The Sacrificial Lamb

On September 15th, 2008, Lehman Brothers filed for bankruptcy. The Bush administration earlier that week had stepped in to save Freddie Mac and Fannie Mae. Why, with the likes of the bailout of AIG and others, did Henry Paulsen, then Secretary of the Treasury, under Bush, allow Lehman to fail? This was also orchestrated in a meeting called by then President of the Federal Reserve Bank of New York, Timothy Geithner, our current Treasury Secretary.

Through statements made at that time, it was felt by Paulsen and others that: a) the public appetite for huge bailouts had been reached; b) Lehman, unlike AIG and other beneficiaries of the Government, would not have the same global impact if allowed to fail; and most importantly, c) Congress was unwilling to act to provide rescue funds at that time as they languished in finger-pointing and a lack of will. This, then, was the real reason Lehman Brothers was allowed to fold. It was to create enough of an explosion to get Congress to act. It worked. The firm founded in 1850 became the sacrificial lamb.

This is not to suggest that Lehman Brothers did not have problems. It was in serious trouble. It had closed down its sub-prime mortgage division, BNC Mortgage, in August of 2007. The damage from sub-prime mortgages, however, had already been done. Oddly, it had held on to both the mortgages and other securitized mortgage instruments. The Lehman holdings in debt swaps was also enormous, leading the International Swaps and Derivatives Association to hold an unprecedented trading session on September 14th for traders to offset their positions, on the promise that Lehman would enter bankruptcy that day. In fact, Lehman did file the next morning. The official records of the Bankruptcy court show that Lehman had $768 billion in debt and $639 billion in assets. The Lehman Brothers employees all packed up and went home.

The Lehman Brothers debacle did what it was "intended" to do. Shortly thereafter, the tumbling markets, triggered by the failure of one of America's venerable old investment firms, forced Congress to act. Thus, the TARP funds, to the tune of $700 billion, was passed by Congress in a surreal environment of cooperation with the Bush administration. No economist, of whatever ilk, doubted that this was needed. The markets continued to bleed and the rest, as they say, is history.

They also say that hindsight is 20/20. Much has been written about the decisions a year ago for the selective euthanasia employed by our government officials. With the storm seemingly behind us, the history being written today seems to gloss over the real impetus for Lehman's failure. Most of us have difficulty in conjuring up the terror we all felt at what could possibly happen from a complete global meltdown. In that sense, we all have walked away from that day one year ago. For 26,200 Lehman employees, it is still all too fresh in their minds.