Bankruptcy

Tracking the Government?s Response to the Economic Crisis

By J. Michael McBride

Historians will someday write about these economic times and will ascribe to the current administration and the federal reserve either praise or approbation or perhaps both. At this point in the crisis, it is hard to get a good perspective on the matter. In particular, there are some who complain that the government did not do enough to save Lehman especially given all that was done to save AIG, the large insurer. Of course, there are others who would argue that the crisis will only be prolonged by the effort to keep the bubble from bursting, which it must do given the years of inflation. There is a good article on the response to the crisis. Here are some quotes:

“But Lehman could not — despite what Mr. Paulson described as personal pleas to other firms to buy some of Lehman’s toxic assets and efforts to persuade another bank to acquire Lehman. With all options closed, he said, the government’s hands were tied. Although the Federal Reserve had helped bail out Bear Stearns — and was within days of bailing out the giant insurer American International Group — it could not help Lehman, even as its default threatened to wreak havoc on financial markets.

“We didn’t have the powers,” Mr. Paulson insisted, explaining a decision that many have since criticized — to allow Lehman to go bankrupt. By law, he continued, the Federal Reserve could bail out Lehman with a loan only if the bank had enough good assets to serve as collateral, which it did not.

“If someone thinks Hank Paulson could have made the Fed save Lehman Brothers, the answer is, ‘No way,’ ” he said.

But that is not the way that many who have scrutinized his actions see it. Bankers involved say they do not recall Mr. Paulson talking about Lehman’s impaired collateral. And they said that buyers walked away for one reason: because they could not get the same kind of government backing that facilitated the Bear Stearns deal. In retrospect, they added, it was emblematic of the miscalculations by the government in reacting to the crisis.

The day after Lehman collapsed, the Fed saved A.I.G. with an emergency $85 billion loan….”

Here is a link to the full article from the New York Times: http://www.nytimes.com/2008/10/23/business/economy/23paulson.html?_r=1&ref=business&pagewanted=print&oref=slogin

Michael

Full post as published by Texas Lawyer Blog on October 29, 2008 (boomark / email).