trying to do was to push the price a little higher than the day before. The exercise brought out the juvenile in Roosevelt. One day he picked an increase of 21 cents, and when asked why, replied that it was a lucky number, three times seven.
When I was visiting Hiroshima in 2010, I stopped at a 'Japanese pizza' shop. It was nothing like actual pizza, but the staff and other customers in there were incredibly friendly, and we ended up trying to explain to each other where we from and what our hobbies were, among other things.
One of them was a man who sat down at the table next to me. We talked for a bit, and he explained that he worked at the Bank of Tokyo. I think he was trying to practice his English. He asked me 'What is the most famous bank in Canada?'
After thinking about the most famous Canadian bank for a bit, I told him it was probably Toronto Dominion (TD). Or maybe the Royal Bank of Canada (RBC). Then I thought for a moment and said 'Though, the bank most famous in Canada is probably Lehman Brothers.'
He had such a look of sadness on his face when I said that.
In Japan, the popular noun for the economic crisis is "Lehman-shock". A lot of weight is attached to Lehman - appropriately so, but it has the effect of sticking around in Japanese memory.
The Lehman brothers bankruptcy was a huge cluster fuck! I don't think most people realize just how close it came to stopping the entire worlds economy.
The problem with Lehman was that it was a large prime broker for many hegde and pension funds. That essentially means its a bank that holds the holding(cash, stock and bonds) of these funds.
When it went bankrupt in the US, what was expected was that each of the funds would pull out their holdings and move them to healthier prime brokers.
This would have the double bonus of removing one unhealthy company(Lehman) and at the same time propping up other healthier companies by having them handle the assest of the funds pulling their holdings out of Lehman( sort of like letting a bank fail and having deposits put into other banks.
Unfortunately the British financial regulators, who built London on a program of pretty much anything goes style regulation, woke up that day and decided that for the first time ever they needed to actually regulate and they declared Lehman's assets frozen, meaning that otherwise healthy funds (including pension, mutual, and hedge) now had no access to their own assets.
So now hedge funds can't trade, pension funds can't pay people and mutual funds can't allow redemption's and the other banks can't take in these assets to prop themselves up. The equity markets started to seize up as funds had no assets to trade.
The capital markets nearly seized up. Repo desks are the portion of banks that lend money to each other to ensure everyone has the money they need to operate, suddenly couldn't get money and weren't allowed to lend out money for fear of lending to a company who might go bankrupt.
Almost all large companies these days operator on this over night borrowing, using this to smooth out cash flows, similar to using a line of credit.
General Electric had 2 days of cash before they couldn't continue operations. We came really, really close to having the entire world stop working!
Andrew Ross Sorkin has a great book called Too Big to Fail that goes into this. House of Cards is also a great book on the 2008 crash.
The other big firm to go under in 2008 was Bear Sterns. If you like finance read "When Genius Failed" its the history of the rise and fall of Long Term Capital Management. In the book they detail how everyone except for Bear Sterns pitches in to bail out the fund. In 2008 Bear Sterns was the one who needed the bail out and the same people who pleaded with Bear to help with the LTCM bailout just turned their bask of Bear and let them go bankrupt and then get bought for $172 a share at the end of 2006 to being bought for $2 a share in 2008.
> British financial regulators ... declared Lehman's assets frozen
As did the US regulators. What the FSA did was refuse to allow the assets in the UK to be repatriated to the US head office. They did this on the, not unreasonable, basis that once the money was back in the US, the chances of UK creditors getting paid was next to zero.
What Lehman's did do was, as you say, speed up the inter-bank liquidity crisis. It also put the clearing houses at risk. That's really what tipped things over the edge and force the governments to step in bug time.
General Electric had 2 days of cash before they couldn't continue operations. We came really, really close to having the entire world stop working!
People are debating this in other responses to you, but you're absolutely right. E.g.:[1]
The Fed then purchased commercial paper issued
by GE 12 times for a total of $16 billion.
It bought paper from Harley-Davidson 33 times,
for a total of $2.3 billion. It picked up debt
issued by Verizon twice, totaling $1.5 billion.
...
Verizon spokesman Robert A. Varettoni said
that it was "an extraordinary time," adding
that there was no credit available otherwise
at the time.
Forget the debate of whether GE is an industrial or a financial, etc. Verizon was the 2nd largest telco in the USA, and if they needed money from the Fed then yes WE CAME REALLY REALLY CLOSE to having (much of the) world stop working.
If people are still not convinced, and they think that it was all financials, consider that McDonalds also needed money from the Fed.[2]
I think the actual scenario was that there was no credit available at rates they were hoping to pay.
The fact that these situations happened 12 and 33 times suggests that management had some structural disability in facing reality rather than needing a short-term boost until they could go shopping for what they needed.
Just like shortages of profession X in geography Y, if you're not willing to pay the price...
