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The FSA Deserves Some Blame for Lehman Too

By Anonymous

ECB official Lorenzo Bini Smaghi responded to Paul Krugman's recent contention that Europe's response to the financial crisis has been inadequate. One of Smaghi's arguments, though, unfairly places all the blame for allowing Lehman to fail on the US:

[Krugman's argument] doesn?t explain how the most fateful decision of all ? the decision to allow a systemically important bank to fail in the midst of a financial crisis ? was taken by a single decision-maker, while the 16 euro area governments have managed to avoid making such a large mistake.

Whoa, let's remember what actually happened. The Fed and the Treasury successfully brokered a private-sector rescue for Lehman, in which Barclays would buy all of Lehman except for $40 billion of commercial real estate assets, which would be acquired by a consortium of major banks. Since Barclays is a British bank, the deal required approval from the UK's Financial Services Authority (FSA). On Sunday morning, though, the FSA unexpectedly rejected the deal. As William Cohan recounted:

The Barclays deal required the blessing of the Financial Services Authority, in London - the UK equivalent of the SEC. So Paulson spoke with his UK counterpart, Alistair Darling, the Chancellor of the Exchequer, and to the FSA. He then summoned McDade, Lehman's president, to the New York Fed and told him at around 9:45 a.m., "Deal's off. The FSA has turned it down." At roughly 10 o'clock, Paulson and Geithner briefed the bankers at the Fed.

So while the Fed and the Treasury undoubtedly made a mistake in letting Lehman fail, let's not forget that the FSA deserves a hefty share of the blame as well.

Full post as published by Economics of Contempt on March 20, 2009 (boomark / email).