The one-year anniversary of the Lehman bankruptcy might be a good time to question the conventional wisdom on the subject, which is that letting the firm go bankrupt was one of the greatest blunders ever by the masters of the universe who control American banking. The more I read about the events that took place over that long weekend of September 13 – 15, 2008, the frenzied meetings at the Fed and at the Treasury which ended with Lehman’s bankruptcy, and especially when I consider the actual events which followed the bankruptcy, the more I have begun to suspect that there was nothing at all accidental about the event. I have come to suspect that the Lehman bankruptcy was a highly risky strategic act carried out by the world’s biggest banks through their control of the New York Fed, an act which succeeded brilliantly in literally "scaring up" trillions of taxpayer dollars to save the very financial institutions which had caused the meltdown.
Very few journalists have bothered to explore the astonishing relationships between the banks and the New York Fed. For example, through all the intense coverage of the story of J.P. Morgan Chase’s spectacular buyout of Bear Stearns in March, 2008, with the New York Fed guaranteeing the riskiest $29 billion in Bear assets, there was NO MENTION in either print or television journalism (please tell me if you have any counter evidence) of the extraordinary fact that Jamie Dimon, the CEO of J.P. Morgan Chase who actually negotiated the last minute deal with the New York Fed over a single weekend, that he himself sits on the board of directors of the New York Fed, as a Class A director representing the banks. We have no idea whether Dimon recused himself from the discussions at the New York Fed concerning the Bear Stearns deal, because Dimon’s dual-hatted role has remained all but invisible to the press and public.
Among the very few writers who transcend the trite when it comes to writing about the Federal Reserve, along with Ron Paul (and his new book, End the Fed), we find remarkably enough the ex-governor and ex-attorney general of the state of New York, Eliot Spitzer, a man who personally sued the New York Fed, and who is intimately familiar with its personnel and workings. Writing earlier this year in Slate magazine, describing the dramatis personae of the New York Fed, beginning with the selection of its bright new president in 2003, Timothy Geitner. Spitzer wrote:
So who selected Geithner back in 2003? Well, the Fed board created a select committee to pick the CEO. This committee included none other than Hank Greenberg, then the chairman of AIG; John Whitehead, a former chairman of Goldman Sachs; Walter Shipley, a former chairman of Chase Manhattan Bank, now JPMorgan Chase; and Pete Peterson, a former chairman of Lehman Bros."
Furthermore, the CEOs and board members of these same institutions repeatedly are to be found among the nine governors of the New York Fed itself. There are nine such governors, three elected by the owner banks to represent their own interest. I have already mentioned that Jamie Dimon was one of these, a Class A director, as it is called. But there are six other directors, three Class B directors which are elected by the member banks to represent the public, and the Class C directors which are elected by all the Fed directors again to represent the public
If you choked a little on the idea of the bankers electing individuals to the board to represent the public, it shows you were paying attention. Spitzer tells us what this process produces:
So whom have the banks chosen to be the public representatives on the board during the past decade, as the crisis developed and unfolded? Dick Fuld, the former chairman of Lehman; Jeff Immelt, the chairman of GE; Gene McGrath, the chairman of Con Edison; Ronay Menschel, the chairwoman of Phipps Houses and also, not insignificantly, the wife of Richard Menschel, a former senior partner at Goldman. Whom did the Board of Governors choose as its public representatives? Steve Friedman, the former chairman of Goldman; Pete Peterson; Jerry Speyer, CEO of real estate giant Tishman Speyer; and Jerry Levin, the former chairman of Time Warner. These were the people who were supposedly representing our interests!
Spitzer climaxes his eloquent rant with this: "So is it any wonder that the N.Y. Fed has been complicit in the single greatest bailout of poorly managed banks in history? Any wonder that it has given—with virtually no strings attached—practically the entire contents of the Treasury to the very banks whose inability to manage risk has brought our economy to its knees? Any wonder that not a single CEO or senior executive of a major bank has been removed as a condition of hundreds of billions of direct cash and guarantees? Any wonder that, despite its fundamental responsibility to preserve the integrity of the banking system, it sat quietly on the sidelines as the leverage beneath the banks exploded and the capital underlying their investments shrank? "
But I want to extend Spitzer’s logic one step further. If you look at what actually went on at the gathering of America’s top bankers to discuss the fate of Lehman over the weekend September 13-15, 2008, you find that prior to the start of the meeting, the "powers that be" had already decided that no public monies were to be used in the bailout of Lehman Brothers. But who were the powers that be? The only power that we know of that could have made such a decision is the New York Fed itself, or the Federal Reserve Bank in Washington, along with the Treasury Department. And certainly Treasury Secretary Paulson made perfectly clear from the start of the weekend that the federal government was not going to bail out Lehman.