"I think the actual scenario was that there was no credit available at rates they were hoping to pay."
Not on the traditional market from banks (i.e. commercial paper and repo) -- banks weren't lending money at any rate at the time as they really couldn't. Keep in mind that bank loans are basically "money printing", something that can't be done when your reserve ratio is already illiquid, as it was for most in mid-late 2008.
Individuals and holding companies like Buffet/Berkshire with actual reserves OTOH were giving high interest rate loans out (i.e. to Goldman), but those were bespoke negotiations.
> Unfortunately the British financial regulators, who built London on a program of pretty much anything goes style regulation, woke up that day and decided that for the first time ever they needed to actually regulate and they declared Lehman's assets frozen, meaning that otherwise healthy funds (including pension, mutual, and hedge) now had no access to their own assets.
I assume that there was reasoning behind this that's a little more nuanced, but even given that then I feel this was the main issue with the crisis. It seems like the financial system is continuously growing in complexity. In that while there were formerly N instruments, a year later there are N+z instruments.
Coupled with the increased mobility of capital, and its tendency to seek the highest returns, you end up with large amounts of private money pooling fairly quickly in unexpected and not-broadly understood places (which is kind of self-evident: if everyone perfectly understood a particular instrument, you would not expect its use to outperform the market).
And don't get me started on the continual improvement of ML systems: a closed loop where code constructs optimal instruments directly by parsing legislation and legal opinions no longer seems impossible.
This seems like a problem in the event that something glitches from business as usual. You now have central bank officials (who while incredibly intelligent, by definition don't know as much about these specialized instruments) tasked with making quick decisions (because HFT and yay automated trading systems) without complete information.
Summary: increased machine complexity and speed vs human decision as the only buffer to unintended emerging failure scenarios seems like a recipe for disaster
You pivoted pretty quickly here from Lehman to HFT and automated trading. I think you're skipping over something very important by doing so: The mortgage backed securities and CDOs that Lehman and the other big banks got into trouble with are nearly bespoke contracts (more like a small town's bonds than an NYSE stock). Some fancy computing goes into determining what to sell any given contract for, but that's as far as it goes. They're traded by people who chat on the telephone, gather round the conference table, and then fax legalese back and forth. These contracts are not traded on the sorts of highly liquid public exchanges that have HFT. Nor is there much if any automated decision making in this corner of the financial industry. No point in paying nerds a fortune to get instant decisions when implementing said decisions is going to take days or weeks (if it's even possible).
Which is to say: The 2008 financial crisis unfolded at human speeds. The public liquid markets didn't move any faster during the crisis than they in Herbert Hoover's day. (Investors already had telephones then.) Public markets react to data as it becomes available, and all the relevant data at the time was generated by humans.
In particular, the central bank officials were forced to make quick decisions without complete information not 'because HFT and yay automated trading', but because there were a lot of well-informed and very scared humans telling them the economy was about to collapse.
Excellent distinction and point. Thanks for correcting me!
Out of interest, are these bespoke because of the amounts we're talking about? In other words, I assume from your comment that institutional MBS and CDOs are a completely different beast than what I could buy from my broker, at least in size?
I said mortgage backed securities like mortgage CDOs are bespoke because the assets behind them aren't really fungible. Two CDOs might both derive their returns from home mortgages in the general Las Vegas area, but their return flows won't come from the same houses. This is very different from stocks, where any two shares in some company are equivalent (provided they're of the same share class). When pricing ABS, people try to pretend they are interchangeable, which is where the fancy computing and dodgy modelling comes in.
My use of the word 'bespoke' here is somewhat poetic. CDO issuers are more likely to build a CDO and try sell it than they are to make them to custom specifications. (Investment banks did make custom CDOs & CDSs, of course. If an investor calls up and says "can you find X, and sell me some", you find X and sell him some.
And yes, you can't just buy an MBS through your broker (unless you're incredibly rich). You can invest in mutual funds that own a wide variety of MBS, of course. But these things just aren't sold to retail investors. This is not so much because of the size of the assets involved -- you can slice off and sell as small a slice of the assets as you want -- but because the fixed costs of arranging a sale are high. You need to pay lawyers who know what the hell they're doing to set up the legal arrangements for these contracts. It doesn't make sense for Uncle Stocktrader to drop $$$$$ just so he can buy a $$$ slice of a CDO. Much easier to pool the costs in a mutual fund or a money market.
I guess my central confusion is that I thought the entire reason for bundling mortgages into some kind of aggregate object (I'm going to drop the financial terminology, as I'd probably use it imprecisely) was so that they could transform it into a fungible asset and therefore have access to a broader market of customers who were interested in buying it.
