A “Shot” Heard Around the World: The Fed made a deliberate choice to let Lehman fail. It was the right one.

Sydney Bowen

On the morning of September 15, 2008, the DOW Jones Industrial Average plunged more than 500 points; $700 billion in value vanished from retirement plans, government pension funds, and investment portfolios (1). This shocking market rout was provoked by the bankruptcy filing of Lehman Brothers Holding Inc., which would soon become known as “the largest, most complex, most far-reaching bankruptcy case” filed in United States history (2). Amid job loss, economic turmoil, and choruses of “what ifs,” a myriad of dangerous myths and conflicting stories emerged, each desperately seeking to rationalize the devastation of the crisis and explain why the Federal Reserve did not extend a loan to save Lehman. Some accuse the Fed of making a tragic mistake, believing that Lehman’s failure was the match that lit the conflagration of the entire Global Financial Crisis. Others disparage the Fed for bowing to the public’s political opposition towards bailouts. The Fed itself, however, adamantly maintains that they “did not have the legal authority to rescue Lehman,” an argument played in unremitting refrain in the years following the crisis. In this essay, I discuss the various dimensions of the heated debate on how and why the infamous investment bank went under. I examine the perennial question of whether regulators really had a choice in allowing Lehman to fail, an inquiry that prompts the multi-dimensional and more subjective discussion of whether regulators made the correct decision. I assert that (I) the Fed made a deliberate, practical choice to let Lehman fail and posthumously justified it with a façade of legal inability, and that (II) in the context of the already irreparably severe crisis, the fate of the future financial landscape, obligations to taxpayers, and the birth of the landmark legislation TARP, the Fed made the ‘right’ decision.

I. The Fed’s Almost Rock-Solid Alibi: Legal Jargon and Section 13(3) Fed Chairman Ben Bernanke, Former Treasury Secretary Hank Paulson, and New York Fed general counsel Thomas Baxter Jr. have each argued in sworn testimony that regulators wanted to save Lehman but lacked the legal authority to do so. While their statements are not lies, they neglect to tell the entire – more incriminating – truth. In this section, I assert that Fed officials deliberately chose not to save Lehman and justified their decision after the fact with the impeccable alibi that they did not have a viable legal option.

In a famous testimony, Bernanke announced,

[T]he only way we could have saved Lehman would have been by breaking the law, and I’m not sure I’m willing to accept those consequences for the Federal Reserve and for our system of laws. I just don’t think that would be appropriate”(3).

At face value, his argument appears sound; however, the “law” alluded to here– Section 13(3) of the Federal Reserve Act–was not a hard and fast body of rules capable of being “broken,” but rather a weakly worded, vague body that encouraged “regulatory gamesmanship and undermined democratic accountability” (4).

i. Section 13(3) Section 13(3) of the Federal Reserve Act gives the Fed broad power to lend to non-depository institutions “in unusual and existent circumstances” (5). It stipulates that a loan must be “secured to the satisfaction of the [lending] Reserve Bank,” limiting the amount of credit that the Fed can extend to the value of a firm’s col- lateral in an effort to shield taxpayers from potential losses (6). Yet, since the notion of “satisfactory security” has no precise contractual definition, Fed officials had ample room to exercise discretionary judgment when appraising Lehman’s assets. This initial legal freedom was further magnified by the opaqueness of the assets themselves – mortgage-backed securities, credit default swaps, and associated derivatives were newfangled financial instruments manufactured from a securitization process, complexly tranched and nearly impossible to value. Thus, the three simple words, “secured to satisfaction,” provided regulators with an asylum from their own culpability, allowing them to hide a deliberate choice inside a comfort- able perimeter of legal ambiguity.

