This article comes from the WeChat public account: Zhibenshe (ID: zhibenshe0-1)
Lehman went bankrupt, and it has been more than ten years.
This landmark incident is still full of doubts:
Why didn’t the US government and the Federal Reserve directly rescue Lehman? If Lehman is invested, will the financial tsunami still occur?
The US Treasury Department took over the "two houses", and the Federal Reserve provided assistance to Bear Stearns, American International Group , Goldman Sachs , Morgan Stanley . Is it selective law enforcement or follows the unspoken rules of "big but not falling"?
Does the Federal Reserve take over banks and private enterprises cause moral risks?
The aftermath of this financial shock has not disappeared yet, and the reasons, logic and grayscale laws are worth pondering.
Save Lehman
Friday, September 12, 2008, at 8 pm, the New York Fed conference room is holding a nervous important meeting related to the fate of the United States.
Participants include: Blankfein of Goldman Sachs, Synne of Merrill Lynne of Synne of , Mike of Morgan Stanley, Dimon of JPMorgan Chase of , Pandit of Citibank of , Kelly of Bank of New York Mellon, Dugan of Credit Suisse, Schenk of BNP Paribas, Allemani of Royal Bank of Scotland and Wolf of United Bank of Switzerland.
Of course, there are US Treasury Secretary Paulson and SEC Chairman Cox.
New York Fed Chairman Geithner is the main convener of this meeting. He has only one goal, that is, to reach an agreement to rescue Lehman Brothers .
However, Lehman Brothers and its potential acquirer Bank of America did not receive an invitation.
"Thank you for arriving in such a short time." Treasury Secretary Paulson gave his opening remarks.
Next, he briefly introduced Lehman's precarious situation and urged that the solution must be found before this weekend. In order to let the participants know the key points of the solution, Paulson said bluntly: "Don't expect government funding, you are the protagonists of the problem."
"If Lehman does not exist, our lives will be even more sad, and you should take action." Paulson continued.
That morning Paulson had breakfast with Federal Reserve Chairman Bernanke . They exchanged views on this. Both sides expressed their efforts to avoid Lehman's bankruptcy in chaos and encourage the private sector to solve their own problems.
But Bernanke doesn't understand why Paulson had to make such a tough statement. He did not ask Paulson why, but speculated that the reason should be that Paulson was frustrated by the rescue of the "two houses". He did not want to make himself the spokesperson for the rescue of Wall Street .
New York Fed Chairman Geithner also said the Fed will not provide "special credit support." He also said to the big guys in an almost threatening tone: "If you can't find a suitable solution, the market will open next Monday, and panic will spread, a local problem will turn into a catastrophe, and the entire financial system will be in danger."
Paulson and Bernanke tightened their pockets to force Wall Street financial tycoons to pay for Lehman. After all, the disaster is caused by you. However, the big guys here hope that the Treasury Department or the Federal Reserve will take action. Some of them regard Paulson's threat as a game strategy.
A complex power and interest game are getting better. A few hours before the
meeting, the financial tycoons were not in a hurry to express their opinions, after all, they were not clear about Lehman's true family background. Next door to the conference room of
, Paulson appointed Goldman Sachs and Credit Suisse to form an accounting team to evaluate Lehman's real assets. The lawyers, auditors and accountants of the accounting team checked Lehman's accounts.
Treasury Secretary Paulson was angry at the negative attitude of all financial tycoons: "This matter is related to the economic security of the entire United States. I will remember those who have not contributed." After
finished speaking, he asked the participants to continue to come here to have a meeting at 9 a.m. the next morning.
On the morning of the next day (13th), the accounting team released their evaluation data. They believe that Lehman's current asset value should be 60% off or even lower.The result of
surprised the big guys, and the acquisition matter immediately fell into pessimism.
Bernanke even doubted whether Goldman Sachs deliberately lowered the numbers and exaggerated the risks. Geithner explained to Bernanke that there is this possibility that Goldman Sachs and Credit Suisse jointly evaluated much less value than Lehman Brothers themselves claimed, which makes it difficult for the market to believe Lehman.
On this day, the participants focused on Bank of America. Bank of America has previously stated that it is willing to acquire Lehman using part of the loan and equity. However, Bank of America hopes that the government can provide some financing. But Paulson does not want the Ministry of Finance to contribute money. The purpose of this meeting is to let all financial tycoons pay the money.
