Many of the documents discussed in this book are cited in the footnotes of the Bankruptcy Examiner (Valukas) Report or the endnotes of the Financial Crisis Inquiry Commission (FCIC) Report. Documents cited in the Valukas footnotes can be accessed through hyperlinks in the footnotes. Documents cited in the FCIC endnotes can be accessed by searching by endnote number in the Archives on the FCIC website.
Preface
1. “Current Economic and Financial Conditions,” background document for September 16, 2008 meeting of the Federal Open Market Committee, pp. 1–16, website of the Board of Governors of the Federal Reserve System.
2. See, for example, Greenspan, 2008, and Baker, 2011.
3. Blinder, 2013, p. 3.
4. Krugman, 2009; Paulson, 2010, p. 436.
5. Baker and Hassett, 2012, describe “The Human Disaster of Unemployment.”
6. Bernanke, Testimony at Financial Crisis Inquiry Commission hearing on “Too Big to Fail,” September 2, 2010, pp. 75–76 of transcript.
7. Cline and Gagnon, 2013; Avent, 2014.
8. Bordo, 1990.
9. Friedman and Schwartz, 1963; Bernanke, 1983.
10. See, for example, Bernanke’s 2012 lecture at George Washington University, “The Fed’s Response to the Financial Crisis.”
11. Blinder, 2013; Wessel, 2009; Wolf, 2014.
1Introduction
1. Bernanke, “Reflections on a Year of Crisis,” Speech at the Federal Reserve Bank of Kansas City’s Annual Economic Symposium, Jackson Hole, Wyoming, August 29, 2009, www.federalreserve.gov.
2. Bernanke, Testimony at Financial Crisis Inquiry Commission hearing on “Too Big to Fail,” September 2, 2010, pp. 75–76 of transcript, www.fcic.law.stanford.edu.
3. Bernanke, The Courage to Act, p. 288.
4. Detailed citations for all facts and quotations in this section are provided in later chapters of this book.
5. FCIC Report, p. 340.
2The Crisis of 2008
1. These percentages are calculated from the assets and equity reported on the 2007 Form 10-K’s filed with the SEC by Goldman Sachs (p. 110), Morgan Stanley (pp. 101–102), Merrill Lynch (p. 19), Lehman Brothers (p. 29), and Bear Stearns (p. 82).
2. FCIC, Lehman Chronology, Tab 14. This chronology is a background document for the FCIC hearing on “Too Big to Fail,” September 1–2, 2010.
3. Copeland et al., 2010.
4. Diamond and Dybvig, 1983.
5. Since the 2008 crisis, the mechanics of tri-party repos have been modified to greatly decrease the amount of intraday credit provided by clearing banks. See the New York Fed’s “Update on Tri-Party Infrastructure Reform,” February 13, 2014.
6. This section draws on chapters 12, 15, and 16 of the FCIC report.
7. FCIC, p. 286.
8. FCIC, pp. 288–289.
9. FCIC, p. 293.
10. Duffie, 2010; Copeland et al., 2010.
11. FCIC Lehman chronology, Tab 40.
12. Duffie, 2010, p. 30.
13. FCIC staff interview of Ben Bernanke, November 17, 2009, pp. 21–22.
14. Compare the “PDCF Collateral Margins Table” in the “Credit and Liquidity Programs” section of the Board of Governors website to the market haircuts from the FCIC Lehman Chronology, Tab 14.
15. FCIC, note 16.15.
16. Valukas, note 5340.
17. Valukas, pp. 58–163.
18. Valukas, note 248.
19. LBHI, Form 10-K for 2007, p. 33.
20. Valukas, Appendix 13, note 16.
21. FCIC, p. 327.
22. Valukas, Appendix 13, pp. 7–9.
23. Levisohn, 2008.
24. FCIC, p. 328.
25. Valukas, note 6341.
26. Valukas, pp. 609–726 and Appendix 13.
27. Valukas note 750.
28. Valukas, Appendix 13.
29. Valukas, Appendix 15; FCIC Lehman Chronology, background document for hearing on “Too Big to Fail,” September 1–2, 2010.
30. Valukas, Appendix 15, note 89.
31. Valukas, note 5438.
32. Valukas, Appendix 15, note 117.
33. FCIC, p. 332.
34. Valukas, p. 698.
35. Valukas, Appendix 15, note 167.
36. Robert Diamond FCIC interview, c. 32:00 in the audio recording.
37. Valukas, Appendix 15, note 283.
38. FCIC, pp. 335–336 and note 18.85.
39. Valukas, Appendix 13, p. 57.
40. Sorkin, pp. 361–362.
41. Board of Governors of the Federal Reserve System, press release, September 14, 2008.
42. See Chapter 10, pp. 178–179.
43. William Dudley, FCIC interview, c. 31:00 in the audio recording.
44. Thomas Baxter, written testimony for FCIC hearing on “Too Big to Fail,” September 1, 2010, p. 11.
45. Haircuts for LBI’s collateral are given in the “September 14, 2008 Burke letter,” a background document for the FCIC hearing on “Too Big to Fail,” September 1, 2010.