ii. Evaluations of Lehman’s Assets and “Secured to Satisfaction” The “legal authority” to save Lehman hinged upon the Fed’s conclusions on Lehman’s solvency and their evaluation of the firm’s available collateral–a task that boiled down to Lehman’s troubled and illiquid real-estate portfolio, composed primarily of mortgage-backed securities. Lehman had valued their portfolio at $50 billion, purporting a $28.4 billion surplus; however, Fed officials and potential private rescuers, skeptical of Lehman’s real-estate valuation methods, argued that there was a gaping “hole” in their balance sheet. Bank of America, a private party contemplating a Lehman buyout, maintained that the size of the hole amounted to “$66 billion” while the Fed’s task team of Goldman Sachs and Credit Suisse CEO’s determined that “tens of billions of dollars were missing” (7). Esteemed economist Lawrence Ball, who meticulously reviewed Lehman’s balance sheet, however, concluded to the contrary–there was no “hole” and Lehman was solvent when the Fed allowed it to fail. While I do not claim to know which of the various assessments was correct, the simple fact remains–the myriad of conflicting reports speak to the ultimate subjectivity of any evaluation. “Legal authority” became hitched to the value of mortgage-backed securities, and in 2008 their value had become dangerously opaque. In discussing the Fed’s actions, it is necessary to point out that the Federal Reserve has a rare ability to value assets more liberally than a comparable private party–they are able to hold distressed assets for longer and ultimately exert incredible influence over any securities’ final value as they control monetary policy. The Dissenting Statement of the FCIC report aptly reveals that Fed leaders could have simply guided their staff to “re-evaluate [Lehman’s balance sheet] in a more optimistic way to justify a secured loan;” however, they elected not to do so since such action did not align with their private, practical interests (8). The “law” could have been molded in either direction–the Fed consciously chose the direction of nonintervention just as easily as they could have chosen the opposite.

iii. The Fed’s “Practical” and Deliberate Choice Section 13(3) had been invoked just five months earlier in March 2008, when the Fed extended a $29 billion loan to facilitate JP Morgan’s purchase of a differ- ent failing firm, Bear Stearns. In an effort to separate the Fed’s handling of Bear Stearns from Lehman, Bernanke admits that considerations behind each decision were both “legal and practical” (9). While in Bear Stearns case, practical judgement weighed in favor of intervention, in Lehman’s case, it did not: “if we lent the money to Lehman, all that would happen would be that the run [on Lehman] would succeed, because it wouldn’t be able to meet the demands, the firm would fail, and not only would we be unsuccessful, but we would [have] saddled the taxpayer with tens of billions of dollars of losses” (10). While an exhaustive display of arguments and testimonies that challenge the Fed’s claim of legal inability is cogent, perhaps the most chilling evidence lies in an unassuming and incisive question:

“Since when did regulators let a lack of legal authority stop them? There was zero legal authority for the FDIC’s broad guarantee of bank holding debt. Saving Lehman would have been just one of many actions of questionable legality taken by regulators” (11).

iv. Other Incriminating Facts: The Barclay’s Guarantee and Curtailed PDCF Lending An analysis of Lehman’s failure would be incomplete without discussing the Fed’s resounding lack of action during negotiations of a private rescue with Barclays, a critical moment in the crisis that could have salvaged the failing firm with- out contentious use of public money. Barclays began conversing with the U.S. Treasury Department a week prior to Lehman’s fall as they contemplated and hammered out terms of an acquisition (12). The planned buyout by the British bank would have gone through had the Fed agreed to guarantee Lehman’s trading obligations during the time between the initial deal and the final approval; yet, the Fed deliberately refused to intervene, masking their true motives behind a legal inability to offer a “‘naked guarantee’–one that would be unsecured and not limit- ed in amount” (13). However, since such a request for an uncapped guarantee never occurred, the Fed’s legal alibi is deceitfully misleading. In truth, Lehman asked for secured funding from the Fed’s Primary Dealer Credit Facility (PDCF), a liquidity window allowing all Wall Street firms to take out collateralized loans when cut off from market funding (“The Fed—Primary Dealer Credit Facility (PDCF),” n.d.). While Lehman would not have been able to post eligible collateral under the initial requirement of investment-grade securities, they likely would have been able to secure a loan under the expanded version of the program that accepted a broader range of collateral. The purposeful curtailment of the expanded collateral to Lehman is one of the most questionable aspects of the Lehman weekend, and is perhaps the most lucid evidence that the Fed made a deliberate choice to let the firm fail. The FCIC de- tails the murky circumstances and clear absence of an appropriate explanation for the act: “the government officials made it plain that they would not permit Lehman to borrow against the expanded types of collateral, as other firms could. The sentiment was clear, but the reasons were vague” (14). If there had been a rational ex- planation, regulators would have articulated it. Instead, they merely repeated that “there existed no obligation or duty to provide such information or to substantiate the basis for the decision not to aid or support Lehman” (15). The Fed’s refusal to provide PDCF liquidity administered the final nail in Lehman’s coffin–access to such a loan made the difference in Lehman being able to open for business that infamous morning.

