“There is close to universal agreement that the demise of Lehman Brothers was the watershed event of the entire financial crisis and that the decision to allow it to fail was the watershed decision,” Alan S. Blinder, an economics professor at Princeton and former vice chairman of the Fed, wrote in his book, “After the Music Stopped.” And most would agree with Blinder. It unlocked the dam and the Great Recession began. But could the decision have gone the other way and bailed out Lehman as it did Bear Stearns, AIG and most of the major banks?
The major participants in the decision initially felt Lehman was insolvent. For example, Geithner now says, “We explored all available alternatives to avoid a collapse of Lehman, but the size of its losses were so great that they were unable to attract a buyer, and we were unable to lend on a scale that would save them.” And Paulson's comment, “Although it was Ben and Tim’s decision to make, I shared their view that Lehman was insolvent, and I know the marketplace did.”
However, the report compiled at the behest of the bankruptcy court overseeing Lehman concluded in 2010 that nearly all of the firm’s real estate valuations were reasonable. It also suggested that Lehman’s chaotic bankruptcy caused many of the losses later borne by the firm’s creditors. And today's Times claims that a New York Fed team concluded that Lehman might be salvageable but was never able to get that message to Geithner.
In October the triumvirate had changed the message saying they were legally barred from bailing out Lehman. Yet subsequently they were to bail out AIG and the rest of the TBTF banks.
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