Lehman Died as Regulators Lied (?)

Is it fair to say "regulators lied?"  We find that soundbite to be too harsh.  True, maybe, but too harsh. Two recent news/opinion articles (New Light on Regulators and Fed Fretted ... Demise of Lehman) push the ideas that:

(1) Paulson, Bernanke, Geithner, and other regulators didn't know what they were doing in 2008;

(2) Some or all of these celebrity regulators were less than candid, shall we say, in their public remarks; and

(3) The U.S. gov't should have bailed out Lehman.


We say "YES" to (1), "YES" to (2) - but understandable given (1), and "NO" to (3).


Instead of a deep-dive analysis, we'll content ourselves here with a few pithy observations:

*    As Treasury Secretary, Paulson had no right - in our opinion - to dictate an initial equity bid of $2 per share to Bear Stearns in March 2008.  Where did he get the idea that was legal?!

*    JP Morgan messed up the "Bear Stearns debt guarantee" in March-April 2008.  This same issue arguably killed the Barclays rescue of Lehman in September of that year.  Nobody seems to understand this point - and it still matters!

*    The New York Fed bent (broke?) the law in its participation in the Bear Stearns bail-out.  To make this dubious deal work, the Fed encouraged and condoned the mis-marking of "Maiden Lane" collateral.

*    In the bail-out of AIG, Bernanke didn't understand AIG insurance entities were not at risk from the failure of AIG Financial Products (the part of AIG with all the losses).

As references for the observations, see:

   House of Cards by William Cohan - the excellent book (not the movie!)

   In Fed We Trust by David Wessel

   Too Big to Fail by Andrew Ross-Sorkin

   Lehman Chapter 11 Proceedings Examiner Report

Rather than dwell on what is fast becoming ancient history, our goal is to make a simpler point.  The financial markets are complicated!!  Regulators don't know how it all works.  Neither do the people who run the banks.  Let's not be surprised when we learn 5 years after the fact that the Fed and the government didn't see failures at Lehman, Fannie, Freddie, AIG FP, and WaMu until the very end.  The executives of all these firms were just as surprised!