October 29, 2015
In his recent book, former Fed chair Ben Bernanke claimed that the Fed did not choose to let Lehman fail, he said that it had no choice because it could not bail it out. The NYT is insisting that this account is true.
“During his remarks, Mr. Bernanke sought to dispel a perception that the Fed and other policy makers made a conscious decision to let Lehman Brothers fail. Even today, nearly a decade after the financial crisis, the view still persists among some.
“‘The tools we had were inadequate’ to save Lehman, Mr. Bernanke said. Early efforts to line up a buyer for Lehman – first Bank of America and then the British bank Barclays — failed. The only remaining option was for the Fed to lend Lehman money. But Mr. Bernanke said that Lehman was ‘so deeply in the red’ that the Fed did not have the financial muscle to bail it out.”
The Fed absolutely did have the financial muscle to bail out Lehman. It could have lent the bank as much as it wanted. Legally, the Fed is not supposed to lend to an insolvent bank, but it almost certainly ignored this restriction in lending to Citigroup and Bank of America, as well as other banks, during the crisis.
Had the Fed opted to lend to Lehman, in spite of its being insolvent, it is difficult to imagine who would have stopped it. It is unlikely that the courts would grant legal standing to anyone trying to sue and even if they did, a suit would likely take years to resolve, at which point we would have been through the worst of the crisis.
The decision to let Lehman fail was a decision. It is unfortunate that the NYT is working to help Bernanke rewrite history on this issue.
Note: Typo corrected.
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