46. Valukas, note 5992.
47. Valukas, p. 2165.
48. FCIC, note 19.26.
49. Quoted in LaCapra, 2009.
50. Congressional Oversight Panel on TARP, pp. 52–55.
51. FCIC, pp. 356–360.
52. FCIC, p. 360.
53. FCIC, p. 362.
54. Bloomberg News website, “Bloomberg Uncovers the Fed’s Secret Liquidity Lifelines.”
55. FCIC, note 20.55.
56. For estimates of the long-term damage from the Great Recession, see Reifschneider et al., 2013; Ball, 2014; and Mason, 2017.
3The Legal Criteria for Fed Assistance
1. The website of the Board of Governors describes these actions in its section on “Credit and Liquidity Programs and the Balance Sheet.”
2. Bagehot, 1873, Chapter 7.
3. For example, in a 2009 article that is widely quoted, Paul Tucker of the Bank of England says that “Bagehot’s dictum” for central banks is to lend “to solvent firms against good collateral.” For more on interpreting Bagehot, see Goodhart, 1999.
4. See Todd, 1993, for the history of Section 13(3).
5. FCIC, note 18.135.
6. Alvarez mentions the memos on 13(3) authorizations in his interview with the FCIC staff (approximately 1:15 in the audio recording). It is not clear why the CPFF memo has been released and others have not. I sought the memos on Maiden Lane and AIG in an unsuccessful Freedom of Information Act request to the Board of Governors (see Chapter 10, pp. 188–189).
7. Scott Alvarez, FCIC interview, c. 1:17 in the audio recording.
8. Valukas, pp. 1503–1504.
4Lehman’s Balance Sheet and Solvency
1. Valukas, note 7362.
2. Valukas, pp. 1551–1553.
3. Valukas, note 750.
4. A major finding of the Valukas Report (Volume 3 and Appendix 17) is that Lehman’s balance sheet was distorted by an accounting trick called “Repo 105.” Under normal accounting rules, a firm’s repos are treated as collateralized borrowings, and the collateral used to secure the repos is included in the firm’s assets. Under Repo 105, some repos were counted as sales of the assets being used as collateral, thus removing the assets from Lehman’s balance sheet. The purpose of this maneuver was to reduce the firm’s reported ratio of assets to equity (its leverage ratio), a widely watched indicator of its financial health. On May 31, Lehman used Repo 105 to reduce its measured assets by $44.5 billion.
The Valukas Report argues that the use of Repo 105 “materially misrepresented Lehman’s true financial condition” (p. 747). Yet Repo 105 is not important for the issues examined in this book. The assets removed from the balance sheet were safe and liquid: 91 percent were Treasury and agency securities, and over 99 percent were investment grade (Valukas Appendix 17, pp. 12–14). If we put those assets back on the balance sheet, along with the corresponding liabilities to repo counterparties, this adjustment does not significantly affect this analysis of Lehman’s solvency, its liquidity needs, or whether it had adequate collateral for a Fed loan.
5. The 10-Q reports that $43 billion of these assets are “pledged as collateral.” This figure is determined by complex accounting rules that count some but not all of the collateral for Lehman’s repos (see King, 2008).
6. LBHI Form 10-Q for 2008 Q2, p. 38.
7. LBHI Form 10-Q for 2008 Q2, p. 38.
8. LBHI press release, p. 2, in Valukas note 750.
9. LBHI press release, p. 1, in Valukas note 750.
10. Valukas, p. 1570.
11. Adrian et al., 2013.
12. See Exhibit 4.4.
13. LBHI, Form 10-Q for 2008 Q2, p. 27.
14. LBHI, Form 10-Q for 2008 Q2, pp. 27–29.
15. LBHI, Form 10-Q for 2008 Q2, p. 29.
16. LBHI, Form 10-Q for 2008 Q2, p. 29.
17. Valukas, note 7788.
18. The memo says, “Analysis on Leveraged & Corporate Lending and Muni portfolios are still in progress and excluded from current write-down estimate.” These types of assets were not among those that Barclays refused to take in its tentative deal with LBHI, so I presume they were not significantly overvalued.
19. Valukas, note 4875.
20. Paulson, p. 206.
21. FCIC, p. 335.
22. Paulson, p. 199.
23. Valukas, note 2195.
24. Valukas, pp. 203–609 and Appendices 12, 14, and 16.
25. Valukas, p. 214.
26. Valukas, pp. 285–355.
27. Valukas, pp. 484–492.
28. Valukas, pp. 1570–1587 and Appendix 21.
29. Duff and Phelps’s reasoning, somewhat simplified, is the following. They assume (1) a firm is solvent if the market value of its assets exceeds the book value of its liabilities; and (2) the market value of assets equals the market value of equity plus the market value of liabilities. These two assumptions imply the solvency condition stated above. Assumption (2) is not valid if the risk of bankruptcy depresses the prices of the firm’s debt and equity. The Valukas Report (p. 1579) cites a finance textbook, Pratt (2008), as the source of assumption (2), but Pratt does not actually suggest that assumption anywhere.
