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22 results

Page 1 of 2

  • 3 - The Legal Criteria for Fed Assistance

  • Laurence M. Ball, The Johns Hopkins University
  • Book:
    The Fed and Lehman Brothers
    Published online:
    04 June 2018
    Print publication:
    07 June 2018, pp 49-54

  • Summary

    This chapter reviews the legal requirements for a Federal Reserve loan to an investment bank. These requirements are stated in Section 13(3) of the Federal Reserve Act, which was enacted in the 1930s but seldom invoked before the 2008 crisis. Section 13(3) restricts loans to investment banks to “unusual and exigent circumstances,” but most economists believe the 2008 crisis fulfilled that condition. The controversial part of Section 13(3) is the requirement that a borrower post “satisfactory collateral” for a loan. The Fed’s General Counsel, Scott Alvarez, told the FCIC that “satisfactory collateral” means “you have to be pretty sure you will be repaid.”

  • 8 - Fed Actions That Ensured Lehman’s Bankruptcy

  • Laurence M. Ball, The Johns Hopkins University
  • Book:
    The Fed and Lehman Brothers
    Published online:
    04 June 2018
    Print publication:
    07 June 2018, pp 145-164

  • Summary

    The Fed did not passively allow Lehman to fail; rather, officials instructed Lehman executives to file for bankruptcy and took steps to ensure that the firm had no alternative. These actions involved arbitrary restrictions on Lehman’s access to the PDCF, restrictions that thwarted plans by Lehman to remain in operation with PDCF assistance.

  • 12 - Explaining the Lehman Decision

  • Laurence M. Ball, The Johns Hopkins University
  • Book:
    The Fed and Lehman Brothers
    Published online:
    04 June 2018
    Print publication:
    07 June 2018, pp 209-224

  • Summary

    Most of the book establishes that issues of collateral and legal authority were not the reasons that policymakers let Lehman fail. This chapter examines the available evidence on the true reasons, which include political opposition to another “bailout” and a failure of policymakers to anticipate fully the damage from the Lehman failure

  • 4 - Lehman’s Balance Sheet and Solvency

  • Laurence M. Ball, The Johns Hopkins University
  • Book:
    The Fed and Lehman Brothers
    Published online:
    04 June 2018
    Print publication:
    07 June 2018, pp 55-80

  • Summary

    This chapter reviews Lehman’s assets and liabilities at the time of its bankruptcy and assesses its solvency (whether its assets exceeded its liabilities) . I conclude that Lehman was near the border between solvency and insolvency based on mark-to-market values of its assets (the amounts for which the assets could be sold at the time). The firm reported that its equity--the difference between assets and liabilities--was $28 billion. Other financial institutions that examined Lehman’s balance sheet estimated, however, that Lehman overvalued its assets by $15-$32 billion. These estimates imply that Lehman’s true equity was somewhere between -$4 billion and +$13 billion based on mark-to-market valuation. That finding strongly suggests that Lehman was solvent based on fundamental values of its assets (the values of future cash flows). The crisis of 2008 drove the market prices of many assets below their fundamental values.

  • 10 - How Risky Were the Fed’s Rescues of Other Firms?

  • Laurence M. Ball, The Johns Hopkins University
  • Book:
    The Fed and Lehman Brothers
    Published online:
    04 June 2018
    Print publication:
    07 June 2018, pp 177-194

  • Summary

    Fed officials have asserted that the institutions it did assist had better collateral than Lehman, and therefore it was safer to lend to them. In fact, collateral values were highly uncertain when the Fed lent to facilitate the acquisition of Bear Stearns by JPMorgan Chase and to support AIG. In these cases, the Fed took on more risk than it would have if it provided liquidity support to Lehman

  • 5 - Lehman’s Liquidity Crisis

  • Laurence M. Ball, The Johns Hopkins University
  • Book:
    The Fed and Lehman Brothers
    Published online:
    04 June 2018
    Print publication:
    07 June 2018, pp 81-94

  • Summary

    This chapter reviews Lehman’s liquidity management and the run that forced the firm into bankruptcy. The most damaging part of the run was the refusal of counterparties to roll over Lehman’s repurchase agreements, or “repos.” These repos were essentially loans to Lehman from other financial institutions, such as mutual funds, that were very short-term (often one day), with Lehman posting securities as collateral. Because the collateral protected lenders against losses, it was widely assumed that the lenders had no reason to cut off funds even if Lehman were at risk of bankruptcy. That assumption was a crucial mistake underlying Lehman’s crisis.

  • 9 - Possible Long-Term Outcomes for Lehman

  • Laurence M. Ball, The Johns Hopkins University
  • Book:
    The Fed and Lehman Brothers
    Published online:
    04 June 2018
    Print publication:
    07 June 2018, pp 165-176

  • Summary

    This chapter reviews possible long-term outcomes if Lehman averted bankruptcy with Fed assistance. The firm might have been acquired by Barclays, which was negotiating a deal before the bankruptcy; it might have survived as an independent firm; or it might have eventually been forced to wind down its business. It is not clear which of these scenarios was most likely, but any would have been less disruptive to the financial system and economy than the bankruptcy that actually occurred.

  • 6 - Lehman’s Collateral and the Feasibility of Liquidity Support

  • Laurence M. Ball, The Johns Hopkins University
  • Book:
    The Fed and Lehman Brothers
    Published online:
    04 June 2018
    Print publication:
    07 June 2018, pp 95-112

  • Summary

    Based on a careful analysis of Lehman’s finances, this chapter demonstrates that the firm had ample collateral to borrow the cash it needed to avoid bankruptcy. This fact implies that a Fed rescue of Lehman would have been legal and the Fed would have taken on little risk. I estimate that Lehman needed to borrow $84 billion, and that it had at least $114 billion of assets that were acceptable as collateral at the Primary Dealer Credit Facility (PDCF), which the Fed created to provide liquidity to investment banks.

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