In fact, this is also what Bernanke thought. Wall Street financial companies jointly provide financial support or guarantees to assist Bank of America or Barclays in acquiring Lehman. If either bank is unwilling to acquire it, then adopt a cooperation mechanism and use the power of the entire financial industry to prevent Lehman Brothers from collapsing in chaos and disorder. Just like bailing out long-term asset management companies in the United States ten years ago.
However, Bernanke ignored a fact: when everyone worked together to rescue long-term asset management companies ten years ago, Lehman began to think about not having a penny, and was later forced to invest $100 million, a distance of $150 million from the initial commitment.
13 (Saturday) morning, at the Bank of America office, Lehman Brothers negotiated tensely with the negotiation team of Bank of America. By more than 1:00 p.m., the two parties had basically reached the main acquisition terms, and the lawyer team was about to draft an acquisition agreement.
At 1:17 pm, one of the representatives of the Bank of America answered a call. After returning, he expressed his regret that the board of directors asked them to terminate the acquisition.
Lehman negotiators are like bolt from the blue. At this time, Lehman realized that while negotiating with them, Bank of America was also negotiating with Merrill Lynch, which was also in trouble. And Merrill Lynch “issued irrefutable conditions” to Bank of America.
Neither Lehman nor Bank of America attended the meeting yesterday, and Merrill Lynch knew that Bank of America was one of their few buyers and that they were in contact with Lehman. The meetings all night were counting on Bank of America to acquire Lehman. In this case, Merrill Lynn showed a strong desire to survive, decisively intercepted, secretly contacted Bank of America, and hugged the funder tightly in a "short sale".
In fact, the Treasury Secretary Paulson tried to force financial tycoons to submit by the threat of Lehman's bankruptcy, which may trigger financial disasters.
However, financial giants such as Merrill Lynch, American International Group, and even Goldman Sachs are considering how to protect themselves. After the meeting, JPMorgan Chase's Dimon held a executive call, and he told 24 executives very seriously: "We must prepare for Lehman's bankruptcy filing right away." He then said, "There are Merrill Lynch...American International...Morgan Stanley." Finally, he added, "Maybe Goldman Sachs will file for bankruptcy."
However, Paulson, Geithner and Bernanke do not seem to have such a strong sense of crisis. In their opinion, although it is regrettable for Bank of America to reject Lehman, their willingness to save Merrill Lynch is also a "good thing", at least it doesn't have to pay the US government.
Next, everyone will hope to invest in the second potential buyer, Barclays, UK, which is actually Lehman's last life-saving straw.
Barclays has no investment banking business. In order to enter the US market, they are willing to acquire Lehman Brothers who have divested toxic assets for $10 billion.
In August, Lehman Brothers CEO Fuld proposed a split plan to divest Lehman's problematic assets and other assets involving mortgages to form a "bad bank"; merge the best assets and high-quality businesses into "good bank". Inject capital into “bad banks” by selling “good banks”.
At that time, the Korean Industrial Bank was interested in Fuld's plan and proposed an acquisition invitation to Lehman. They had the opportunity to reach a cooperation, but Fold disliked the other party's bid too low. On September 8, South Korean financial regulators criticized the deal, which directly led to South Korean industrial banks giving up the acquisition.
The withdrawal of South Korean Industrial Bank has hit Lehman a big blow. On the same day, Lehman's stock price fell from $14.15 to $7.79, and many interested acquirers chose to retreat. Fulder also negotiated the acquisition with some buyers such as Buffett , the UK, and China, but ultimately failed.
In fact, many people have a question: Can the creditors of "bad banks" pursue claims from "good banks"?
14 (Sunday), Paulson and Geithner came to the conference hall to announce a good news that everyone knows. Last night, Barclays Bank of England formulated a complete plan to acquire Lehman and was ready to be implemented.
The only obstacle today is that the program requires other banks to provide enough funds to finance Lehman's non-performing assets, which will require a total of about $33 billion. Geithner asked the big guys present to give a number and formulate a detailed investment plan.
Barclays' acquisition enthusiasm for the UK gives all the big guys full confidence. Except for Merrill Lynch and Bear Stearns clearly stated that they were unwilling to invest, other bankers all formed a circle to start subscribing their share of capital, among which JPMorgan Chase's Dimon was the most active.