30. Bernanke, 2015, p. 264.
31. In 2014, the New York Times published an article about Lehman based on interviews with unnamed staff at the New York Fed (Stewart and Eavis, 2014). These sources say they analyzed Lehman’s finances in its final days, and their “preliminary finding” was that the firm was solvent. Senior policymakers were unaware of this analysis, according to the Times.
32. FCIC, hearing on “Too Big to Fail,” September 1, 2010, p. 253 of transcript.
33. FCIC, hearing on “Too Big to Fail,” September 1, 2010, pp. 253–255.
34. Pirro, 2013.
35. FCIC, follow up documents for hearing on “Too Big to Fail,” September 1–2, 2010.
36. FCIC, hearing on “Too Big to Fail,” September 1, 2010, p. 145.
37. Cline and Gagnon, 2013, also argue that Lehman was insolvent at the time of its bankruptcy. They cite the deep insolvency of the LBHI estate after the bankruptcy and suggest that value destruction cannot fully explain the estate’s condition.
38. Fleming and Sarkar, 2014.
39. Miller and Horwitz, 2013.
40. Fleming and Sarkar, 2014.
41. National Organization of Life and Health Insurance Guaranty Associations, 2013.
42. McCracken, 2009. For more on this topic, see Duffie, 2010, and Roe and Adams, 2014.
43. Valukas, p. 2193.
44. Crapo, 2008.
45. Giddens, 2014.
46. Crapo, 2008.
47. Harvey Miller, testimony at FCIC hearing on “Too Big to Fail,” September 1, 2010, p. 271 of transcript and p. 13 of written testimony.
5Lehman’s Liquidity Crisis
1. See, for example, Lehman’s presentations to Standard and Poor’s and to the Fed in May 2008 (Valukas, notes 6250 and 6251).
2. LBHI Form 10-Q for 2008 Q2, p. 81.
3. LBHI memo on “Liquidity Management,” June 2008, Valukas, note 6312.
4. LBHI Form 10-Q for 2008 Q2, p. 81.
5. Valukas, note 5422.
6. LBHI Form 10-Q for 2008 Q2, pp. 80–81.
7. LBHI memo on “Liquidity of Lehman Brothers,” October 7, 2008, Valukas, note 6341.
8. The figure of $188 billion appears in the discussion of liquidity management in LBHI’s 10-Q for 2008 Q2 (p. 84). The balance sheet in the same 10-Q reports only $128 billion in repos (see Exhibit 4.2). The balance sheet may omit some repos because they are netted with reverse repos in the same securities.
9. See, for example, LBHI 10-Q for 2008 Q2, pp. 84–85, and Valukas, note 6251.
10. LBHI memo on “Funding Lehman Brothers,” September 10, 2008, Valukas, note 6259.
11. Valukas, note 6251.
12. Valukas, note 6329.
13. Valukas, notes 6331 and 6334.
14. Quoted in Lehman presentation to the Chicago Mercantile Exchange, Valukas, note 6312.
15. Valukas, Appendix 13, note 16.
16. Valukas, pp. 1665–1687.
17. Valukas, note 6259.
18. Valukas, note 6341.
19. LBHI press release, p. 2, in Valukas, note 750.
20. The September 10 memo reports that Lehman lost $10 billion of repos from May 31 through August 31, with no change in overfunding. The October 7 memo says that Lehman’s liquidity position, including its repos, was “relatively stable” from August 31 through September 9.
21. Valukas, pp. 1084ff.
22. See Chapter 2, pp. 34–35, for more on the events of September 9 and 10.
23. Valukas, note 5604.
24. Valukas, Appendix 13, note 350.
25. Aubin, 2008.
26. Sorkin, pp. 366–369; FCIC, hearing on “Too Big to Fail,” September 1, 2010, written testimony of Harvey Miller, pp. 9–10.
27. Valukas, Appendix 15, p. 61.
6Lehman’s Collateral and the Feasibility of Liquidity Support
1. For example, Tarullo, 2014.
2. Basel Committee, 2014; Board of Governors of the Federal Reserve System, press release, May 3, 2016.
3. Exhibit 4.3 presents part of Lehman’s financial statement for August 31, 2008. The statement reports that the firm had equity of $28 billion and “total long-term capital” of $143 billion. Total long-term capital is defined as equity plus long-term debt (p. 11 of the statement, Valukas, note 750). These figures imply that long-term debt is $115 billion ($143 billion minus $28 billion).
4. My analysis assumes that all of Lehman’s assets could have served as collateral, which the Fed could have seized if the firm defaulted on a loan. Arguably, intangible assets and goodwill could not have served as collateral. However, these items accounted for only $4 billion of Lehman’s assets, so excluding them does not change my calculations substantially.
