Lehman Died So TARP and AIG Might Liveby
Mike Whitney
"Lehman's fate was sealed not in the boardroom of that gaudy Manhattan headquarters. It was sealed downtown, in the gloomy gray building of the New York Federal Reserve, the Wall Street branch of the U.S. central bank." ~ Stephen Foley, UK Independent Stephen Foley is on to something. Lehman Bros. didn't die of natural causes; it was drawn-and-quartered by high-ranking officials at the US Treasury and the Federal Reserve. Most of the rubbish presently appearing in the media, ignores this glaring fact. Lehman was a planned demolition (most likely) concocted by ex-Goldman Sachs CEO Henry Paulson, who wanted to create a financial 9-11 to scare Congress into complying with his demands for $700 billion in emergency funding (TARP) for underwater US banking behemoths. The whole incident reeks of conflict of interest, corruption, and blackmail. The media have played a critical role in peddling the official "Who could have known what would happen" version of events. Bernanke and Paulson were fully aware that they playing with fire, but they chose to proceed anyway, using the mushrooming crisis to achieve their own objectives. Then things began to spin out of control; credit markets froze, interbank lending slowed to a crawl, and stock markets plunged. Even so, the Fed and Treasury persisted with their plan, demanding their $700 billion pound of flesh before they'd do what was needed to stop the bleeding. It was all avoidable. Lehman had potential buyers – including Barclays – who probably would have made the sale if Bernanke and Paulson had merely provided guarantees for some of their trading positions. Instead, Treasury and the Fed balked, thrusting the knife deeper into Lehman's ribs. They claimed they didn't have legal authority for such guarantees. It’s a lie. The Fed has provided $12.8 trillion in loans and other commitments to keep the financial system operating without congressional approval or any explicit authorization under the terms of its charter. The Fed never considered the limits of its "legal authority" when it bailed-out AIG or organized the acquisition of Bear Stearns by JP Morgan pushing $30 billion in future liabilities onto the public's balance sheet. The Fed's excuses don't square with the facts. Here's how economist Dean Baker recounts what transpired last September 15:
The reason Bernanke did not underwrite the commercial paper market was, if he had, he wouldn't have been able to blackmail congress. He needed the rising anxiety from the crisis to achieve his goals. Here's a clip from an editorial in the New York Times (admitting most of what has already been stated) that tries to put a positive spin on the Fed's behavior:
So, according to the muddled logic of the NY Times, everything worked out for the best so there's no need to hold anyone accountable. (Tell that to the 7 million people who have lost their jobs since the beginning of the meltdown.) This latest bit of spin is pure cover-your-ass journalism, an attempt to rewrite history and absolve the guilty parties. The fact is, Paulson and Bernanke deliberately created the crisis in order to jam their widely-reviled TARP policy down the public's throat. The Times thinks the public should be grateful for that because, otherwise, the crooked insurance giant, AIG, would not have been bailed out and Goldman Sachs and other Wall Street heavies would not have been paid off. The reason panic spread through the markets after Lehman filed for bankruptcy, was because the Reserve Primary Fund, which had lent Lehman $785 million (and received short-term notes called commercial paper) couldn't keep up with the rapid pace of withdrawals from worried clients. The sudden erosion of trust triggered a run on the money markets. Here's an excerpt from a Bloomberg article, "Sleep-At-Night-Money Lost in Lehman Lesson Missing $63 Billion":
This is what a run on the shadow banking system looks like. Bernanke and Paulson pinpointed the trouble in the commercial paper market and used it to put more pressure on Congress to approve their bailout bill. Bloomberg again:
Bernanke could have fixed the problem in an instant. All he needed to do was provide explicit government guarantees on money markets and commercial paper. That would have ended the bank-run pronto. But he chose not to. He chose to wait until Congress capitulated so he could net $700 billion for his banking buddies. According to the UK Telegraph:
Despite their dire warnings, on Monday morning, the banking system was still intact, just as it was a full month later when the first TARP funds were handed out to the big banks. It was all a hoax. The problem wasn't the banks toxic assets at all, but the commercial paper and money markets. The Fed and Treasury knew that they could count on Congress's abysmal ignorance of anything financial; and they weren't disappointed. On October 3, 2008, Congress passed the Financial Rescue Plan (TARP). Paulson's fear-mongering had triumphed. Here's a quick look at the Lehman chronology:
These are the two facilities which relieved the tension in the markets, not the TARP funds. It's clear that Bernanke knew exactly how to fix the problem, because he did so as soon as the TARP was passed. Here's economist Dean Baker in The American Prospect:
The American people have been ripped off by industry reps working the policy-levers from inside the government. That's the real lesson of the Lehman bankruptcy. Happy anniversary. September 18, 2009 Mike Whitney [send him mail] lives in Washington state. Copyright © 2009 Mike Whitney
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