v. An Intriguing Lack of Evidence The Fed did not furnish the FCIC with any analysis to show that Lehman lacked sufficient collateral to secure a loan under 13(3), referencing only the estimates of other Wall Street firms and declining to respond to a direct request for “the dollar value of the shortfall of Lehman’s collateral relative to its liquidity needs” (16). Diverging from typical protocol, where the Fed’s office “wrote a memo about each of the [potential] loans under Section 13(3),” Lehman’s case contains no official memo. When pressed on this topic, Scott Alvarez, the General Counsel of the Board of Governors of the Federal Reserve, rationalized the opportune lack of evidence as an innocuous judgement call: “folks had a pretty good feeling for the value of Lehman during that weekend, and so there was no memo prepared that documented why it is we didn’t lend... they understood from all of [the negotiations] that there wasn’t enough there for us to lend against and so they weren’t willing to go forward” (17). While this absence of evidence does not prove that the Fed had access to a legal option, it highlights a disconcerting and suggestive vacancy in their claims. Consider an analogous courtroom case where a defendant exercises the right to remain silent rather than respond to a question that may implicate them–similarly, the Fed’s intentional evasion of the request for concrete evidence appears an incriminating insinuation of guilt. The lack of “paper trail” becomes even more confounding when coupled with the Fed’s inconsistent and haphazard statements justifying their decision. Only after the initial praise for the decision soured into a surge of public criticism did any mention of legality enter the public record. Nearly three weeks after Lehman’s fall on October 7th, Bernanke introduced a strategic “alibi:” “Neither the Treasury nor the Federal Reserve had the authority to commit public money in that way” (18). Bernanke insists that he will “maintain until [his] deathbed that [they] made every effort to save Lehman, but were just unable to do so because of a lack of legal authority” (19). However, when considering the subjectivity of “reasonable assurance” of repayment, the malleability of “legal authority,” and the convenient lack of evidence to undermine his statement, Bernanke’s “dying” claim becomes comically hollow. If the Fed had truly made “every effort” to rescue Lehman, they would have relied on more than a “pretty good feeling”–had they truly been sincere, the Federal Reserve, a team of seasoned economists, would have used hard numerical facts as guidance for a path forward.

