Hat tip to one of my students – Kimberly Chen – who alerted me to this July 25, 2016 article by Bloomberg. The article rests on an academic paper discoverable here. Essentially, the article contains arguments that the Fed could have rescued Lehman under its emergency powers and political considerations were immeasurably important. These arguments are plausible and agreeable. However, like many articles on the public (U.S. Treasury), quasi-public (Federal Reserve System), and private (cf. Bear Stearns, JPMorgan Chase) sector treatment of the Lehman problem, which was superficially one of liquidity and/or solvency origin – a financial circumstance readily solvable by a lender with the resources of the FRS. The author of the paper was so close to imagining and conceiving the primary reason why Lehman was not rescued with this quote from p. 3:
“…policymakers did not fully anticipate the damage from the bankruptcy.” As we used to say in law school: Res ipsa loquitur.
The paper omits a discussion of the centrality of then newly enacted Chapter 15, which was designed to improve the administration of U.S. bankruptcy cases that involved international jurisdictions (e.g., Lehman and Australia). Policymakers needed to understand how the courts would interpret Chapter 15, especially in light of the superpriority given derivatives transactions, under which Lehman was a party / counterparty.
Here is my summary using my grading rubric:
- Timeliness – the nature of the conclusions reached in the paper, the path for which allegedly took four years, was not surprising. Making these general and specific conclusions public after these years diminishes the force and suasion of the paper and is not an exceptionally powerful set of statements.
- Accuracy – the paper scores high marks here. It’s hard to disagree with the author’s contentions, given their limited reach.
- Completeness – not touching Chapter 15 is a critical omission. Whether God plays dice with the universe may be debated, however I can assure the reader(s) that creditors, especially those with millions sitting atop billions of U.S. dollars and other financial resources and currencies, do not (at least with their own resources – see AIG and Other People’s Money). Domestic and international procedures for administering bankruptcies implicating Chapter 15 needed development. Lehman was the test case.
- Creativity – again, Chapter 15. An essential skill in fraud examination, financial forensics, and inspection and oversight generally is to infer what nobody is telling you. If the author expected his interviewees and advisers to tell him some cold and calculating truths, then…, especially in light of the author’s own observation:
“Fed officials have not been transparent about the Lehman crisis.” (p. 210.) Cui bono?