February 2014 – FINANCE – Six weeks after Lehman Brothers filed for bankruptcy in September 2008, Ben S. Bernanke, then chairman of the Federal Reserve, gave his central bank colleagues an imitation of the people who were already criticizing the government’s decision to let the Wall Street bank collapse. “”What in the heck were you guys doing letting Lehman fail?” he said, according to minutes of a closed Fed meeting in late October 2008 that were released Friday. Bernanke did not debate whether it was right to let Lehman die at the Fed meeting held on Sept. 16, the day after the investment bank filed for bankruptcy, according to the newly released minutes. But from the comments in the October meeting, he appeared to have been aware that the government’s decision to let Lehman fail was coming under intense scrutiny from prominent financial figures around the world who said it was a huge and unnecessary mistake that caused global financial markets to freeze up. The Lehman decision is still fiercely debated as politicians and regulators grapple with how to handle large banks in unstable times. In addition, the reputations of Bernanke and Henry M. Paulson Jr., Treasury secretary at the time, rest heavily on the Lehman episode. “The transcripts of the 2008 Fed meetings that were published Friday provide one of the fullest pictures yet of the thinking of top government officials on Lehman’s implosion. The documents will most likely prompt a fresh examination of the decisions made in that crisis year. For the equilibrium of the world financial system, this was a genuine error,” Christine Lagarde, France’s finance minister at the time, said in the days after Lehman’s demise.
In response to their critics, both Bernanke and Paulson have since said they could not save Lehman because their hands were legally tied. Bernanke made that argument at the Oct. 29 meeting of the Federal Open Market Committee meeting. “”The Fed and the Treasury simply had no tools to address both Lehman and the other companies that were under stress at that time,” he said. But six months earlier, in March 2008, the Fed found the tools to bail out Bear Stearns, another Wall Street firm toppling under the weight of soured mortgages, and the Fed took extraordinary steps to rescue American International Group the day after Lehman filed for bankruptcy. Some of those present during the 2008 decisions assert that Bernanke and Paulson either did not act because they expected Wall Street firms to rescue Lehman or because they feared that bailing it out would create an appetite for even more taxpayer largess. Today, critics of the Treasury and the Fed say that the our-hands-were-tied argument may be an excuse, used after the fact, as a shield from criticism that they were negligent and miscalculated badly. “It was a post-incident rationalization,” Harvey R. Miller, a partner at Weil, Gotshal & Manges, said in an interview Friday. –Economic Times