Tags: lehman | failure | mistake

Did the Fed Screw Up on Lehman Call?

Monday, 29 Sep 2008 10:22 AM

The Fed’s call to let Lehman Brothers collapse — while bailing out Bear Stearns and later AIG — could be coming back to haunt it.

Congress is on the edge of voting on a $700 billion bailout, but a chain of financial market panics over Lehman seems to be spreading around the globe, asserts The Wall Street Journal.

The call sped up the end of AIG and has led foreign banks to totter as investors yank cash and buy up U.S. Treasurys in a flight to safety. Iceland seized its No. 3 bank on Monday and European giant Fortis was institutionalized as well. The U.K. took over the mortgage assets of Bradford & Bingley.

Now it seems that saving the 158-year-old Lehman might have headed off the waves of panic. Global stock markets plunged as the U.S. Congress wavers on taking action. U.S. stocks opened sharply lower as well.

"I don't understand why they didn't understand that the markets would be completely spooked by this failure," Richard Portes, professor of economics at London Business School and president of the Centre for Economic Policy Research, told The Journal.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke certainly could have stepped in to save Lehman. Yet they held back, only to be forced into taking action on AIG.

There are already signs of private action to stem the tide of bank failures many fear. Citigroup will be taking over Wachovia, and JPMorgan’s move on Washington Mutual helped shore up the huge retail bank.

However, Chris Whalen, co-founder of Institutional Risk Analytics, says that — at least in the short term — the "only party who can play” in the markets and make a difference is government.

What some in Congress still cannot grasp, Whalen says, is that the problem is no longer a matter of a bubble in housing prices or a mark-to-market gap in value, Whalen told CNBC.

“We started off with a bubble in assets in terms of overvaluation,” Whalen says. “What we’re looking at coming at us is a much bigger wave of losses on loans, old-fashioned losses, and that’s where the government has got to get involved.”

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The Fed’s call to let Lehman Brothers collapse — while bailing out Bear Stearns and later AIG — could be coming back to haunt it.Congress is on the edge of voting on a $700 billion bailout, but a chain of financial market panics over Lehman seems to be spreading around the...
lehman,failure,mistake
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2008-22-29
Monday, 29 Sep 2008 10:22 AM
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