5. We can reduce this upper bound substantially by making the worst case scenario a bit more realistic, in particular, by accounting for the $273 billion of reverse repos and securities borrows on the asset side of Lehman’s August 31 balance sheet. These items were effectively short-term loans of cash from Lehman to its customers, which Lehman could have refused to roll over to offset its cash losses. If Lehman had to pay off all its short-term liabilities but terminated its reverse repos and securities borrows, it would need a loan of only $184 billion ($457 billion minus $273 billion) from the Fed.
6. LBI’s collateral in repos maturing on September 15 included $54.6 billion of Treasury and agency securities, and that day it pledged only $6.6 billion of Treasuries and agencies to the PDCF. These figures imply that LBI pledged $48.0 billion of Treasuries and agencies to private counterparties on September 15. See Chase Triparty Haircut Summary, Valukas note 7810, and the data on PDCF lending on the Board of Governors website.
7. Valukas, Appendix 13, note 350.
8. This assumption is not essential. If JPMC refused to clear Lehman’s repos, the Fed could have bypassed the tri-party market and lent to Lehman directly. This strategy was proposed in a July 2008 analysis at the New York Fed (see Chapter 7, p. 116).
9. Valukas, notes 5604, 6259, 6331, 6334, 6341, and Appendix 13, note 350.
10. See Chapter 5, p. 91.
11. Valukas, note 7807.
12. Lehman’s commercial paper outstanding was approximately $4 billion on August 31 and fell by $2 billion between then and September 12, leaving $2 billion at the time of the bankruptcy. Memo on “Liquidity of Lehman Brothers,” Valukas, note 6341.
13. Lehman limited its long-term debt maturing within any quarterly interval to 7.5 percent of its total long-term debt. On August 31, this limit was $8.5 billion. Memo on “Funding Lehman Brothers,” Valukas, note 6259.
14. FCIC Lehman chronology, Tab 40.
15. The New York Fed stress test in June lists liquidity losses related to “operating cash flows,” which include the $9 billion of collateral calls listed in a previous bullet point and two other items: $2 billion for “prime brokerage” and $2 billion for “derivatives/margins payment mismatches.” I conjecture that these two items are part of the operational friction discussed in Lehman memos, and do not count them as additional liquidity drains.
16. See Chapter 2, pp. 40–41.
17. Leising, 2011. Bloomberg obtained these data through a lawsuit against the Fed under the Freedom of Information Act.
18. Data on PDCF lending in section on Credit and Liquidity Programs and the Balance Sheet, website of the Board of Governors of the Federal Reserve System.
19. Wachtell et al., 2011.
20. Geithner, pp. 187–188.
21. See Chapter 2, pp. 27–28 and 40–41.
22. Valukas, p. 1659.
23. Valukas, note 5349.
24. See Chapter 5, pp. 87 and 89.
25. Valukas, pp. 584 and 596 and note 6255 (Lehman’s Global Liquidity MIS).
26. Valukas, notes 750 and 2065.
27. The balance sheet footnote from which I take other figures lists $55.0 billion of mortgages and asset-backed securities. However, this figure includes $9.2 billion of mortgages which were serving as collateral for securities that Lehman had issued, and which therefore could not be pledged to the PDCF. (The relevant accounting issues are discussed in Lehman’s 10-Q for 2008 Q2, p. 29, note (1).)
28. Valukas, note 5601.
29. September 14, 2008 Burke letter, background document for FCIC hearing on “Too Big to Fail,” September 1, 2010.
30. Valukas, note 4293.
31. PDCF Collateral Margins Table, in section on Credit and Liquidity Programs, website of the Board of Governors.
32. Thomas Baxter, follow-up letter after FCIC hearing on “Too Big to Fail,” September 1, 2010.
33. Transcript of Federal Open Market Committee meeting, September 16, 2008, p. 7.
34. Valukas, note 7807.
35. Over September 16 and 17, this total grew to $36 billion ($20 billion from the PDCF and $16 billion from Barclays). I have not found precise figures for repos maturing on the 16th and 17th, so it is more difficult to determine LBI’s liquidity needs on those days.
36. This figure is an estimate based on the fact that LBI pledged $6.6 billion of Treasury and agency securities as PDCF collateral on September 15, and on the range of PDCF haircuts on various types of Treasuries and agencies. As discussed in note 6, most of LBI’s Treasury and agency repos with the private sector rolled over on September 15.
37. Valukas, note 7810.
38. Valukas, note 7807.
39. Valukas, note 5604.
40. James Giddens, LBI Trustee Preliminary Investigation Report, pp. 74–75.
41. See Exhibit 5.1, which shows that collateral calls on derivatives (“derivative margins”) during the week of September 8 occurred at LBHI, not LBI or LBIE.
7Fed Discussions of Collateral and Liquidity Support
1. Valukas, note 6331.
2. Valukas, note 6334.
3. FCIC Lehman Chronology, background document for hearing on “Too Big to Fail,” September 1–2, 2010, Tabs 14–17.
4. FCIC Lehman Chronology, Tab 18.
5. FCIC Lehman Chronology, Tab 36.
6. FCIC Lehman Chronology, Tab 37.
7. There is a small mistake here: it is the Board of Governors, not the FOMC, that approves lending facilities under Section 13(3).
