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David Wessel on the Failure of Lehman Brothers

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The Wall Street Journal's David Wessel's In Fed We Trust: Ben Bernanke's War on the Great Panic is just out to the usual accompanying publicity. It's a very pleasant read, written in that WSJ style adapted to books that hit its apotheosis with Barbarians at the Gate and has never returned to that height again. Wessel's book is well-done, commercial nonfiction, pitched at about the same level as his "Capital" column in the paper. It bounces along at a brisk clip, efficiently introducing characters and providing all those little details -- where Hank Paulson and Ben Bernanke had breakfast, how much gold bullion is in the basement of the New York Fed -- that publishers seem to believe readers crave.

I'll offer a full consideration of In Fed We Trust eventually (vacation looms). Right now, I want to focus on a single decision that continues to look like the key turning point in the crisis: the decision to let Lehman Brothers Holdings Inc. fail. Wessel opens with the events leading up to that decision, the context of which was the Bear Stearns Cos. crisis five months earlier. (It's shrewd narration, but a little annoying: After dealing with Lehman, Wessel dials back and doesn't hit Bear for 120 pages. Bear set up Lehman; it was essentially a continuum. That said, this isn't a very long book.) Hanging over the Lehman affair are a series of questions. Should Lehman not have been saved? If Bear was "saved," why not Lehman? What were the dynamics of the major decision makers? What was the logic behind the final decision? How could decision makers not realize the consequences?

Wessel moves so fast that many of these questions get asked but never truly answered. This is economic management by personality and meetings. Wessel has talked to each of the three major players -- Paulson, Bernanke and Tim Geithner -- but he has little new to add to the portraits that have already floated through the media. Wessel favors Bernanke, likes Geithner, but views Paulson, and his minions of former Goldman, Sachs & Co. (NYSE:GS) staffers, as a man cast in the wrong role: an investment banking dealmaker caught in situations in which those strengths did not exactly shine. Wessel suggests, in the mildest of ways, that Paulson screwed it up. Bernanke is conciliatory and thoughtful; Geithner organized and rational; Paulson impulsive with strange personality tics. Wessel gives Paulson very little credit, though he rarely comes right out and criticizes him. Instead he nibbles away at him in a kind of death by detail.

But again, it's very hard to get at the more substantive questions. For instance, did Paulson dislike Lehman's Dick Fuld so much that he let his firm die, as Lawrence McDonald, the author of the recent A Colossal Failure of Common Sense argues? In passing, Wessel offers two details about Fuld and Paulson: One, Paulson never thought much of Lehman as a firm; and two, he and Fuld had been talking on the phone for weeks before the crisis worsened, presumably discussing buyers. That's it. Fuld remains a shadowy, off-the-stage figure; at one point he's pointedly kept out of the meetings. The Korea Development Bank episode is barely alluded to. The result: When Paulson finally decides the government can't save Lehman, the decision remains deeply opaque. He mentions politics, and a moral hazard. But Wessel has already slyly suggested that perhaps his disdain for Lehman fed the decision. And the conspiracy claque, realizing how lousy the situation was with former and current Goldmanites, will eternally believe Paulson did it to help his old firm.

Paulson is coming out with his own book this fall, so perhaps some of these questions will be tackled.

There are fewer of those odd, discordant details with Geithner and Bernanke. Indeed, the theme of the book is how Bernanke saved civilization by realizing he had to do whatever it takes, an italicized refrain that annoyingly recurs like some particularly intrusive background music at key moments. And yet, Wessel can't take Bernanke completely off the hook with Lehman. "Bernanke and Paulson implied initially that they deliberately let Lehman go. But their accounts were, well, different." Even Bernanke spun the decision from a general powerlessness in the face of cataclysmic markets, to legal restraints on the Fed, which constrained it from putting up the money. Yes, Bernanke spins.

There are other thorny issues Wessel flies past in his recitation of emergency meetings and conference calls. You have to skip all the way to the Bear Stearns chapter to discover what happened to the Securities and Exchange Commission's Christopher Cox: He was simply not invited to the meetings, despite being Bear's and Lehman's regulator, because of a judgment (by whom?) that "he wasn't up to the job." Moreover, writes Wessel, "Apparently, he wasn't missed." Who knows he wasn't missed since he was never there? And his exclusion certainly calls for more explanation. What exactly happened? The comment is revealing: Cox was not part of the "in" crowd (for one thing, the SEC had no money) and therefore he wasn't important. True, the SEC had grave supervisory failures, but then so did the Fed.

Another detail: There were five months between Bear and Lehman. Bear clearly was a systemic threat because it was so densely interconnected with the rest of finance, which Wessel points out. Why, then, didn't the Fed or Treasury make some attempt to either reduce Lehman's interconnections (this frankly would have been difficult) or at least spend the five months trying to get a better grasp of the systemic consequences? Again, Wessel mentions that Paulson and Bernanke assured people that counterparties "had been given time to protect themselves" and that the Fed had "found new ways to lend to investment houses that might be hurt in a Lehman collapse." But, he adds, "They were wrong."

They were wrong? That's it? The real mistake of Lehman may not have been to let it die, but to fail to understand the implications of that failure. They may have been wrong on the single most important issue in this crisis -- and one that speaks directly to the job of systemic regulator -- and Wessel never goes into any detail as to why, and never asks. This was a Katrina-like failing. A disaster was clearly building and defenses were weak. What were the Fed and Treasury doing in those key months between Bear and Lehman? How would the acknowledgment, or the investigation of that failure, alter the heroic characterization of Bernanke that Wessel undertakes?

All this is not to blacken any of these names. They were all making it up under extraordinary conditions as they went along. But it does point out how many of the obscurities and mysteries still prevail around the major events of 2008. Well, there are many other books coming -- a veritable flood of them. We'll see what we learn.

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Robert Teitelman is the editor in chief of The Deal.