Just when they thought everything was right, McCarthy, the head of the Financial Services Agency, called Geithner. McCarthy told Geithner that the UK Financial Services Authority still needs to evaluate whether Barclays has the right capital structure to take the risk of acquiring Lehman. After
, Geithner angrily rushed into Paulson's office and informed Paulson and Cox that the British financial regulator might reject the facts of the deal.
Paulson immediately expressed his incredible belief. He asked Cox to call McCarthy again to confirm. After receiving the same reply, Paulson personally called the British Chancellor Darling, who also said that he was anxious about the potential risks of the deal, and that Barclays' acquisition of Lehman would pose a threat to UK financial security. After hanging up the phone, Paulson said fiercely, "We were fooled by the British. They don't want to import 'our cancer'." At this time, he also wanted to call President Bush to let the president communicate with British Prime Minister Brown to see if there is room for maneuver. However, he seemed to have heard from Darling that Prime Minister Brown knew about this. So he gave up his final struggle.
"Why didn't we think of it before? This is so fucking crazy." Geithner shouted.
Paulson, Bernanke, Geithner and Wall Street tycoons made a serious mistake. They did not consider that the British financial regulator would reject the deal and there was no second alternative.
At that time, everyone was in danger. In 2007, the subprime mortgage crisis became increasingly severe. Bear Stearn was acquired by JPMorgan Chase under the protection of the Federal Reserve, and Freddie Mac and Fannie Mac were taken over by the Ministry of Finance. Financial companies realize that Lehman's toxic assets are huge and complex in their relationships, which may trigger financial shocks and spread to themselves. Everyone is looking for a way out for themselves.
The US government and Wall Street financial institutions do not want to do anything or take on anything for Lehman. British Finance Darling reminded Paulson: "We need to determine what we will undertake and what the US government is willing to do."
Paulson's answer was: "Then we are helpless." Obviously, Wall Street bosses and the British government will respond with the same attitude.
This day was a desperate day for Lehman.
After Sunday, there is not much time left for Lehman.
British Barclays acquired Lehman for a miscarriage, Paulson immediately realized that Lehman bankruptcy was inevitable. So, Paulson and Bernanke, the original Lehman rescuers, immediately turned into "extubators". They urgently urged Lehman's board of directors to file for bankruptcy as soon as possible, as soon as possible, to prevent bad market expectations from spreading.
At 1 a.m. on September 15, the board of directors of Lehman Company announced: "Lehman Brothers Investment Company applied for the Federal Government for Bankruptcy Protection Act No. 11."
At this point, this 158-year-old Lehman Brothers company has become the largest bankruptcy case in US history.
Lehman Moment
On Monday, morning, Lehman Headquarters Building was filled with reporters. Employees each entered the office and packed their personal belongings into suitcases. When they left with their suitcases, some looked solemn, some were crying with their heads in their arms, and some were out of control and angrily scolding the crowded reporters.
This company with debt of up to $613 billion collapsed. In addition to the unemployment of more than 20,000 employees, it also triggered a chain reaction in the financial market. As soon as
opened in the morning, the US stock market encountered a "Black Monday". The Dow Jones Index hit its largest single-day decline point and decline since the "9.11" incident, and global stock markets also plummeted.
The next day, the Asia-Pacific stock market, Japan, Hong Kong, Taiwan and South Korea all fell by more than 5%.
At this point, the global economy encountered Lehman moment, and the subprime mortgage crisis eventually led to a world-class financial tsunami.
Just as Lehman announced his filing for bankruptcy, Bank of America announced that it would acquire Merrill Lynch, the third largest investment bank in the United States, for a total price of US$44 billion.
Affected by Lehman, the only two remaining independent investment banks in the United States, Goldman Sachs and Morgan Stanley, also encountered considerable trouble. The urgent situation is American International Group (AIG), the largest U.S. industrial and commercial insurance agency, involved a large number of toxic assets, including housing mortgage-backed securities.
After Lehman filed for bankruptcy, mortgage defaults increased significantly, and financial institutions and counterparties who purchased such insurances all claimed compensation from American International Group. If you don’t get financial assistance, the company may not last for a few days or even hours.