8. FCIC Lehman Chronology, Tab 50.
9. FCIC Lehman Chronology, Tab 53.
10. Section 10(b) of the Federal Reserve Act concerns discount loans to depository institutions. It is relevant here because the March 14 loan to Bear, which was not a depository institution, was channeled through JPMorgan Chase, which was.
11. FCIC Lehman Chronology, Tab 61.
12. All of Bernanke’s Congressional testimony and speeches as Fed Chair are available on the website of the Fed’s Board of Governors.
13. FCIC hearing on “Too Big to Fail,” September 2, 2010, p. 19 of transcript.
14. FCIC hearing on “Too Big to Fail,” pp. 24–25.
15. FCIC hearing on “Too Big to Fail,” pp. 76–77.
16. FCIC Report, p. 340.
17. Bernanke, 2015, p. 289.
18. Henry Paulson also suggested initially that the failure of Lehman was a policy choice, and later said that the Fed and the government had no legal means to rescue the firm. In a 2013 update of his memoir, Paulson gives the same explanation as Bernanke for an initial lack of candor. Speaking of his press conference on September 16, Paulson says (p. xxi): “When asked why we didn’t save Lehman, I wouldn’t publicly admit that the U.S. couldn’t find a single authority to rescue a failing investment bank. I believed that if I acknowledged as much, Morgan Stanley, which was also on the ropes, would have gone down within a few days.”
19. Bernanke interview with FCIC staff, November 17, 2009, p. 30.
20. Bernanke interview with FCIC staff, pp. 25–26.
21. Valukas, pp. 1503–1504.
22. Bernanke, “The Federal Reserve’s Response to the Financial Crisis,” lecture at George Washington University, March 27, 2012.
23. Bernanke, pp. 287–288.
24. Bernanke, pp. 267–268.
25. Geithner, p. 186.
26. Geithner, p. 187.
27. FCIC hearing on “Too Big to Fail,” September 2, 2010, pp. 18–21 of transcript.
28. FCIC hearing on “Too Big to Fail,” pp. 22–23.
29. FCIC hearing on “Too Big to Fail,” pp. 25–27.
30. FCIC hearing on “Too Big to Fail,” pp. 80–84.
31. FCIC hearing on “Too Big to Fail,” pp. 87–88 and p. 89.
32. Geithner, p. 182.
33. Bernanke, reply to follow-up letter from FCIC after hearing on “Too Big to Fail,” November 4, 2010, pp. 11–14.
34. See Chapter 4, pp. 74–76.
35. FCIC Lehman chronology, Tab 40.
36. Thomas Baxter, written testimony for FCIC hearing on “Too Big to Fail,” September 1, 2010, p. 9.
37. FCIC hearing on “Too Big to Fail,” September 1, 2010, pp. 185–186 of transcript.
38. FCIC hearing on “Too Big to Fail,” pp. 165–166.
39. The OMOs counted here were repos of Treasury securities from Lehman to the New York Fed, which the latter initiated as part of its implementation of monetary policy.
40. Harvey Miller, written testimony for FCIC hearing on “Too Big to Fail,” September 1, 2010, p. 18.
41. The source of Miller’s figure is not clear. If he is suggesting that a wind down would have cost the government $40–50 billion, then I disagree. The only necessary public assistance would have been Fed liquidity support during the wind down, which could have been well secured (see Chapter 9, pp. 173–176).
42. FCIC hearing on “Too Big to Fail,” pp. 161–163. In the transcript, the sentence quoted here includes the word “can” rather than “can’t,” but that appears to be a typo.