vi. The Broader Implications of “Secured to Satisfaction:” a Logical Fallacy While the Fed’s lack of transparency is unsettling, perhaps the most unnerving aspect of the entire Lehman episode is the precarious regulatory framework that the American financial system trusted during a crisis. The concept of “secured to satisfaction” is not the bullet-proof legal threshold painted by the media, rather it was a malleable moving target molded by the generosity of the Fed’s estimates and the fluctuating state of the economy, instead of precise mathematical facts. A 2018 article by Columbia Law Professor Kathryn Judge exposes the logical fallacy of Section 13(3)’s “secured to satisfaction,” citing how “subsequent developments can have a first order impact on both the value of the assets accepted as collateral and the apparent health of the firms needing support” (20). The “legal authority” of regulators to invoke Section 13(3) is a circular and empty concept, hitched to nebulous evaluations of complex and opaque securities, assets that were not only inherently hard to value but whose valuations could later be manipulated. By adjusting the composition of their balance sheet (Open Market Operations) and altering interest rates, the Fed guides the behavior of financial markets, thus subtly inflating (or deflating) the value of a firm’s collateral (21). Indeed, in the years following the government’s support of Bear Stearns and AIG, the Fed’s aggressive and novel monetary policy (close to zero interest rates and a large-scale program of quantitative easing) may have been “critical to making the collateral posted by [Bear Stearns and AIG] seem adequate to justify the central bank’s earlier actions’’ (22). Using collateral quality and solvency as prerequisites for lawful action is inherently problematic, since a firm’s health and the quality of their collateral are not factors given exogenously–they are endogenous variables that regulators them- selves play a critical role in determining. Thus, acceptance of the narrative that Lehman failed because the Fed lacked any legal authority to save it would be a naive oversight. Rather, Lehman failed because the Fed lacked the practical and political motivations to exploit the law.

II. The Right Choice As Lehman’s downfall is both a politically contentious and emotionally charged topic, it is necessary to approach the morality of the Fed’s decision with sympathy and caution. In the following sections, I intend to illustrate why regulators made the right decision in allowing Lehman to fail by using non-partisan facts organized around four key arguments. (1) Lehman was not the watershed event of the Crisis. The market panic follow- ing September 2008 was a reaction to a collection of unstoppable, unrelated, and market-shaking events. (2) Lehman’s failure expunged the hazardous incentives carved into the financial landscape prior. Policymakers shrewdly chose long-term economic order over the short-term benefit of keeping a single firm afloat. (3) Failure was the “right” and only choice from a taxpayer’s perspective. (4) Lehman’s demise was a necessary catastrophe, creating circumstances so parlous that Congress passed TARP, landmark legislation that gave the Federal Reserve the authority that ultimately revived the financial system.

(1) Lehman Was Not the Watershed Event of the Crisis For many people, the heated debate over whether regulators did the right thing in allowing Lehman to fail is synonymous with the larger question: “would rescuing Lehman have saved us from the Great Recession?” In the following section, I assert that Lehman was not the defining moment of the Financial Crisis (as is often construed in the media); rather, the global financial turmoil was irreversibly underway by September 2008 and the ensuing disaster could not have been simply averted by Lehman’s rescue.

The problem was larger than a single failed bank – large, unconnected financial institutions were undercapitalized because of [similar, failed housing bets]” (23).

By Monday September 15, Bank of America had rescued the deteriorating Merrill Lynch and the insurance giant AIG was on the brink of failure–a testament to the critical detail that many other large financial institutions were also in peril due to losses on housing-related assets and a subsequent liquidity crisis. Indeed, in the weeks preceding Lehman’s failure, the interbank lending market had virtually froze, plunged into distress by a contagious spiral of self-fulfilling expectations. Unable to ascertain the location and size of subprime risk held by counterparties in the market, investors became panicked by the obscured and so ubiquitous risk of housing exposure, precipitously cutting off or restricting funding to other market participants. This perceived threat of a liquidity crisis triggered the downward spiral of the interbank lending market in the weeks preceding Lehman’s fall, a market which pumped vital cash into nearly every firm on Wall Street. The LIBOR-OIS spread, a proxy for counterparty risk and a robust indicator of the state of the interbank market, illustrates these “illiquidity waves” that severely impaired markets in 2008 (24). (Sengupta & Tam, 2008). As shown in the figure below, in the weeks prior to the failure of Lehman Brothers, the spread spiked dramatically, soaring above 300 basis points and portraying the cascade of panic and contraction of lending standards in the interbank market.

The idea that Lehman was the key moment in the crisis might be accurate if nothing of significance happened before its failure; however, as I outline below this was clearly not the case. The quick succession of events occurring in September 2008 – events which would have occurred regardless of Lehman’s failure – triggered the global financial panic.