In other words, while retail investor might not be interested (either through a mutual fund or something else) in owning these 3 mortgages, they might be interested in owning a smaller share of 1,000 aggregated mortgages. And furthermore, that you could alter the criteria those 1,000 mortgages were selected by to create different products (offering different rates and risks). And furthermore, that you could attempt to value add (and I thought this was where it went off the rails) by packaging junk mortgages in some statistically magical way where you could sell the aggregate for more than the total value of its individual components.
So, in essence my understanding was something like (start at top, trickle to bottom):
Actual mortgage
Basic mortgage backed security (no value add)
Complex mortgage backed security (value add)
Retail mutual funds / investment bank consumers
(Which, as you've said, still has nothing to do with HFT, as given the nature of these things there probably isn't much pricing variance day-to-day, and therefore has little interest to that community)
It didn't actually come that close. Commercial paper rates went to 8% (http://www.wsj.com/articles/SB122186683086958875), which was not insanely high, historically speaking. And certainly part of that rise was due to Paulson's Chicken Little act.
Most businesses which actually make and sell things would have been unaffected if Goldman, etc. had been allowed to reap the consequences of their terrible decisions.
> General Electric had 2 days of cash before they couldn't continue operations. We came really, really close to having the entire world stop working!
This should be one of the reasons why we shouldn't look at "captains of industry" with so much reverence. People made lots and lots of money (MBA courses, corporate trainings etc) by regurgitating whatever Jack Welch had said over dinner or stuff like that, simply because the company he had led was better at financial engineering compared to other industrial conglomerates.
The same will probably happen to Berkshire Hathaway once Warren Buffet is gone. The company has somehow managed to accumulate $62 billion in deferred corporate taxes (http://www.ft.com/intl/cms/s/2/9c690e44-c1d2-11e4-abb3-00144...), which my layman's intuition tells me is not sustainable for very long (5 to 10 years), absent political meddling. Of course people would say that's meant only for encouraging investment, but my gut feeling is telling me that that happened because BH couldn't match their past returns, so they had to come up with something "creative". We'll probably live and see.
allow me to doubt about the 2days of cash before they couldn't continue operations. GE is one of the companies with the biggest cashflow you can get. they can basically live 1-2 years without any profit just using their cash.
> The reality is that for years, about half of GE's prodigious profits have come from General Electric Capital, a 100%-owned affiliate that files its own reports with the SEC. GE Capital, headed by 29-year GE veteran Michael Neal, has ventured into practically every kind of financial service, from making car loans in Europe to investing in commercial real estate in Florida. If you have a credit card from Wal-Mart or Lowe's, it's really from GE Capital. The business owns almost 1,800 commercial airplanes and leases them to 225 airlines. Until last year it made subprime mortgages in the U.S.
So, basically, at that moment (October 2008) GE was more of a financial company than an industrial one, and since other financial behemoths had collapsed (Lehman) or were about to collapse (AIG), chances were that GE the company was indeed only 2 days from disaster.
Projected cashflow is only worth something if customers keep paying their bills. If they all stop paying -- because they can't get credit and need their cash to, say, pay bonuses to their executives -- then projected cashflow stops being equal to actual cashflow.
> General Electric had 2 days of cash before they couldn't continue operations.
Instead they passed this burden onto everyday people, who - by the millions - were evicted or foreclosed on because they ran out of cash and "couldn't continue operations".
Could you explain the mechanics of that? How does beginning a many-months long foreclosure process help GE's 2 day cash flow, or somehow pass costs on to everyday people?
By not getting equal representation by our government. I'm saying the gasp shock! that GE might not pay its bills really clenches peoples' rectums. so something had to be done! (and was). But when cashflows of millions of ordinary citizens ran out, no shock, no horror, no rush to "bail out" people from insolvency.
> Unfortunately the British financial regulators...
I'm not convinced by any narrative that says "oh it was all going to work itself out just fine till the nasty government got involved". That's just too convenient.
If you remove the Goldman Sachs alumni connections, and look at it from the perspective that the Fed and Treasury really did not want to perform any bail outs or rescues unless absolutely necessary, then the whole thing (sort of) makes sense. The tentacles of AIG reached far and wide, to such things as insurance on commercial jet liners and if AIG had gone under, those planes would have contractually been not allowed to fly.
Yet it's incredibly difficult to believe the Fed and Treasury were completely against any bailouts, considering that 6 months before, a rescue package was offered to Bear Stearns, and the eventual purchase of Bear by JP Mogran was effectively guaranteed via the NY Fed's backing.
I want to believe it was for reasons other than influence by GS and their alumni, but that is a hard sell.
Here is the Treasury's Assistant Secretary for Economic Policy on why the Fed bailed out plenty of other institutions, but did not bail out Lehman:
The reluctance of the Federal Reserve to lend to Lehman contrasts with its actions regarding Bear Stearns and A.I.G. The difference is that in the other two cases, the Fed saw itself as lending against reasonable collateral.