43. FCIC hearing on “Too Big to Fail,” pp. 163–164.
44. FCIC hearing on “Too Big to Fail,” p. 253.
45. FCIC hearing on “Too Big to Fail,” p. 254.
46. FCIC hearing on “Too Big to Fail,” pp. 174 and 253.
47. Thomas Baxter, reply to follow-up letter from FCIC after hearing on “Too Big to Fail,” October 15, 2010, p. 5.
48. FCIC hearing on “Too Big to Fail,” p. 41.
49. FCIC hearing on “Too Big to Fail,” pp. 43–44.
50. Scott Alvarez interview with FCIC staff, July 29, 2010, around 1:21 in the audio recording.
51. See, for example, Paulson, p. 189.
52. See Chapter 4, pp. 72–73.
53. Statement by the UK Financial Services Authority, Valukas, note 5918.
54. Thomas Baxter, written testimony for FCIC hearing on “Too Big to Fail,” September 1, 2010, pp. 8–9.
55. FCIC hearing on “Too Big to Fail,” pp. 151–152.
56. FCIC hearing on “Too Big to Fail,” p. 164.
57. FCIC hearing on “Too Big to Fail,” p. 166.
58. Scott Alvarez, interview with FCIC staff, around 1:23 in the audio recording.
8Fed Actions that Ensured Lehman’s Bankruptcy
1. Valukas, Appendix 15, p. 58.
2. Harvey Miller, written testimony for FCIC hearing on “Too Big to Fail,” September 1, 2010, pp. 7–9.
3. Sorkin, pp. 356–359.
4. Harvey Miller, written testimony, pp. 9–10.
5. Paulson, p. 220.
6. Valukas, note 2829.
7. FCIC hearing on “Too Big to Fail,” September 1, 2010, pp. 147–148 of transcript.
8. FCIC hearing on “Too Big to Fail,” pp. 159–160.
9. FCIC hearing on “Too Big to Fail,” p. 178.
10. Bart McDade, interview with FCIC staff, August 9, 2010, around 54:00 in the audio recording.
11. Ian Lowitt, interview with FCIC staff, August 25, 2010, around 37:00.
12. FCIC hearing on “Too Big to Fail,” September 1, 2010, p. 166 of transcript.
13. FCIC hearing on “Too Big to Fail,” p. 177.
14. FCIC hearing on “Too Big to Fail,” pp. 183–184.
15. FCIC hearing on “Too Big to Fail,” pp. 180–181.
16. Thomas Baxter, follow-up letter after FCIC hearing on “Too Big to Fail,” footnote 8.
17. Valukas, note 5978.
18. Federal Open Market Committee meeting, September 16, 2008, p. 7 of transcript.
19. FCIC, p. 337.
20. Thomas Baxter, follow-up letter after FCIC hearing on “Too Big to Fail,” p. 4.
21. Thomas Baxter, follow-up letter, Exhibit 7.
22. Other parts of the record add more confusion. The minutes of the September 14 Lehman board meeting (p. 2) state: “Mr. Russo [Lehman’s General Counsel] described the Fed’s emergency order allowing non-investment grade securities to be used as collateral at the Fed window and the Firm’s need for the Fed to accept a broader range of collateral, but that the Fed’s position is that the expanded window would only apply to tri-party repos of securities.” Also on September 14, Board Vice Chair Kohn wrote to Ben Bernanke that “LEH heard about the pdcf enlargement and thought it was a lifeline, but they didn’t understand it was limited to triparty” (FCIC Lehman Chronology, Tab 66). The FCIC final Report (p. 337) interprets Russo to mean that Lehman asked to borrow against an even broader range of collateral than that accepted by the expanded PDCF, which accepted assets that “closely matched” the collateral in tri-party repos. The Kohn remark can be interpreted the same way. Most evidence, however, suggests that Lehman only sought to borrow against the expanded PDCF collateral.
23. Valukas, note 2829.
24. FCIC, note 18.98.
25. Data on PDCF lending in section on “Credit and Liquidity Programs and the Balance Sheet,” website of Board of Governors of the Federal Reserve System.
26. LBHI, Form 10-Q for 2008 Q2, p. 48.
27. Valukas, pp. 1550–1554.
28. James Giddens, LBI Trustee Preliminary Investigation Report, p. 53.
29. Joint Administrators of LBIE, First Progress Report, p. 51.
30. Giddens, Preliminary Investigation Report, p. 74.
31. Giddens, Preliminary Investigation Report, Exhibit C, p. 10. The Report does not cite the original source of this information.
32. Valukas, pp. 584 and 596.
33. Valukas, pp. 1532–1533.
34. Thomas Baxter, follow-up letter after FCIC hearing on “Too Big to Fail,” p. 2.
35. Alex Kirk, interview with FCIC staff, August 16, 2010, around 1:05 in the audio recording.
36. Alex Kirk interview, around 1:11.
37. Valukas, note 5995.
38. FCIC hearing on “Too Big to Fail,” September 2, 2010, p. 26 of transcript.
39. Thomas Baxter, follow-up letter after FCIC hearing on “Too Big to Fail,” p. 2.
40. United States Code, Section 547.
41. United States Code, Section 548.
9Possible Long-Term Outcomes for Lehman
1. I do not consider the possibility of a capital injection from the Troubled Asset Relief Program. If Lehman had survived, the financial crisis would have been less severe, and Congress might not have decided to create the TARP.
2. See Chapter 2, pp. 38–39.
3. See Chapter 2, p. 39.
4. Paulson, pp. 210–211.
5. FSA Statement to Bankruptcy Examiner, pp. 6–10, FCIC note 18.98.
6. Bernanke, p. 254.
7. Valukas, note 5816.
8. FCIC Lehman Chronology, background document for hearing on “Too Big to Fail,” September 1, 2010, Tab 17.
9. Valukas, note 5816.
10. FCIC Lehman Chronology, Tab 36.
11. FCIC Lehman Chronology, Tab 37.
12. Valukas, note 5896.
13. Valukas, Appendix 13.
14. Valukas, Appendix 15, note 79.
15. Valukas, Appendix 15, p. 18.
16. Valukas, Appendix 13, p. 12; FCIC, p. 328.
17. See Scott, 2016, for estimates of recovery rates for Lehman’s creditors.
18. Thomas Baxter, written testimony for FCIC hearing on “Too Big to Fail,” p. 11.
19. Alex Kirk, interview with FCIC staff, August 16, 2010, around 31:00 in the audio recording.
20. Valukas, Appendix 15, pp. 55–56.
10How Risky were the Fed’s Rescues of Other Firms?