A New Yorker article publishing a detailed timeline of the weekend exposes how AIG’s collapse and near failure was completely uncorrelated to Lehman (25). On Saturday September 13, AIG’s “looming multi-billion-dollar shortfall” from bad gambles on credit default swaps became apparent. Rescuing AIG became a top priority throughout the weekend, and on Tuesday, the day after Lehman filed for bankruptcy protection, the Fed granted an $85 billion emergency loan to salvage AIG’s investments (26). Given the curious timing, AIG’s troubles are often chalked up to be a market reaction to Lehman’s failure; however, proper facts expose the failures of AIG and Lehman as merely a close succession of unfortunate, yet unrelated events. In a similar light, the failure and subsequent buyouts of Washington Mutual (WaMu) and Wachovia, events that further rocked financial markets and battered confidence, would have occurred regardless of a Lehman bailout. Both commercial banks were heavily involved in subprime mortgages and were in deep trouble before Lehman. University of Oregon economist Tim Duy asserts that, even with a Lehman rescue, “the big mortgage lenders and regional banks [ie. WaMu and Wachovia] that were more directly affected by the mortgage meltdown likely wouldn’t have survived” (27). The financial system was precariously fragile by the fall of 2008 and saving Lehman would not have defused the larger crisis or ensuing market panic that erupted after September 2008. Critics of the Fed’s decision often cite how the collapse of Lehman Brothers be- gat the $62 billion Reserve Primary Fund’s “breaking of the buck” on Thursday, September 18 and precipitated a $550 billion run on money-market funds. Lehman’s dire effect on money and commercial paper markets is irrefutable; however, arguments that Lehman triggered this broader global financial panic neglect all relevant facts. The Lehman failure neither froze nor would a Lehman rescue have unfrozen credit markets, the key culprit responsible for the escalation and depth of the Crisis (28). Credit markets did not freeze in 2008 because the Fed chose not to bailout Lehman–they froze because of the mounting realization that mortgage losses were concentrated in the financial system, but nobody knew precisely where they lay. It was this creeping, inevitable realization, amplified by Lehman and the series of September events, that caused financial hysteria (29). As Geithner explains, “Lehman’s failure was a product of the forces that created the crisis, not the fundamental cause of those forces” (30). The core problems that catalyzed the financial market breakdown were an amalgamation of highly leveraged institutions, a lack of transparency, and the rapidly deteriorating value of mortgage-related assets–bailing out Lehman would not have miraculously fixed these problems. While such an analysis cannot unequivocally prove that regulators made the right decision in choosing to let Lehman fail, it offers a step in the right direction–the conventional wisdom that Lehman single-handedly triggered the collapse of confidence that froze credit markets and caused borrowing rates for banks to skyrocket is unfounded. While I have argued above that Lehman’s bankruptcy was not the sole trigger of the crisis, it was also not even the largest trigger. Research by Economist John Taylor asserts that Lehman’s bankruptcy was not the divisive event peddled by the media–using the LIBOR spread (the standard measure for market stress), Taylor found that the true ratcheting up of the crisis began on September 19, when the Fed revealed that they planned to ask Congress for $700 billion to defuse the crisis (31). Arguments advanced by mainstream media that saving Lehman would have averted the recession are naively optimistic and promote a dangerously inaccurate narrative on the events of 2007–2009. The failure of Lehman did indeed send new waves of panic through the economy; however, Lehman was not the only disturbance to rock financial markets in September of 2008 (32). This latter fact is of critical importance.

(2) Lehman’s Collapse Caused Inevitable and Necessary Market Change

“The inconsistency was the biggest problem. The Lehman decision abruptly and surprisingly tore the perceived rule book into pieces and tossed it out the window.” –Former Vice Chairman to the Federal Reserve Alan Blinder (33).

