September 15, 2009
The Real Lesson of Lehman's Fall
Lehman Died So TARP and AIG Might Live
By MIKE WHITNEY
"Lehman's fate was sealed not in the boardroom of that gaudy Manhattan headquarters. It was sealed downtown, in the gloomy gray building of the New York Federal Reserve, the Wall Street branch of the U.S. central bank."
-- Stephen Foley, U.K. Independent
Stephen Foley is on to something. Lehman Bros. didn't die of natural causes; it was drawn-and-quartered by high-ranking officials at the US Treasury and the Federal Reserve. Most of the rubbish presently appearing in the media, ignores this glaring fact. Lehman was a planned demolition (most likely) concocted by ex-Goldman Sachs CEO Henry Paulson, who wanted to create a financial 9-11 to scare Congress into complying with his demands for $700 billion in emergency funding (TARP) for underwater US banking behemoths. The whole incident reeks of conflict of interest, corruption, and blackmail.
The media have played a critical role in peddling the official "Who could have known what would happen" version of events. Bernanke and Paulson were fully aware that they playing with fire, but they chose to proceed anyway, using the mushrooming crisis to achieve their own objectives. Then things began to spin out of control; credit markets froze, interbank lending slowed to a crawl, and stock markets plunged. Even so, the Fed and Treasury persisted with their plan, demanding their $700 billion pound of flesh before they'd do what was needed to stop the bleeding. It was all avoidable.
Lehman had potential buyers--including Barclays--who probably would have made the sale if Bernanke and Paulson had merely provided guarantees for some of their trading positions. Instead, Treasury and the Fed balked, thrusting the knife deeper into Lehman's ribs. They claimed they didn't have legal authority for such guarantees. It’s a lie. The Fed has provided $12.8 trillion in loans and other commitments to keep the financial system operating without congressional approval or any explicit authorization under the terms of its charter. The Fed never considered the limits of its "legal authority" when it bailed-out AIG or organized the acquisition of Bear Stearns by JP Morgan pushing $30 billion in future liabilities onto the public's balance sheet. The Fed's excuses don't square with the facts.
Here's how economist Dean Baker recounts what transpired last September 15:
"Last September, when he (Bernanke) was telling Congress that the economy would collapse if it did not approve the $700 billion TARP bailout, he warned that the commercial paper market was shutting down.
This was hugely important because most major companies rely on selling commercial paper to meet their payrolls and pay other routine bills. If they could not sell commercial paper, then millions of people would soon be laid off and the economy would literally collapse.
What Mr. Bernanke apparently forgot to tell Congress back then is that the Fed has the authority to directly buy commercial paper from financial and non-financial companies. In other words, the Fed has the power to prevent the sort of economic collapse that Bernanke warned would happen if Congress did not quickly approve the TARP. In fact, Bernanke announced that the Fed would create a special lending facility to buy commercial paper the weekend after Congress voted to approve the TARP." ("Bernanke's bad Money", Dean Baker, CounterPunch)
The reason Bernanke did not underwrite the commercial paper market was, if he had, he wouldn't have been able to blackmail congress. He needed the rising anxiety from the crisis to achieve his goals.
Here's a clip from an editorial in the New York Times (admitting most of what has already been stated) that tries to put a positive spin on the Fed's behavior:
"Mr. Nocera says that almost everyone he’s ever spoken to in Hank Paulson’s old Treasury Department agrees that without the immediate panic caused by the Lehman default, the government would never have agreed to make the loans needed to save A.I.G., a company it knew very little about. In effect, the Lehman bankruptcy caused the government to panic, which in turn caused it to save the firm it really had to save to prevent catastrophe. In retrospect, if you had to choose one firm to throw under the bus to save everyone else, you would choose Lehman.....it is quite likely that the financial crisis would have been even worse had Lehman been rescued. Although nobody realized it at the time, Lehman Brothers had to die for the rest of Wall Street to live. ("Lehman Had to Die So Global Finance Could Live", Sept 14, 2009, New York Times)
So, according to the muddled logic of the NY Times, everything worked out for the best so there's no need to hold anyone accountable. (Tell that to the 7 million people who have lost their jobs since the beginning of the meltdown) This latest bit of spin is pure cover-your-ass journalism, an attempt to rewrite history and absolve the guilty parties. The fact is, Paulson and Bernanke deliberately created the crisis in order to jam their widely-reviled TARP policy down the public's throat. The Times thinks the public should be grateful for that because, otherwise, the crooked insurance giant, AIG, would not have been bailed out and Goldman Sachs and other Wall Street heavies would not have been paid off.