16, at 4 pm, President Bush Jr. convened Secretary Paulson, Federal Reserve Chairman Bernanke, advisers and representatives of other financial regulators to hold a high-level meeting in the White House Roosevelt Hall.
The president changed his relaxed and humorous style, his face was melancholy, and asked bluntly: "How did we get to where we are today?"
Bernanke was sitting opposite the president at the time, and later recalled: "This question is deafening."
Let's start with Lehman Brothers. Before filing for bankruptcy, the company was the fourth largest investment bank in the United States. It has a 158-year business history and has experienced several adventures, but it has turned bad luck into good luck and is getting bigger and bigger. It is the title of "cat with 19 lives".
However, it was Fuld who really brought Lehman Brothers to life. Fulder joined Lehman in 1969. He is extremely capable, has a irritable temperament, pursues profit goals, and has a radical style.
After Lehman became independent from American Express (in 1994), Fuld became the helm of the company and began to lead the company to achieve success.
In 2006, an article in Fortune magazine praised Lehman Brothers for achieving "the most outstanding operating performance in history" within the previous 10 years, and believed that "Fulder's transformation of Lehman Brothers is so comprehensive that it is not like the CEO's style, but more like the founder's style."
However, Lehman Brothers' performance myth is leveraged by high leverage. The company has injected a large amount of toxic assets into its $639 billion assets.
In order to expand its assets, Fuld has vigorously entered commercial real estate, leveraged loans and housing mortgage-backed securities, and provided loans to companies that are already heavily in debt while breaking through risk control. Among them, the most direct harm to Lehman Brothers is the credit default swap contract (CDS).
This is a common financial derivative and belongs to the default insurance of financial assets. For example, Lehman Company issues $1 billion in bonds, and you subscribe to some of the bonds, but you are worried about risks. What to do at this time?
You can choose to buy an insurance for this investment, and that's CDS. If Lehman's bond has not defaulted, you can pay the premium regularly; if Lehman defaults, the seller shall bear the loss of your assets, which is equivalent to transferring the debt risk.
Grinspan When he served as the chairman of the Federal Reserve, he strongly supported credit default swap contracts, believing that this is an important financial innovation that diversified the credit risks in the United States and increased the risk resistance of the entire financial system.He believes that banks have more motivation and ability than the government to regulate the risks of this financial derivative, thus leaving them free from the Federal Reserve's regulation.
credit default swaps use counter transactions, lack of a central clearing system, no centralized trading quotation system, no trading reserves as a guarantee, and no government system supervision.
This leads to the irrationality of trading behavior and the expansion of debt scale.
First of all, lending institutions and bond buyers rely on CDS protection to lend regardless of risks. Investment banks like Lehman broke through the wind control system and issued large-scale subprime mortgages.
Secondly, insurance companies like the American International Group have issued a large number of CDS products. Once the market defaults occur, they face huge compensation pressure.
There is a company under the United States International Group called "AIG-FP" which operates a large number of credit default swap derivatives. Due to lack of supervision and indirect reputation guarantees from ASI Group, the customer did not require the company to increase the transaction margin, so the company has been operating in light asset and high risk for a long time.
Third, the most important thing is that the credit default swap broke through the original intention of reducing financial asset risks and was alienated into a bet between buyers and sellers of insurance contracts. Both buyers and sellers can have nothing to do with the financial assets of credit insurance, and they bet on whether the credit default event has occurred.
For example, Lehman Brothers issued a $1 billion bond, you don’t need to buy his bond products to buy the CDS of this bond. You bet on whether Lehman defaults, and if Lehman cannot repay the bond when it matures, you will receive an "insurance compensation." This is actually no different from betting on horses.
Therefore, credit default swaps evolve into counterparty, a powerful short selling force. If a default occurs, the institution holding a credit default swap will make a big profit. In fact, Goldman Sachs happened to hold a large-scale credit default swap for Lehman financial products at that time. As long as Lehman defaulted, Goldman Sachs made a big profit. Of course, Goldman Sachs does not want to see Lehman's bankruptcy trigger a chain reaction.
In 2007, the total value of the global CDS market reached US$62 trillion, far exceeding the total US GDP of US$14.48 trillion that year, while the total value of US subprime mortgage bonds is only US$7 trillion. According to statistics in the third quarter of 2007, CDS products held by the top 25 U.S. banks are worth up to $14 trillion.