1. Data on PDCF lending in section on Credit and Liquidity Programs and the Balance Sheet, website of Board of Governors of the Federal Reserve System.
2. Compare the haircuts for LBI in Christopher Burke’s letter to Lehman (background document for FCIC hearing on “Too Big to Fail”); the market haircuts on September 12 reported by JPMorgan Chase (Valukas, note 7810); and the normal PDCF haircuts on the Board of Governors website (PDCF Collateral Margins Table in the Credit and Liquidity Programs section).
3. See Chapter 2, p. 25 for details of the March 14 loan.
4. FCIC, note 15.80.
5. Section on Maiden Lane Transactions, website of the Federal Reserve Bank of New York.
6. PDCF Collateral Margins Table, section on Credit and Liquidity Programs and the Balance Sheet, website of the Board of Governors.
7. Alloway, 2010.
8. See Publication H.4.1 on the Board of Governors website.
9. For a detailed review of the Fed’s assistance to AIG, see Congressional Oversight Panel for TARP, 2010, pp. 46–82.
10. Congressional Oversight Panel, p. 57.
11. FCIC hearing on “Too Big to Fail,” September 2, 2010, p. 37 of transcript.
12. FCIC hearing on “Too Big to Fail,” September 2, 2010, pp. 60–61.
13. Thomas Baxter, written testimony for FCIC hearing on “Too Big to Fail,” September 1, 2010, p. 10.
14. Geithner, p. 193.
15. Geithner, pp. 194 and 197.
16. Quoted in Stewart, 2014.
17. Bernanke, p. 281.
18. Bernanke, pp. 282–283.
19. Secured Credit Facility Authorized for American International Group, Inc, in Reports Pursuant to Section 129 of the Emergency Economic Stabilization Act of 2008, website of the Board of Governors, p. 7.
20. Secured Credit Facility Authorized for American International Group, Inc, p. 7.
21. Ball v. Board of Governors of the Federal Reserve System, D.D.C. No. 13-cv-0603, 2015.
22. My FOIA request also included memos by the Board’s General Counsel about the legal justifications for the Maiden Lane and AIG loans. This part of my request was also denied, and the denial was upheld by the court. Despite these outcomes, I am grateful for the outstanding work on my case by PCLG attorneys, especially Jehan Patterson.
23. Office of the Special Inspector General for the Troubled Asset Relief Program, Factors Affecting Efforts to Limit Payments to AIG Counterparties, SIGTARP-10–003, November 17, 2009, p. 8.
24. Congressional Oversight Panel on the Troubled Asset Relief Program, The AIG Rescue, Its Impact on Markets, and the Government’s Exit Strategy, June 10, 2010, note 246.
25. Congressional Oversight Panel, pp. 54–55.
26. FCIC, note 19.38.
27. See Congressional Oversight Panel, pp. 68–82.
28. See Publication H.4.1 on the Board of Governors website.
29. FCIC note 18.135.
30. FCIC note 18.135 (Alvarez memo, p. 3).
31. Kacperczyk and Schnabl, 2010.
32. Adrian et al., 2011.
33. FCIC note 18.135 (Alvarez memo, p. 8).
34. Kacperczyk and Schnabl, 2010.
11Who Decided that Lehman Should Fail?
1. Geithner, p. 154.
2. Paulson, pp. 100–116; Geithner, pp. 147–158; Wessel, pp. 157–171.
3. Geithner, p. 156.
4. Paulson, pp. 136–137.
5. Geithner, p. 178.
6. Paulson, p. 186.
7. Geithner, p. 179.
8. Sorkin, pp. 282–283.
9. Sorkin, p. 295.
10. Quoted by Geithner, p. 179.
11. In his memoir, Paulson says he would have changed his position and agreed for the Fed to finance some of Lehman’s assets if doing so would have facilitated an acquisition of the firm. He says of himself and Geithner, “we both knew that if a Bear Stearns-style rescue was the only option, we would take it” (p. 181). The Fed financed some of Bear’s assets as part of the deal with JPMorgan Chase. According to Paulson, it was the absence of an acquirer that made a Lehman rescue impossible.
12. Paulson, pp. 187–190.
13. Thomas Baxter, written testimony for FCIC hearing on “Too Big to Fail,” September 1, 2010, p. 6.
14. Wessel, p. 16.
15. Paulson says that “Tim opened the meeting” and then “handed the meeting over to me” (p. 191). However, Geithner, Baxter, Sorkin, and Wessel all report that Paulson spoke first. Paulson confirms that he said “there could be no government money involved in any rescue” (p. 192).
