Lehman Had to Fail; FinReg May Help Others: Paulson
BOSTON—The government let Lehman Brothers fail during the financial crisis because there was no other choice, former Treasury Secretary Henry Paulson said Wednesday.
Addressing one of the chief controversies during the systemic collapse that began in 2008, Paulson said Lehman had neither the interested buyers that Bear Stearns had nor the access to government funds that saved American International Group.
As such, there was no choice but to let Lehman fall in September 2008, a move often attributed as the proverbial last straw that broke the credit system and sent the global economy spiralling.
"They had a capital and liquidity problem and no buyer," Paulson told hundreds of investment professionals gathered at the Impact 2010 conference sponsored by Charles Schwab, later adding, "We were under intense pressure. It was a difficult period."
JPMorgan Chase swooped in to buy Bear Stearns when the venerable investment bank crumbled in March 2008, while the government used bailout funds from the $700 billion Troubled Asset Relief Program to rescue AIG.
"We didn't have TARP with Lehman Brothers," Paulson said.
The former CEO at Goldman Sachs detailed the political difficulty in getting Congress to approve the rescue funds, a struggle recounted in Paulson's book, "On the Brink." Paulson also praised Congress for taking steps to prevent such a crisis from happening again.
"To me the big thing is if an institution should fail in the future, that no institution should be too big to fail," he said regarding the financial reforms.
"The book is about the collision of market and political forces," he said. "Everyone (in Congress) who made the vote for TARP knew they were making a politically unpopular vote."
"All I know is I did the very best I could under difficult circumstances."
During the course of an hour-long conversation with Liz Ann Sonders, chief market strategist for Schwab, Paulson recalled some of the volatile events that occurred as the US financial system teetered on the brink.
Against a backdrop of the looming 2008 presidential election, Paulson had to steer the economy back from the ledge, using an unprecedented level of government intervention that required deft political maneuvering.
Paulson remarked that then-Vice President Dick Cheney said he "had never seen anything like" a caustic closed-door session between Democratic and Republican leaders as they tried to resolve the crisis. Paulson recalled walking into the session and trying to break the tension by dropping to one knee before House Speaker Nancy Pelosi and saying, "Nancy, please don't blow this thing up."
"We worked hard to make progress," he said. "It took the cirsis to get Congress to act."
He said the decision to let Lehman fail was difficult but there was little other option at that point. The only potential buyers for the investment bank were Bank of America , which ultimately rescued Merrill Lynch, and Barclays, a purchase blocked by UK regulators.
Though AIG had "great mismanagement and was more like a big hedge fund," the company company's debts "were secured by the underlying insurance business" and thus a more viable bailout candidate than Lehman, which had suffered a liquidity crisis and had lost its financing partners on Wall Street.
"It couldn't have taken place at a worse time," Paulson said.
Despite "concerns about moral hazard," or creating conditions where other banks would act irresponsibly with the belief that they would be bailed out as well, Paulson said the conditions were too dire not to act.
"We were going to have five or six money market funds that were going to break the buck," he said, referring to the condition where a dollar invested in a fund was now worth less than that. "I thought in that month when the money market funds were on the verge of imploding that we were going to have an economic armageddon ... You could have easily had conditions that looked as bad as the Great Depression."
So would he do it again?
Taking the job as Treasury Secretary was a difficult choice for him, as he came from a Democratic background and had promised his family he wouldn't go to Washington. He joked that his elderly mother told him, "You started out with Richard Nixon and you ended up with George W. Bush. You should be ashamed of yourself."
Yet Paulson had kind words for the former president.
"The way he is perceived by most of the public is very different from what I saw," he said. "He was a good boss."
As for his own performance, Paulson takes solace in what has transpired since he left. He praised the financial reform legislation and believes it will have a positive effect on ending the too-big-to-fail aspect that helped create the financial crisis.
"All I know is I did the very best I could under difficult circumstances," he said. "I'm pleased we got Congress to act the way they did and prevent the collapse of the financial system."