Therefore, after Lehman goes bankrupt, the risk of default is brought by Lehman, and credit default swaps alone can crush the seemingly huge financial system. Credit default swaps are only one link in the complex financial chain of the United States.
In the entire default incident, Lehman is not an isolated incident. In fact, from the Federal Reserve, the federal government to investment banks, subprime lenders, and other financial institutions are all participants.
Since the Reagan administration in the 1980s, with the support of a strong dollar, the United States has launched a financial capitalist model, finance continues to flourish, stocks and real estate ushered in an epic bull market, ending the subprime mortgage crisis in 2007. Under the model of
, American society has fallen into two-level differentiation, financial institutions and multinational corporations have made great profits, manufacturing enterprises and blue-collar workers have grown slowly, and the gap between the rich and the poor and social contradictions have gradually become prominent.
1990-2008, the three presidents Bush, Clinton and Bush Jr., aimed at improving the rate of housing ownership and advocated the "American Dream" of housing ownership. The main method to accomplish this goal is not a transfer of fiscal taxes, but a financial stimulus.
Since the 1980s, both the federal benchmark interest rate and mortgage interest rate in the United States have continued to decline. During the Bush administration, in order to cope with the economic recession in 2001, Greenspan adopted a low interest rate policy, and market interest rates fell below 2% for three consecutive years.
Stimulated by low interest rates, the United States experienced a serious liquidity surplus, financial markets were extremely prosperous, real estate and stock prices continued to rise, and a large number of financial derivatives emerged, including large-scale CDS and subprime mortgage loans.
At that time, the working class could easily issue a $500,000 mortgage certificate from the bank and get a loan in one month. Freddie Mac and Fannie Mac have handled a large number of subprime mortgage contracts for many unqualified lenders.
These loan contracts were acquired by investment banks such as Bear Stearns, Lehmann, and Merrill Lynch. They regard them as financial "raw materials" and are made into a series of complex financial derivatives through layer by layer cutting, packaging and securitization, and then placed into the financial market.
These complex financial products are the driving force for the prosperity of the United States, and the financial sector created more than 40% of the profits at that time. In 2007, the total salary of Wall Street financial practitioners reached $53 billion.
The total salary paid by Goldman Sachs is US$20 billion. The complexity of financial derivatives greatly strengthens the fragility of finance. None of these high-paying financial elites truly understand the risks in the financial derivatives chain.
Everyone feels that they have transferred the risk, but in fact every chain is increasing the risk. The greater the snowball rolls, the greater the risk, because the "raw material" itself is a poisonous asset. Throughout the entire chain, the default insurance CDS that originally reduced asset risks became a nuclear bomb that defeated the bubble.
Starting from 2005, in order to curb the flood of liquidity, the Federal Reserve chose to raise interest rates from 1.35% in 2004 to 5.02% in 2007.
Interest rates have risen rapidly, the wave of subprime loan defaults has intensified, and CDS repayment risks have increased significantly. In August 2007, the subprime loan market with a market value of up to $200 billion began to collapse. Two hedge funds under the fifth largest investment bank in the United States, Bear Stearns, which mainly deals in subprime loan derivatives, collapsed, and investors lost $1.6 billion.
Subprime mortgage crisis broke out.
subprime mortgage crisis is essentially a balance sheet crisis, and it is technically derived from improper risk control. However, the reasons for improper risk control in banks and finance in each country are different.
In the global financing market and the most developed countries in financial derivatives, this subprime mortgage crisis mainly comes from the flood of liquidity and financial innovation under the indulgence of financial ease regulation. Investment banks blindly believe in default insurance and develop and trade subprime loan derivatives on a large scale, which directly brewed a crisis.
During the Latin American debt crisis, the risk control of the banking systems in Brazil, Mexico and other countries was mainly caused by large-scale lending by government departments. The root cause was the nationalization or non-independence of the banking system.
During the Asian financial crisis, the main reason why the Korean banking system suffered spillover risks was that local chaebol forces blindly borrowed, which deteriorated the risk control system and balance sheet of the banking system.
Therefore, the risk control of the banking system is the valve of financial pulse.
takes over the controversy
To this day, Lehman's bankruptcy is full of doubts and controversy.