Arguments that cite the ensuing market panic and erosion of confidence that erupted after Lehman’s failure are near-sighted and fail to appreciate the larger picture motivating policy makers’ decision. Regulators’ decision not to rescue the then fourth largest investment bank, an institution assumed “too big to fail,” dispensed a necessary wake-up call to deluded and unruly Wall Street firms, which had been lulled into a costly false sense of security. The question of whether regulators did the right thing in allowing Lehman to fail cannot be studied in a vacuum; it must be considered alongside the more consequential question of whether regulators made the right decision in saving Bear Stearns. In 2007, the Fed’s extension of a $29 billion loan to Bear Stearns rewrote the tacit rules that had governed the political and fiscal landscape for centuries, substantiating the notion that institutions could be “too big or too interconnected to fail.” The comforting assumption that regulators would intervene to save every systemically important institution from failure was a turning point in the crisis, “setting the stage for [the financial carnage] that followed” (34). After the Bear Stearns intervention, regulators faced a formidable and insuperable enemy: the inexorable march of time. It would be an unsustainable situation for the government to continue bailing out every ailing financial firm.

“These officials would have eventually had to say ‘no’ to someone, sometime. The Corps of Financial Engineers drew the line at Lehman. They might have been able to let the process run a few weeks more and let the bill get bigger, but ultimately, they would have had to stop. And when they did expectations would be dashed and markets would adjust. If Lehman had been saved, someone else would have been allowed to fail. The only consequence would be the date when we commemorate the anniversary of the crisis, not that the crisis would have been forever averted.” (35).

The Lehman decision corrected the costly market expectations created by Bear Stearns’ rescue and restored efficiency and discipline to markets. Throughout the crisis, policymakers, unable to completely avoid damage, were forced to decide which parties would bear losses. Lehman’s demise was a reincarnation and emblem of their past decisions–their precedent of taxpayer burden had further encouraged Wall Street’s excessive leverage and reckless behavior (36). Saving Lehman would have simply hammered these skewed incentives further into markets, putting the long-term stability and structure of capitalist markets at risk. Taxpayers would have been forced to foot a bill regardless of the Fed’s final decision: if not directly through a bailout, then indirectly through layoffs and economic turmoil (37). Instead of saddling taxpayers with the lingering threat of a large bill in the future, the Fed made the prudent and far-sighted decision to hand them a smaller bill today. The Fed heeded the wisdom of the age-old adage, “better the devil you know than the devil you don’t.” Put simply, the economic “calculus” of policymakers was correct. While rescuing Lehman may have seemed tantalizing at the time, the long-term costs would have been far more consequential than the short-term benefits (38). Political connotations often accompany this argument, evocative of what some have christened the Fed’s “painful yet necessary lesson on moral hazard;” however, partisan beliefs are extraneous to the simple, economic facts of the matter. From a fiscal perspective, policymakers made the right choice to let Lehman fail by shrewdly choosing long-term economic order over short-term benefits.

(3) The Right Decision from a Taxpayers’ Perspective Given financial markets’ complete loss of confidence in Lehman and the unnervingly fragile state of the economy, an attempt at a Lehman rescue (within or above the law) would not only have been a fruitless, but also a seriously unjust use of taxpayer dollars. The health of an investment bank hinges upon the willingness of customers and counterparties to deal with it, and according to former Secretary Geithner, “that confidence was just gone” (39). By the weekend, the market had already lost complete confidence in Lehman: “no one believed that the assets were worth their nominal value of $640 billion; a run on its assets was already underway, its liquidity was vanishing, and its stock price had fallen by 42% on just Friday September 12th; it couldn’t survive the weekend” (40). For all practical purposes, the markets had sealed Lehman’s fate and a last-minute government liquidity line could have done nothing to change it. In testimony, Bernanke aptly characterizes a loan to supplant the firms’ disappearing liquidity as a prodigal expenditure, “merely wast- ing taxpayer money for an outcome that was unlikely to change” (41). After the fallout of the Barclays deal, many experts have argued that the Fed should have provided liquidity support during a search for another buyer, since temporary liquidity assistance from the government might have extinguished the escalating crisis. However, such an open-ended government commitment that allowed Lehman to shop for an “indefinite time period” would have been an absurd waste of public money (42). If the Fed had indeed provided liquidity aid up to some generous valuation of Lehman’s collateral, “the creditors to Lehman could have cashed out 100 cents on the dollar, leaving taxpayers holding the bag for losses” (43). The loan would not have prevented failure, but only chosen which creditors would bear Lehman’s losses at the expense of others. On September 15, “Lehman [was] really nothing more than the sum of its toxic assets and shattered reputation as a venerable brokerage”(44). It would have been an egregious abuse of the democratic tax system if the government were to bail out Lehman, leaving the public at the whims of the fragile financial markets and saddling them with an uncapped bill for Wall Street’s imprudence. While virulent rumors of Lehman’s failure as political save-face by regulators may prevail in mainstream media, I maintain that the Fed’s deci- sion was the right one for the American public (45).

