Challenging the Fed on Lehman.

AuthorMcKinley, Vern
PositionThe Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster - Book review

The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster

By Laurence M. Ball

294 pp.; Cambridge University Press, 2018

A lot of ink has been spilled in the media, academic journals, and a number of prominent books about why Lehman Brothers was allowed to fail in September 2008, at the depths of the financial crisis. Last year, I reviewed one of the more recent of these books, Oonagh McDonald's Lehman Brothers: A Crisis of Value

("Is There Value in Revisiting the Lehman Collapse?" Spring 2017). This year, Johns Hopkins University economist Laurence Ball offers his analysis in The Fed and Lehman Brothers.

Ball brings considerable expertise to the task. Besides his tenure at Hopkins, he is a research associate at the National Bureau of Economic Research and a consultant for the International Monetary Fund. He has also been a visiting scholar at the Federal Reserve Board of Governors and the Reserve Banks of Boston, Kansas City, and Philadelphia, as well as the Bank of Japan, the Bank of England, and the Reserve Bank of New Zealand.

Ball admits that his book does not unearth much in the way of new, earthshaking evidence about Lehman and the Fed. But he has spent years painstakingly compiling and assessing the already-existing evidence. He writes, "I soon discovered something that is not widely appreciated: there is a huge amount of hard evidence on these topics that is easily available to anyone." He draws heavily from the report of the Financial Crisis Inquiry Commission (FCIC) and the report drafted by Lehman's bankruptcy examiner, Anton Valukas. He also uses records from the Federal Reserve, Lehman's financial statements filed with the Securities and Exchange Commission, and research by journalists. Ball did make Freedom of Information Act requests for Federal Reserve Board documents on the AIG rescue, but the Fed declined to release those documents and, when Ball appealed to the courts, they deferred to the Fed's opacity.

How the Fed's justifications are flawed / The book is straightforward. Ball relates the narrative offered by the Federal Reserve and Treasury Department regarding the Lehman Brothers collapse and federal officials' decision not to bail out the bank. He then aggressively argues that the individual components of that narrative are false.

The primary points that he dissects are:

* The New York Fed claimed that it had no legal authority to fund Lehman because Lehman lacked supporting collateral. Ball...

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