A lot of eyes rolled on Wall Street last October when Ben Bernanke, who chaired the Federal Reserve in the lead up to and during the financial collapse in 2008, released his memoir of the financial crisis with the title: “The Courage to Act: A Memoir of a Crisis and its Aftermath.” Many Wall Street observers felt the title would have more correctly captured the facts on the ground had it read: “The Lack of Fed Courage to Supervise Mega Banks Led to an Epic Collapse.” (In the leadup to the crisis, the Fed allowed Citigroup CEO Sandy Weill and JPMorgan Chase CEO, Jamie Dimon, to sit on the Board of its Federal Reserve Bank of New York, among numerous other conflicts of interest.)
Throughout his memoir, including Chapter 12 titled “Lehman: The Dam Breaks,” Bernanke goes to great pains to paint a portrait of the Fed and himself as being intensely on top of the situation at Lehman Brothers from March 2008 forward, following the Bear Stearns collapse and its absorption by JPMorgan Chase.
For example, Bernanke reveals that the Fed had placed bank examiners at Lehman Brothers, writing as follows:
After JPMorgan Chase bought Bear, the New York Fed staff conferred frequently with the SEC and Lehman – up to three times per day. We would eventually send a small number of bank supervisors to Lehman and the other remaining investment banks.We also know that Bernanke was briefed in great detail on the Lehman situation by Fed economist Patrick M. Parkinson on July 20, 2008, almost two months before the Lehman bankruptcy, because Parkinson’s email was included among the thousands of pages of text and exhibits of the Financial Crisis Inquiry Commission Report, the official analysis of the crisis. In that email, Parkinson wrote:
…Focusing
for the moment on LB’s [Lehman Brothers] vulnerable tri-party
borrowings, as of July 14 it was financing $200 billion of collateral.
Of that amount, all but $12.8 billion was PDCF-eligible [PDCF was an
emergency loan program set up by the Fed]. Of the non-PDCF-eligible,
$8.7 billion was equities. JPMC [JPMorgan Chase], LB’s clearing bank, is
likely to be the first to realize that the money funds and other
investors that provide tri-party financing to LB are pulling back
significantly. If some morning it fears that the investors are unlikely
to roll their repos, it may threaten not to unwind LB’s previous night’s
repos. If it did that, LB would be done because the tri-party investors
would control its securities inventory. The investors presumably would
promptly liquidate the $200 billion of collateral and there is a good
chance that investors would lose confidence in the tri-party mechanism
and pull back from funding other dealers. Fear of those consequences is,
of course, why we facilitated Bear’s acquisition by JPMC. We could try
to dissuade JPMC from refusing to unwind by pointing out that if the
investors don’t roll the repos LB can borrow from us through the PDCF.
Even if we did so, for two reasons JPMC might still balk. The first is
the non-PDCF collateral. We could address that concern by making the
equities and other non-PDCF collateral eligible. Or we could try to get
LB to wire $12.8 billion of cash into JPMC to cover the rollover risk.
The other reason is a fear that LB could be placed in bankruptcy
intra-day, before the next day’s tri-party repos and any PDCF loans are
settled, in which case JPMC would be stuck with $200 billion in secured
loans to LB. I’m not sure that this is at all likely, but JPMC and BNYM
[Bank of New York Mellon] are sufficiently concerned that they have
arranged a meeting Monday afternoon with SIPC [Securities Investor
Protection Corporation that insures brokerage accounts]. (LB’s PD
[Primary Dealer] is a SIPC member (as are some but not all of the other
PDs) and its bankruptcy would be administered by SIPC.) Board staff plan
to sit in on this meeting. But even if we are willing to extend as much
as $200 billion of financing to LB, absent an acquirer our action would
not ensure LB’s survival… [Information in [ ] brackets has been
inserted by Wall Street On Parade.]
The original source of this article is Wall Street onParade
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