WASHINGTON, DC: The New York Times had a fascinating story the other day, which again raises a crucial historical question about the financial crisis: Did Lehman Brothers have to go bankrupt in September 2008? Lehman’s failure turned what had been a series of serious problems at financial institutions (Bear Stearns, Fannie Mae and Freddie Mac) into a full-blown panic. But did Lehman have to crash?
The answer from the then top-policy makers -- Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and head of the New York Federal Reserve Bank, Timothy Geithner -- has been that they lacked the legal authority to rescue Lehman. Under the law, they said, the Fed couldn’t lend to a financial institution with a negative net worth: its liabilities (what it owed) exceeding its assets (what it owned). This was the case with Lehman Brothers, they have contended.
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