Politics pushed Lehman off brink?

Next Tuesday (September 14) will be the second anniversary of Lehman Brothers' bankruptcy and the ensuing panic that helped spawn the deepest recession since the Great Depression. Yet two years on, a mystery remains about the fateful weekend before Lehman's fall.

Next Tuesday (September 14) will be the second anniversary of Lehman Brothers' bankruptcy and the ensuing panic that helped spawn the deepest recession since the Great Depression. Yet two years on, a mystery remains about the fateful weekend before Lehman's fall.

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Last week, during the Financial Crisis Inquiry Commission's final hearings, entitled "Too Big to Fail," two competing versions of events were revisited about the last frantic 72 hours of Lehman's life: That the government did not have the legal "authority" to rescue the firm or, more conspiratorially, that the firm was knowingly killed because politics made it impossible to save.

A trove of new e-mails and notes released as part of the Commission's investigation shows that American leaders at the time — Ben S. Bernanke, Timothy Geithner and Henry M. Paulson Jr. — insisted over and over again that they did not have the legal authority to rescue Lehman as they did for Bear Stearns and the American International Group. The documents also show that the decision not to lend to Lehman was made against the backdrop of a hot political climate.

Donald Kohn, vice-chairman of the Federal Reserve, several hours later to Bernanke and Warsh: There's a "strong predilection against by both Treasury and Fed" providing liquidity to Lehman.

Of all the e-mails unearthed from that weekend, however, a two-sentence note from Bernanke to a colleague on the Sunday night while Lehman was in the process of filing for bankruptcy speaks volumes: "In case I am asked: How much capital injection would have been needed to keep LEH [Lehman] alive as a going concern? I gather $12B or so from the private guys together with Fed liquidity support was not enough."

In other words, the chairman of the Federal Reserve didn't even know how much money would have been required to rescue Lehman, even temporarily.

What is clear is that the politics of the moment played a factor — or at least was discussed among senior and junior staff — in the decision not to lend to Lehman Brothers, perhaps the greatest mistake of the crisis.