The most puzzling thing is why US Treasury Secretary Paulson or Federal Reserve Chairman Bernanke did not directly rescue Lehman? Or, if one party takes over Lehman and avoids the domino falling, will the financial crisis still break out? In addition, a large number of people criticized the official takeover of Bear Stearns, "Two Houses", American International Group and other practices.
Bear Stearn had a crisis before Lehman. Bear Stearn held a large amount of debt-secured bonds, and investors redeemed a large amount of cash, resulting in cash reserves exhaustion and the company was on the verge of bankruptcy.
At that time, New York Fed Chairman Geithner discovered this systemic risk and immediately reported it to the Federal Reserve. The Federal Reserve intervened with the Treasury Department, and the Federal Reserve urgently supported $30 billion in "guarantee" and supported JPMorgan's acquisition of Bear Stearns. This action by the US government sent a signal of rescue to the market.
Next, Secretary Paulson directly took over the "two houses" that had long been trapped in the whirlpool - Freddie and Fannie Mae. The specific plan is that the Ministry of Finance injects capital into Freddie Mac and Fannie Mac and acquires relevant preferred shares; relevant government regulatory agencies take over the agency's daily business and appoint new leaders at the same time.
Freddie Mac and Fannie Mac are the two largest housing mortgage companies in the United States. They were once an agency under the federal government, but later, although they were privatized, they received government subsidies for a long time. In essence, these are two companies that make money and get paid by private bosses and lose money. Therefore, the "two houses" have kidnapped the federal government's credit to some extent.
For Paulson, there is no other choice but to rescue.Paulson said: "Fanlimai's problem has put the financial market at systemic risks, and taking over these two institutions is the 'best way' to protect the market and taxpayers at present."
However, Paulson's takeover of the "two houses" has caused moral risks to the market. At the same time, a large number of critics believe that taxpayers should not be used to rescue these greedy bigwigs.
At that time, the " Wall Street Journal " said: "If the federal government agencies take action to rescue Lehman Brothers after rescuing Bear Stearns and Fannie Mai, it would be tantamount to showing that the government will provide guarantees for all institutions that are in crisis. This policy of the federal government will encourage more reckless risky behaviors."
So, when it was Lehman's turn next, Paulson's attitude reversed. Starting from
, almost everyone, including Lehman CEO Fuld, believes that Paulson will not be saved. However, this time, Paulson's attitude was extremely firm, and he insisted from beginning to end that the Ministry of Finance would not contribute funds to rescue Lehman.
The furious Fuld believes that the Ministry of Finance is standing by and watching is the main reason for Lehman's bankruptcy. Of course, this is also his best excuse for shirking responsibility.
Why did Paulson save Bear Stearns, Freddie Mac, and Fannie Mac, but let Lehman die?
In fact, Paulson did not stand idly by. He did make great efforts to save Lehman. However, his strategy is no longer to directly rescue, but to force Wall Street bosses to pay for the difficulties together. It is certainly an ideal way to start the market's power to resolve the systemic risks of the market, but the differences are much beyond Paulson's expectations.
Paulson and Bernanke both realized that the previous rescue of Bear Stearn and the "two houses" had triggered moral risks in the market and had also encountered overwhelming criticism. This time they insisted not to let moral risks spread, and at the same time they also tried to make a financial institution go bankrupt to serve as a warning.
In fact, the case of "killing the chicken to warn the monkey" also has precedents in the history of world financial supervision. After the Japanese bubble crisis, the financial regulatory authorities intend to break the "escort method" that does not allow financial institutions to go bankrupt, allowing Yamaichi Securities, one of Japan's four major securities companies, and the large bank Hokkaido Cultivation Bank to go bankrupt, using regulatory measures to punish the market and curb moral risks.
Of course, Paulson and Bernanke did not dare to make such a big bet. After all, they knew very well what Lehman's size meant to the American financial community.
After confirming that Lehman's bankruptcy is inevitable, Paulson and Bernanke gave detailed reports to President Bush. President Bush's attitude is that he does not want to see Lehman go bankrupt, but respects Paulson's approach and does not want the Treasury Department to take over Lehman directly.