The reason panic spread through the markets after Lehman filed for bankruptcy, was because the Reserve Primary Fund, which had lent Lehman $785 million (and recieved short-term notes called commercial paper) couldn't keep up with the rapid pace of withdrawals from worried clients. The sudden erosion of trust triggered a run on the money markets. Here's an excerpt from a Bloomberg article, "Sleep-At-Night-Money Lost in Lehman Lesson Missing $63 Billion":
"On Tuesday, Sept. 16, the run on Reserve Primary continued. Between the time of Lehman’s Chapter 11 announcement and 3 p.m. on Tuesday, investors asked for $39.9 billion, more than half of the fund’s assets, according to Crane Data.
“Reserve’s trustees instructed employees to sell the Lehman debt, according to the SEC.
“They couldn’t find a buyer.
“At 4 p.m., the trustees determined that the $785 million investment was worth nothing. With all the withdrawals from the fund, the value of a single share dipped to 97 cents.
“Legg Mason, Janus Capital Group Inc., Northern Trust Corp., Evergreen and Bank of America Corp.’s Columbia Management investment unit were all able to inject cash into their funds to shore up losses or buy assets from them. Putnam closed its Prime Money Market Fund on Sept. 18 and later sold its assets to Pittsburgh-based Federated Investors.
“At least 20 money fund managers were forced to seek financial support or sell holdings to maintain their $1 net asset value, according to documents on the SEC Web Site.
“When news that Reserve Primary broke the buck hit the wires at 5:04 p.m. that Tuesday, the race was on" (Bloomberg)
This is what a run on the shadow banking system looks like. Bernanke and Paulson pinpointed the trouble in the commercial paper market and used it to put more pressure on Congress to approve their bailout bill.
"It was commercial paper and the $3.6 trillion money market industry that traded the notes that came close to sinking the global economy -- not a breakdown in credit-default swaps or bank-to-bank lending....
“Like ice-nine, the fictitious substance in Kurt Vonnegut Jr.'s 1963 novel Cat’s Cradle, a single seed of which could harden all the world’s water, commercial paper was the crystallizing force that froze credit markets, choking off the ability of companies and banks to borrow money and pay bills." (Sleep-At-Night-Money Lost in Lehman Lesson Missing $63 Billion, Bob Ivry, Mark Pittman and Christine Harper, Bloomberg News)
Bernanke could have fixed the problem in an instant. All he needed to do was provide explicit government guarantees on money markets and commercial paper. That would have ended the bank-run pronto. But he chose not to. He chose to wait until Congress capitulated so he could net $700 billion for his banking buddies.
According to the UK Telegraph:
"On Thursday night, the Treasury went literally down on his knees before Nancy Pelosi, speaker of the House of Representatives, begging her to agree taxpayer money to bail out the financial system. Bernanke, a scholar of the financial panic that caused the Great Depression, told fearful lawmakers there wouldn't be a banking system in place by Monday morning if they didn't act. Paulson talked openly about planning for martial law, about how to feed the American people if banking and commerce collapsed."
Despite their dire warnings, on Monday morning, the banking system was still in tact, just as it was a full month later when the first TARP funds were handed out to the big banks. It was all a hoax. The problem wasn't the banks toxic assets at all, but the commercial paper and money markets. The Fed and Treasury knew that they could count on Congress's abysmal ignorance of anything financial; and they weren't disappointed. On October 3, 2008, Congress passed the Financial Rescue Plan (TARP) Paulson's fear-mongering had triumphed.
Here's a quick look at the Lehman chronology:
On Sept 15, 2008, Lehman Bros filed for bankruptcy sending the Dow plummeting 504 points.
On Sept 17, the Dow falls 449 points in reaction to AIG bailout.
On Sept 29, the Dow tumbles 777 points after House votes "No" on TARP.
On Oct 3, the House passes Financial Rescue Plan (TARP) The Dow falls 818 points.
On Oct 7, the Fed creates the Commercial Paper Funding Facility to backstop the commercial paper market. Two weeks later, Bernanke announces the Money Market Investor Funding Facility to make loans of longer maturities.
These are the two facilities which relieved the tension in the markets, not the TARP funds. It's clear that Bernanke knew exactly how to fix the problem, because he did so as soon as the TARP was passed. Here's economist Dean Baker in The American Prospect:
"Bernanke was working with Paulson and the Bush administration to promote a climate of panic. This climate was necessary in order to push Congress to hastily pass the TARP without serious restrictions on executive compensation, dividends, or measures that would ensure a fair return for the public's investment.
“Bernanke did not start buying commercial paper until after the TARP was approved by Congress because he did not want to take the pressure off, thereby leading Congress to believe that it had time to develop a better rescue package. ("Did Ben Bernanke Pull the TARP Over Eyes?", Dean Baker, The American Prospect)
The American people have been ripped off by industry reps working the policy-levers from inside the government. That's the real lesson of the Lehman bankruptcy. Happy anniversary.
Mike Whitney lives in Washington state. He can be reached at email@example.com