Firefighting: The Financial Crises and Its Lessons

By Ben Bernanke, Tim Geithner and Hank Paulson

Story of the 2008 global financial crises as told by the principal responders in the US government: Ben Bernanke (Chairman of the Federal Reserve), Tim Geithner (President of the New York Fed) and Hank Paulson (Secretary of the Treasury). Primarily an exculpation of their actions during the crisis so take it for what it’s worth. The one argument put forwarded that I hadn’t heard (mostly because of my ignorance, not because it hasn’t been made) is that the intention was never to let Lehman Brothers collapse but that neither the Federal Reserve nor the US Treasury had any legal authority to do so since Lehman was insolvent.

The Fed and Lehman Brothers

By Laurence M Ball

Extensive rebuttal of claims made in, among other places, Firefighting: The Financial Crisis and Its Lessons about the failure of the Fed not to bail out Lehman Brothers during the 2008 financial crisis. The basic story told by Ben Bernanke and others is that the Fed lacked any statutory authority to help Lehman because they can only lend to non-banks under their section 13(3) authority if that loan is secured by “good collateral.” They claimed that Lehman was in fact deeply insolvent and therefor had no collateral to post for a Fed loan. Ball attempts to refute this along several dimensions:

1. Post-hoc analysis by independent parties concluded that Lehman was at least very close to solvent based on mark-to-market valuations of their assets when they went bankrupt. Furthermore, they were “clearly solvent” using valuations of their assets based on valuations derived from fundamental cash flows (such as repayment rates on the underlying mortgages packaged into their mortgaged-backed securities)
2. Even if they were not solvent, something on the order of $150B of their liabilities were long-term, unsecured loans which did not encumber assets that they had to post as collateral for a potential Fed loan
3. The Fed didn’t actually need to make any special arrangements for Lehman. They had already setup the Primary Dealer Credit Facility (PDCF) which would provide repo loans to Primary Dealers (such as Lehman) but they actively prevented Lehman from using this facility in the final hours before they filed bankruptcy
4. Various accounts and historical records of the events surround the Lehman bankruptcy do not support the story that Fed and Treasury officials were set on rescuing Lehman but lacked the tools to do so. Rather , there is ample evidence that they simply miscalculated the impact a Lehman bankruptcy would have and chose not to intervene because of intense political pressure to not bail out any more Wall Street financial institutions Ball marshals an impressive amount of evidence but I’m not entirely convinced for a number of reasons
5. His calculations about Lehmans liquidity needs and their solvency are based on careful analysis done after the fact. In the middle of the crisis it was probably quite unclear whether Lehman did in fact have sufficient collateral to secure loans in an amount necessary to prevent their collapse. Lending them $100B and having them file for bankruptcy anyway was the worst possible outcome
6. A key point in his narrative is the Fed closing off access of the PDCF to Lehman was unclear even in his own telling. The facility already existed but the relevant point is that the Fed expanded the types of collateral that could be posted in response to the imminent collapse of Lehman to try and provide liquidity during the inevitable market turmoil. Ball quotes a number of Fed officials who flatly denied that Lehman was in any way singly prevented from accessing the PDCF. It seems perfectly plausible to me that the changes made to the PDCF were made after Lehman had already committed to a bankruptcy filing and the whole issue is irrelevant. It seems entirely possible (even likely) that there is considerable truth to the basic narrative. That is, the certainty with which the Fed and Treasury officials claimed to realize Lehman’s collapse would be catastrophic is a post-hoc rationalization and that the reality was probably quite a bit fuzzier. The facts that
7. There WAS immense political pressure to avoid any more bailouts
8. In real time it was not clear that Lehman could be saved at any price
9. In real time it was unclear whether Lehman was deeply insolvent or merely temporarily illiquid meant that officials didn’t really go to extraordinary lengths to rescue Lehman once the Barclays deal fell through tat the last minute. If I had miscalculated so catastrophically, I’d probably have a hard time admitting too. Even to myself.

Bug Business: A Love Letter to an American Anti-Hero

By Tyler Cowen

George Mason Economics professor and blogger (of Marginal Revolution) fame makes the case for big business. Specifically, that while large corporations do in fact do many bad things, we are nevertheless overly critical of corporations in general. The structure of his arguments is to essentially go through the most common complaints or objections about big business (they rip people off, they control the government, etc) and dismantle them based on the availability empirical research. I’m not really in a position to evaluate the validity of his empirical claims because I’m not familiar with the literature, but my sense is that he’s correct at least in the claim that we are overly critical and should have a more favorable view of big business on the margin. In many ways the most interesting argument in the book is in his conclusion in which he asks, If big business is so good then why do we hold such unfavorable views? The basic answer Cowen gives is that we often anthropomorphize corporations (something which they often actively encourage) and then are upset when they don’t behave in way that is in line with basic norms we apply to other people. In other words, your friends don’t abandon you because they can make an extra buck by doing so but you may get laid off (or have prices raised on you) if there is some additional profit in it. Overall, it is probably good that this is how big business operates but it is often in direct tension with their explicit attempts to establish more personal relationships with their customers or employees.