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Wednesday, September 18, 2013

'DeLong: The Lehman Disaster was Foreseeable'

Brad DeLong:

... The uncontrolled bankruptcy of Lehman was a disaster.
Lehman was a systemically-important financial institution, and it was foreseeable that an uncontrolled bankruptcy would be a disaster--the only surprise was that it turned out to be a much bigger disaster than Paulson, Bernanke, Geithner were expecting at the time.
There is a date--April 15, 2008, say--at which Lehman Brothers was "solvent" in the sense that the Bush Treasury and the Bernanke-Geithner Fed would have been willing to lend to it massively as they near-extinguished the claims of its equity holders, closed down the institution, and distributed some of its risk to the Federal Reserve and some of its risk to other financial institutions.
There was a date--September 15, 2008--at which the Bush Treasury and the Bernanke-Geithner Fed were unwilling to do that, and let Lehman go.
By continuity, in between there is a last date at which Lehman can still be resolved in an orderly fashion--a date on which their special assistants walk into Paulson's, Bernanke's, and Geithner's offices, and say: "Today may be our last chance to close down Lehman in an orderly fashion. If things go badly for Lehman on the markets today, by tomorrow it will be so clearly insolvent that we will not be able to lend to it to grease its shutdown."
When Paulson, Bernanke, and Geithner heard that, they should immediately have huddled, and then called Lehman and said: "You need to do a deal today, because tonight we are going to announce that our judgment is that you are on the edge of insolvency."

    Posted by on Wednesday, September 18, 2013 at 12:24 AM in Economics, Financial System, Regulation | Permalink  Comments (27)

          


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