Another look at Lehman Brothers collapse

In a new book out this month, “The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster,” economist Laurence M. Ball re-examines the choices facing the managers of the 2008 financial crisis.

In particular, he looks at a crucial choice — to let the storied Wall Street firm Lehman Brothers fail in bankruptcy rather than offer taxpayer support for a bailout.

His conclusion: The Federal Reserve, U.S. Treasury and New York Fed made a grave unforced error in allowing Lehman Brothers to declare a messy bankruptcy (still the largest U.S. corporate bankruptcy of all time), in the process adding destructive force to the financial tsunami already enveloping the economy and financial markets in September 2008. And they disingenuously described the reasons for their decision.

The main managers of the 2008 financial crisis, Treasury Secretary Hank Paulson, New York Federal Reserve Bank President Tim Geithner and Federal Reserve Chairman Ben Bernanke, all claimed in official testimony and their subsequent memoirs that Lehman Brothers was “insolvent” at the time of the bankruptcy.

The Fed cannot lend money to insolvent institutions or banks with insufficient collateral to pledge for a new loan.

It is undeniable that in September 2008, Lehman faced a liquidity crisis — the inability to pay back everyone it owed money to, if everyone wanted their money back right away. That’s a classic problem facing any bank in which depositors demand immediate return of their deposits. The dispute

Ball addresses is whether Lehman had enough assets in the medium to long run that would have covered what it owed so that a fresh loan from the Fed could have averted bankruptcy.

In household terms, we can imagine a well-off person with

MICHAEL TAYLOR