In the case of the Fed’s loans that facilitated the acquisition of Bear Stearns by JPMorgan Chase, $29 billion of Fed money was at risk against a collection of Bear Stearns assets thought to be worth $30 billion. JPMorgan would absorb the first $1 billion if the value of those assets declined, providing a cushion ahead of the Fed (that is, ahead of taxpayers). Those assets were good in the end, with the Fed fully repaid with interest.
In the case of A.I.G., the Fed’s loans were collateralized by the entire assets of the firm, based on the observation that A.I.G. had potentially huge losses at its unit that sold credit default swaps but the rest of the firm was a successful insurer. The latter parts — the rest of the company — provided the collateral for the Fed’s initial loans, and eventually TARP funds were substituted for the Fed resources to provide the company with a better capital base rather than Fed loans. To be sure, it was hard to know in September 2008 that the value of the company would offset the potential losses in A.I.G.’s financial products division, but this turned out to be the case, with both the Treasury and the Fed turning considerable profits on their investments in A.I.G.
Such a successful outcome was simply less imaginable with Lehman than with either Bear Stearns or A.I.G. To all eyes, the problem at Lehman was one of solvency while the issue in the other two cases was liquidity. The Fed’s actions on Bear and A.I.G. were thus appropriate in its role as a lender of last resort and the same with its caution at Lehman. Indeed, after Lehman had filed for bankruptcy, the Fed did extend loans to allow the firm’s broker-deal subsidiary to function, but in bankruptcy these loans could be fully collateralized by assets within the brokerage subsidiary and not encumbered by obligations in other parts of the larger firm. [1]
Basically, Bernanke knew that Lehman owned a bunch of worthless paper whereas firms like AIG, GM, Fannie Mae + Freddie Mac, Goldman, etc. owned actual valuable assets that they could use as collateral against taxpayer loans, and operated in profitable segments outside of risky IB and junk-debt securitization. He was tight-lipped about saving Lehman Bro's because he wanted the private sector to step up and do it themselves, and also so that they wouldn't know whether or not to expect handouts from the Fed down the road.
Although I disagree with Bernanke's decision to adhere to Keynesian economics during the economic crisis, valuing short-term stability over properly setting precedents for long-term prosperity and growth, I have to respect the man for his intelligence and thoughtfulness. Looking forward to reading his account of the crisis and why he made the decisions that created the economic environment as it currently stands.
I'm tired of seeing this argument. What they are putting at risk is the faith of investors who trade in USD and the belief that the US economy is robust and healthy.
Creating $ out of thin air also creates inflation within the financial system, benefitting debtor institutions and hurting creditors. It also sets a precedent that the Fed will simply push the magic money button whenever something goes wrong, which affects market behavior.
The Fed pays a price every time it takes any action - you just have to think harder about what that price is.
If FED takes a position on their balance sheet that get's wiped out (very theoretical since cost of carry for FED is 0) This does very little to erode investor confidence compared to having full blown meltdown. In any case FED eventually increased it's balance sheet to almost 20% of GDP around 2012
so it might have being cheeper to bail out lehman brothers
Lehman didn't fall, it was pushed, by Goldman Sachs. A veritable scapegoat, the meat of which was then eaten by the remaining players. Take a look at Henry Paulsons activities surrounding them for more insight. Financial terrorists, the bankers are.
Pure and complete lying. The government could have rescued Lehman Brother's. It would have created very bad problems with TBTF, but they could have rescued them. He's just trying to make it seem as if all the things they did were right by pretending he was wrong in this one narrow instance.
I'm not saying that what they did was wrong. But the guy here is just making up this pretend honesty to solidify all the choices he made afterwards.
Anyone who swallows this self serving nonsense is naive.
> It would have created very bad problems with TBTF
That's one of the reasons that both Paulson and Bernanke cite for not bailing out Lehman.
Technically the government can bail out whoever they want for whatever amount they want. Bernanke isn't dumb - he knows this. He is saying that the bailout was impossible from a cost-benefit perspective. Setting a TBTF precedent so early on and putting the garbage debt-profile of Lehman's underlying assets on the government's balance sheet were too risky to justify bailing the bank out.
I'm also willing to reserve judgement until I read the full book rather than a few quotes picked out by the NYT.
Well, can you back up your claims with something of substance? Believing Bernanke is naive, but believing a random person on the internet, who provides no argumentation whatsoever is prudent?
The stated reason is often that AIG was so huge that it had to be saved to avoid disaster. Yet, this article seems to argue that the exact reason Lehman wasn't saved 2 days earlier was because it was just too large for the government to handle and that it didn't have the authority to do so until a month later when TARP was passed.
You have to wonder how candid memoirs by former officials are vs attempts to influence the historical record. Wikipedia says that Bernanke now advises Citadel which benefited to the tune of $200 million from the bailout of AIG.