2008 is the year of the presidential election. If Bush overemphasizes government assistance, it will definitely be detrimental to the Republican Party to continue to win the election. Shortly before Lehman filed for bankruptcy, the Republican Party clearly announced in its campaign program: "We do not support the government in rescuing private institutions." Before
, the government's intervention in Bear Stearns, especially the Treasury's takeover of the "two houses", put Paulson and Presidents George W. Bush in controversy.
Therefore, from external factors, Lehman's bad luck happened to be a victim of political and market game at this critical moment. However, Lehman himself has a bigger problem.
Lehman's bankruptcy ultimately left President Paulson, Bernanke and Presidents George W. Bush in a dilemma, and they were not human inside and outside.
After Paulson and Bernanke reported on Lehman's impending bankruptcy, they immediately proposed to the president the plan to urgently assist the American International Group.
Bernanke's reason is that the motivation to save the company is definitely not to hope to help its shareholders or employees, but that the entire U.S. economic system cannot afford to endure the company's bankruptcy.
The asset size of American International Group exceeds US$1 trillion, more than 50% more than Lehman Brothers, and has more than 74 million corporate and individual customers worldwide.
More importantly, the company's main business itself is not a big problem, it can be said to be very high-quality, but its main problem is that it involves a large number of CDS. Now that Lehman has gone bankrupt, the company may go bankrupt immediately due to large-scale compensation caused by the breach of contract.
Bernanke told President Bush very seriously: "Because the degree of international business is very deep, once the US International Group goes bankrupt, it is likely to cause the collapse of more financial giants in the United States and other countries."
Paulson also reminded the president that it is necessary to rescue the US International Group, and there is not much room for choice. No agency in the market is willing to acquire it or provide loans to it, and the government does not have enough funds to take over. If the US International Group still has enough collateral assets, the Federal Reserve can only provide loans to it to avoid bankruptcy.
President Bush chose to trust Paulson and Bernanke's judgment and practices regarding whether to rescue American International Group.
Lehman's bankruptcy seems to have established the White House's attitude towards the market. But when a systemic crisis occurs, the logic of "big but not falling" seems to be true again.
However, there are actually many key details under the logic. Not all "big" institutions can receive bailout from the Federal Reserve.
After reporting to President Bush Jr., Paulson and Bernanke rushed to Capitol Hill again. There, they must explain to the difficult lawmakers why they need to bail out ASI.
Various difficult questions came to the fore, and some lawmakers asked whether the Fed had the right to lend money to an insurance company.
Generally speaking, the Federal Reserve can lend money to banks and savings institutions. Bernanke's explanation is that under "abnormal and emergency situations", the Federal Reserve may issue loans to any individual, partnership or institution under "abnormal and emergency situations". The
meeting lasted for several hours, and the lawmakers had already shown signs of fatigue, and they were more aware that the crisis was approaching and did not raise too much objection to Bernanke and Paulson's approach. After the meeting of
, the exhausted Bernanke returned to the Federal Reserve's office. Geithner of the New York Fed happened to call him and said that the board of directors of the United States Group had agreed to the conditions they proposed.
To receive the assistance of the Federal Reserve, certain conditions need to be met. Out of caution, Bernanke put very strict conditions for American International Group. "Because we don't want to reward a failed company, nor do we want to encourage other companies to follow the example of ASI to take risks that may lead to bankruptcy," Bernanke recalled.
The Federal Reserve's loan interest rate to the US International Group is very high, and the shareholding ratio after capital injection is close to 80%. The real advantage of American International Group is that its main business assets are relatively healthy and high-quality.
However, Bernanke was extremely uneasy about this. If the rescue operation fails, the market's trust in the Fed's ability to control the crisis will be devastating.
The Federal Reserve was born after the financial crisis in 1907. Its original intention was to avoid bank bankruptcies. However, during the Great Depression, the function of the Federal Reserve failed to stand the test and even became the culprit of the Great Depression (Friedman's view).
This time, in the history of the United States, government agencies have intervened the most in the market and intervened the most. If it fails, can the Federal Reserve bear this responsibility? In Congress, lawmakers have clearly put all the blame on Bernanke and Paulson. The president will certainly defend them, but President Bush will step down in a few months.
Bernanke, in the end, mustered up the "courage to act" and "do what others cannot do but must do, but must do."