(4) TARP: Lehman Begat the Legislation that Revived the Financial System In considering the relative importance of Lehman as the cause of the crisis, scholars must also consider the more nuanced and hard-hitting counterpart: “How important was Lehman as a cause of the end of the Crisis?” While in the context of the suffering caused by the Great Recession and the polarizing rhetoric of “bailing out banks,” this question is politically unpopular; I broach it nonetheless, since it is an important facet of the debate on whether regulators made the “right decision.” Lehman’s failure was vitally important to the end of the Crisis–it allowed the Troubled Asset Relief Program (TARP) to pass Congress, a critical piece of legislation that equipped regulators with the tools ultimately necessary to repair the financial system (46). Every previous effort of the Fed (creating the PDCF, rescuing Bear Stearns, the conservatorship of Fannie and Freddie) was not enough to salvage the deteriorating financial system–by September 2008 “Merrill Lynch, Lehman, and AIG were all at the edge of failure, and Washington Mutual, Wachovia, Goldman Sachs, and Morgan Stanley were all approaching the abyss” (47). The Fed needed the authority to inject capital into the financial system, and as described in Naomi Klein’s The Shock Doctrine, Lehman’s unexpected fall acted as the final catastrophic spark necessary to “prompt the hasty emergency action involving the relinquishment of rights and funds that would otherwise be difficult to pry loose from the citizenry” (48). With authority to inject up to $700 billion of capital into suffering non-bank institutions, TARP preserved the crumbling financial system by inspiring them to lend again. The government offered $250 billion in capital to the nine most systemically important institutions, and used $90 billion in TARP financing to save the teetering financial giants, Bank of America and Citigroup (49). Exactly how much credit TARP deserves for averting financial catastrophe is unclear, yet the fact remains that coupled with Geithner’s Stress Tests, TARP helped stop the county’s spiral into what could have been a crisis as dire as the Great Depression.

IV. Conclusion In this essay, I have shown that the Fed exploited the vagueness of Section 13(3) to ad- vance their political, economic, and moral agenda to let Lehman fail, and asserted that policymakers made the right choice in allowing Lehman to fail (weighing economic facts, the implications of future economic landscape, taxpayers’ rights, and the passage of land- mark legislation). It may have been easier for regulators to hide behind legal jargon and technicalities than to defend the economic rationale and practicality of their onerous decision to an audience of distressed Americans; however, this ease is not without the costs of continued confusion, misleading conventional wisdom, and bitter citizenry.

Lehman’s bankruptcy will forever be synonymous with the financial crisis and (resulting) wealth destruction.” -Paul Hickey, founder of Bespoke Investment Group (50).

Lehman’s failure left an indelible mark in history and a tireless refrain of diverging and potent emotions towards regulators: contempt for the Fed that “triggered the Crisis,” disdain for the government that bailed out Wall Street with TARP, and hatred of impressionable leaders who “bowed” to political pressure. It is indeed easier to accept a visceral and tangible moment like Lehman’s failure as a cause of suffering than the nihilistic and elusive fact that the buildup of leverage and the burst of the housing bubble caused the crisis. However, it is not enough for only academics and policymakers to understand that “Lehman’s failure was a product of the forces that created the crisis, not a fundamental cause of those forces” (51). Conventional wisdom must be rewritten for the sake of faith in the government and the prevention of future crises. Our acceptance of why Lehman was allowed to die must move beyond the apportioning of responsibility or the distribution of reparations–we must redirect the futile obsession over the legality and morality of the Fed’s decision towards the imbalances in the financial system that caused the Crisis to begin with.