16. Geithner, pp. 181–182.
17. Paulson, pp. 194–206.
18. Paulson, p. 206.
19. See Chapter 2, p. 39.
20. Paulson, p. 211; Sorkin, p. 349.
21. Paulson, p. 212.
22. See Chapter 8, pp. 151–153.
23. Sorkin, p. 355.
24. Paulson, p. 225.
25. FCIC, note 18.101.
26. Paulson, p. 209.
27. Bernanke, p. 263.
28. Bernanke, pp. 263–269; Paulson, pp. 186–221; Geithner, pp. 180–190; Sorkin, pp. 297–372; FCIC Lehman Chronology, background document for hearing on “Too Big to Fail,” September 1, 2010.
29. Bernanke, p. 263.
30. FCIC Lehman Chronology, Tab 58.
31. Sorkin, pp. 350–351.
32. Bernanke, pp. 267–268.
33. Paulson, p. 218.
34. Wessel, p. 13.
35. Bernanke, p. 263.
36. FCIC Lehman Chronology, Tabs 66–67.
37. FCIC Lehman Chronology, Tab 66. Kohn’s remark that the PDCF expansion “was limited to triparty” is puzzling and is discussed in Chapter 8 note 22.
38. Bernanke, p. 289.
39. Geithner, p. 178.
40. Wessel, p. 12; Sorkin, pp. 41 and 44.
41. Ball, 2016.
42. Appelbaum, 2014.
43. Davidson, 2009.
44. Blinder, 2013, p. 98.
45. Geithner, p. 154.
46. Sorkin, p. 366.
47. Geithner, p. 189.
48. Paulson describes the same conversation on pp. 219–220 of his memoir. In Paulson’s account, his language is more polite, but the message is the same. He says, “I finally walked into Chris’s office around 7:15 PM and urged him to move quickly to execute the SEC’s plan” [for bankruptcy]. Paulson quotes himself as telling Cox, “It is essential that you call the company now.”
12Explaining the Lehman Decision
1. Sorkin, pp. 38 and 78.
2. Paul Volcker, speech at Economic Club of New York, April 8, 2008.
3. Vincent Reinhart, speech at American Enterprise Institute, April 28, 2008.
4. Geithner, pp. 159–160.
5. Geithner, p. 175.
6. Sender, 2008.
7. Paulson, p. 212.
8. Bernanke, p. 261.
9. Schuman, 2008.
10. Quoted in Geithner, p. 190.
11. Wessel, p. 14; Sorkin, p. 282; Geithner p. 179; Paulson, p. 186.
12. Sorkin, p. 239.
13. Sorkin, p. 302.
14. FCIC Lehman Chronology, background document for hearing on “Too Big to Fail,” September 1, 2010, Tab 32.
15. Wessel, p. 274.
16. See Chapter 7, pp. 121–123.
17. Bernanke, interview with FCIC staff, November 17, 2009, pp. 25–26 of transcript.
18. FCIC hearing on “Too Big to Fail,” September 2, 2010, p. 22 of transcript.
19. Bernanke, p. 268.
20. Paulson, p. 225; Geithner, p. 187.
21. Scott Alvarez, interview with FCIC staff, July 29, 2010, around 44:00 in the audio recording.
22. Paulson, p. 187.
23. Wessel, p. 11.
24. Sorkin, pp. 357–359; Harvey Miller, written testimony for FCIC hearing on “Too Big to Fail,” September 1, 2010, pp. 8–9.
25. FOMC meeting, September 16, 2008, p. 3 of transcript.
26. FOMC meeting, pp. 3–6.
27. FOMC meeting, p. 51.
28. FOMC meeting, p. 51.
29. FOMC meeting, pp. 61–62.
30. FOMC meeting, p. 71.
31. President Rosengren of Boston advocates a quarter-point cut in the funds rate, but he is not a voting member of the Committee.
32. Geithner, p. 176.
33. Congressional Oversight Panel for the Troubled Asset Relief Program, 2010, p. 52.
34. Sorkin, pp. 383 and 388.
35. Geithner, p. 193.
36. Quoted in Sorkin, p. 386.
37. Sorkin, p. 396.
38. Sorkin, p. 295.
39. Bernanke, interview with FCIC staff, p. 25; Paulson testimony to House Committee on Oversight and Government Reform, January 27, 2010; Geithner, p. 194.
40. Paulson, p. 228; Blinder, p. 129.
41. Paulson, pp. 227–228 and 230.
42. Geithner, p. 184.
43. Congressional Oversight Panel, note 252.
44. See Chapter 7, pp. 121–122.
45. Nocera, 2009.
46. For example, Ickes, 2009.
47. Bernanke, p. 291.
13Conclusion
1. Bernanke, p. 291.
2. Bernanke, p. 288.
3. Bernanke, “The Federal Reserve: Looking Back, Looking Forward,” January 3, 2014.
4. See Chapter 3, pp. 50–51 for more on the Dodd-Frank revisions to Section 13(3). Scott, 2016, Chapter 9 gives a detailed analysis.
5. Sanders is quoted in Solman, 2012.