“At a House Financial Services Committee hearing just after Lehman Brothers filed for bankruptcy protection a year ago, the committee chairman, Barney Frank, suggested that September 15, 2008 be commemorated as Free Market Day, since Lehman was allowed to fail and free markets allowed to work. Frank then added that because AIG was bailed out the next day, “the national commitment to the free market lasted one day.”
Funny guy, the chairman — but probably not to Ben Bernanke, Hank Paulson, or Timothy Geithner. They’re the folks, obviously, who get the blame for not ginning up some way — any way — to bail out the investment bank and avoid a dangerous escalation of the financial crisis.
At last check, both Bernanke and Paulson steadfastly maintain that legally their hands were tied, thus the need for expanded authority to take over and wind down failing financial firms. If such authority had existed, Bernanke said a month after Lehman’s implosion, “we could have saved it. We would have saved it.”
While I love the idea of Free Market Day, I have to disagree with the typical post-mortem assessment of Lehman. This was not a binary choice; The Lehman decision was not an either/or situation, limited to a gladiatorial thumbs up/thumbs down.
In the real world, there are shades of grey.
I have said — and I am still saying — that the best option would have been a more Bear Stearns approach (w/o the Fed’s $29B) — essentially, a prepackaged, orderly bankruptcy sale/liquidation. The problem with Lehman wasn’t that it was allowed to suffer for its own sins –the problem was they were allowed to do a header onto the sidewalk and splatter everyone else around. They should have been gently euthanized, their body parts sold off.
The “Rescue them” or “Let them die” choice is really a false dichotomy. When reviewing how the Fed and Treasury behaved, discussing what was done, and analyzing the possible impact of the alternatives, we need not be limited to simple Yes or No choices.
Originally published at The Big Picture and reproduced here with the author’s permission.