What was surprising about this was that earlier that same year the New York Fed had already pitched in $29 billion of taxpayer funds to guarantee Bear Stearns assets in the deal with J.P. Morgan Chase, and just a week before the critical weekend in mid September the federal government had put Fannie Mae and Freddie Mac into receivership, a move that would certainly commit tens of billions additional in taxpayer money. Why was the Treasury Department and the Fed suddenly balking at a few tens of billions to save Lehman? The answer to this question can be had in one acronym: AIG.
The placing of Fannie Mae and Freddie Mac into receivership looked like the straw that was going to break AIG’s back. Earlier that year its accounting firm had reported irregularities in AIG’s books which had caused considerable investor concern, and everyone knew that AIG was over its head in the subprime market. But suddenly the government takeover of Fannie and Freddie had rendered a $400-500 million dollar mortgage portfolio that AIG held worthless, and far worse, the threat of a Lehman bankruptcy would expose a gigantic $441 billion dollar involvement in credit default swaps, a market that involved the biggest European as well as American banks.
The bankers who met at in the Treasury board rooms between September 12- 15 were well aware of the looming threat of AIG. At least two bankers tried to raise the issue, saying "we should be talking about AIG too." Geithner refused to allow it, saying with a scowl that one calamity at a time was enough. But Timothy Geithner doesn't control the New York Fed. The New York Fed was not controlled by the Treasury Department at all, but rather by -- well, by the biggest players like those running J.P. Morgan, AIG, Lehman, Goldman, Merrill Lynch – these guys all knew the jig was up, and that AIG was going to fail unless it was rescued, and that if AIG failed it would destroy the world financial system as we know it, and could very well destroy all the named mega-institutions mentioned just above. Therefore – and here is my one-year-later hypothesis – it seems likely to me that these guys reasoned that the taxpayers and politicians, including Republican Party politicians, would not support a piecemeal bailout of all the failing banks with an ever increasing price tag. Such a use of public money was absolutely unsustainable – without a catastrophe. And here is the idea that I suspect prevailed at the New York Fed, when all the insiders met, before the more public meeting of bankers at the Treasury, the idea was to sacrifice Lehman in order to show the world what too big to fail really meant, to deliberately crash the market, and to use the terror that this would create to "scare up" enough taxpayer money to save all of Lehman’s big brothers.
One of the most convincing exhibits I would put forward in defense of this thesis is the recitation of events which happened immediately following the Lehman bankruptcy. Within 24 hours the Federal Reserve had extended an $85 billion line of credit (using taxpayer money) to AIG. Eventually this would rise to perhaps $200 billion. Within a month Congress had passed the $700 billion TARP fund (again, taxpayer money) to shore up the very financial institutions most implicated in the credit derivatives game and subprime mortgage frenzy.
So could the Lehman bankruptcy have been deliberate – an act of economic terror intended to scare up trillions of dollars to save Lehman’s threatened big brothers from extinction? Sure, Dick Fuld was on the board of the New York Fed in the months leading up to the bankruptcy of the firm he headed (Fuld was a Class B director elected to "represent the public"!). Fuld was asked to resign from the Fed few days before the bankruptcy, which itself raises a very interesting question. Who asked Richard Fuld to resign from the New York Fed? What decision did the New York Fed make about whether to use taxpayer money to bail out Lehman? When the bankers raised this issue on the weekend of September 13 – 15, Treasury Secretary Geithner told them that there was no "legal authority" to use public money to bailout Lehman. But the Fed had demonstrated before Lehman’s bankruptcy and after that it had all the authority it needed to throw around billions of taxpayer dollars to shore up banks. Geithner’s claim seems legalistic, a comment about the authority of the U.S. Treasury, not about the authority of the Federal Reserve Bank, which certainly could have saved Lehman had it chosen to do so. The only thing missing now from the public record is the actual minutes of the meeting of the board of directors concerning the Lehman bankruptcy. We know who sat on that board, we know they have directly benefited from the tsunami of taxpayer funds which the Lehman bankruptcy unloosed. But we have no idea whether that was their strategic objective, or whether they just inadvertently lucked into salvation. What do you think?