1 Public Affairs, The Financial Crisis Inquiry Report, 340.

2 Ibid.

3 Clark, “Lehman Brothers Rescue Would Have Been Unlawful, Insists Bernanke.”

4 Judge, “Lehman Brothers: How Good Policy Can Make Bad Law.”

5 Fettig, The History of a Powerful Paragraph.

6 Ball, The Fed and Lehman Brothers, 5.

7 Stewart, Eight Days.

8 Public Affairs, The Financial Crisis Inquiry Report, 435.

9 Public Affairs, The Financial Crisis Inquiry Report, 340. 10 Ibid. 11 Calabria, “Letting Lehman Fail was a Choice, and It Was the Right One.”

12 Chu, “Barclays Ends Talks to Buy Lehman Brothers.” 13 Ball, The Fed and Lehman Brothers.

14 Public Affairs, The Financial Crisis Inquiry Report, 337.

15 Ball, The Fed and Lehman Brothers, 141.

16 Ibid, 11.

17 Ibid, 133.

18 J.B. Stewart and Eavis, “Revisiting the Lehman Brothers Bailout that Never Was.”

19 Ibid.

20 Judge, “Lehman Brothers: How Good Policy Can Make Bad Law.”

21 Tarhan, “Does the federal reserve affect asset prices?

22 Judge, “Lehman Brothers: How Good Policy Can Make Bad Law.”

23 Public Affairs, The Financial Crisis Inquiry Report, 433.

24 Sengupta & Tam.

25 J.B. Stewart, “Eight Days.”

26 Public Affairs, The Financial Crisis Inquiry Report, 435.

27 O’Brien, “Would saving Lehman have saved us from the Great Recession?”

28 Ibid.

29 Public Affairs, The Financial Crisis Inquiry Report, 436.

30 Geithner & Metrick, Ten Years after the Financial Crisis: A Conversation with Timothy Geithner.

31 Skeel, “History credits Lehman Brothers’ collapse for the 2008 financial crisis. Here’s why that narrative is wrong.” 32 Public Affairs, The Financial Crisis Inquiry Report, 436. 33 J.B. Stewart and Eavis, “Revisiting the Lehman Brothers Bailout that Never Was.”

34 Skeel, “History credits Lehman Brothers’ collapse for the 2008 financial crisis. Here’s why that narrative is wrong.” 35 Reinhart, “A Year of Living Dangerously: The Management of the Financial Crisis in 2008.” 36 Ibid. 37 Antoncic, “Opinion | Lehman Failed for Good Reasons.”

38 Reinhart, “A Year of Living Dangerously: The Management of the Financial Crisis in 2008.”

39 Geithner & Metrick, Ten Years after the Financial Crisis: A Conversation with Timothy Geithner.

40 J.B. Stewart, “Eight Days.”

41 Public Affairs, The Financial Crisis Inquiry Report, 435.

42 Ibid.

43 Ibid.

44 Grunwald, “The Truth About the Wall Street Bailouts.”

45 Erman, “Five years after Lehman, Americans still angry at Wall Street: Reuters/Ipsos poll.”

46 Geithner & Metrick, Ten Years after the Financial Crisis: A Conversation with Timothy Geithner.

47 Ibid.

48 Erman, “Five years after Lehman, Americans still angry at Wall Street: Reuters/Ipsos poll.”

49 J.B. Stewart, “Eight Days.”

50 Straders, “The Lehman Brothers Collapse and How It’s Changed the Economy Today.”

51 Geithner & Metrick, Ten Years after the Financial Crisis: A Conversation with Timothy Geithner.

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