On the second day after Lehman announced his bankruptcy filing, the Federal Reserve announced that it would authorize the New York Fed to provide US$85 billion in loans to US International Group.
The market generally believes that Lehman holds a large number of toxic assets, and the net assets of the main business have depreciated significantly, leaving only 30% off or less, lacking high-quality assets as collateral or attracting capital injections, and no longer has the conditions to apply for loans from the Federal Reserve. This is the key to Lehman's inability to get rescued by the Federal Reserve.
Even Goldman Sachs and Morgan Stanley can only "save the country in a curve". As the only two independent investment banks, Goldman Sachs and Morgan Stanley filed a request to the Federal Reserve to become a bank holding company.The Federal Reserve approved the requests from the two investment banks on September 21.
Only after Goldman Sachs and Morgan Stanley "transformed" can they permanently obtain the right to obtain emergency loans from the Federal Reserve like other commercial banks in order to overcome the difficulties.
In fact, the role of the Federal Reserve as the "lender of last resort" is extremely unpleasant and controversial. No one would thank you if you don’t do it, and no one would thank you if you do it, but if you don’t do it, someone would scold you.
htmlOn 15, Paulson and Bernanke refused to save Lehman, and the market still generally agrees with it. But the next day, the two men helped ASI. Criticism surged over and over again, and economist Vincent Reinhardt said: "The government has drawn a clear line between Lehman Brothers, but now it has erased part of this line."Someone joked: "The United States' commitment to the free market only lasted on Monday," and designated September 15 as the "free market anniversary."
Frank Borman, CEO of Eastern Airlines, once said a classic saying: "Capitalism without bankruptcy is like Christianity without hell."
Bankruptcy is indeed part of the market and is also a manifestation of the market's initiation of punishment mechanisms. If the Federal Reserve and the Treasury Department do not allow companies to go bankrupt, does this mean that it will undermine the performance of market mechanisms? Does it mean that the insatiable financial tycoons continue to take risks?
billionaire William Berkins once spent a lot of money to buy the full page advertisement of " New York Times " and published a cartoon with Bush, Paulson, and Bernanke planted a flag into a capitalist cemetery like the US Marine Corps flag-planting warriors in the Battle of Iwo Jima. This is a satirizing their rescue actions of private enterprises.
Bernanke made a vivid metaphor to explain the legitimacy of his rescue: a man accidentally lit a bedding while smoking on his own bed, and the house caught fire and lost control; at this time, you happened to live next door to him, so have you joined the firefighting ranks? Does our fire extinguishing together mean it encourages the neighbor to continue smoking in bed? In fact, at this time, we don’t care about moral risks.
Later, with the spread of the financial crisis, Bernanke launched "large-scale asset purchase", that is, to release more liquidity to the market by purchasing two-bedroom bonds, mortgage-backed securities, treasury bonds, etc. This move, we usually call it "quantitative easing."
Bernanke's approach is procedurally legal, and he has made the Federal Reserve assume the responsibility of "lender of the last resort" - a key responsibility of central banks in the world at present.
The legendary British 19th century economist Bai Zhihao In the famous brochure "Lombardy Street", the central bank proposed for the first time the responsibility of acting as the "lender of the last place": in the financial crisis, banks should lend generously, but only to companies with stable operations and high-quality collateral, and lend at a high enough interest rate that can scare away non-urgent money. People call it the "Bai Zhihao Principle". The controversy caused by the principle of
has always been there, such as moral risk, "big but not falling", power rent-seeking, using taxpayers' money to wipe the adventurers, encourage financial tycoons to take risks and repeatedly trigger financial crises, etc.
But there seems to be no choice other than that.
Paulson and Bernanke's rescue operations are considered the key to the failure of the Great Depression in this world economic crisis. However, ten years have passed, and the aftermath of this crisis has not completely disappeared around the world, and the harm of these rescue operations is still spreading.
But we can never wake up a person who pretends to be asleep.
References
【1】The courage to act, translated by Ben Bernanke, Jiang Zongqiang, CITIC Publishing House;
【2】Big but not falling, translated by Andrew Ross Solkin, Ba Shusong, etc., Renmin University of China Press;
【3】Debt Crisis, translated by Rui Dalio, Zhao Can, etc., CITIC Publishing House.
