Colin Barr

Following the money in banking, economics, and Washington

Lehman rescue: A bridge too far

September 1, 2010: 4:14 PM ET

Dick Fuld has a bridge he wants to sell you.

Had the government constructed a "liquidity bridge" one fateful weekend two years ago, the former Lehman Brothers chief told the Financial Crisis Inquiry Commission Wednesday, it could have staved off a bankruptcy at the brokerage firm.

Where's that confounded bridge?

But a Federal Reserve official at the hearing blanched at the prospect of providing funds to Lehman without what he said would be adequate collateral. He said the Fed concluded it couldn't provide such a loan except at enormous risk to taxpayers.

Lehman filed for Chapter 11 bankruptcy protection the morning of Monday, Sept. 15, after federal officials failed to broker a sale of the investment bank.

"Had we gotten through that Sunday, we would have had a chance at at least an orderly wind-down," Fuld said in testimony before the FCIC Wednesday. "It may even have given us an opportunity to do a merger."

Of course, it's doubtful that Fuld would have been in a "wind-down" state of mind had the Fed provided the funds to keep Lehman going. Though officials at Wednesday's hearing stressed they believe Lehman did everything within its limited power to give itself a chance to survive, accounts at the time suggested Fuld was overplaying a weak hand by demanding too much of possible equity partners.

He said Wednesday that the firm was in discussions with as many as eight or nine possible capital providers at the time the firm collapsed. But his failure over the course of 2008 to secure a partnership deal of any sort suggests his openness to a merger is mostly retrospective.

In any case, Thomas Baxter, the general counsel of the Federal Reserve Bank of New York, said the point was moot because the Fed concluded it couldn't advance money to Lehman without running the risk of outsize losses.

The Bear Stearns episode in March 2008 taught the Fed that it couldn't prop up an investment bank without a guarantee of the firm's trading books, Baxter said.

Because Lehman was so much larger than Bear and because the markets had deteriorated even further in the intervening six months, the Fed concluded that securing a guarantee of Lehman's books could cost literally hundreds of billions of dollars.

And by this time, of course, private investors had made abundantly clear they wouldn't go anywhere near Lehman without federal backing.

"There was no investor appetite to continue to finance Lehman's operations" beyond the weekend, JPMorgan Chase (JPM) chief risk officer Barry Zubrow said.

Because the Fed aims to lend only on collateral that will prevent taxpayers from losing money, Baxter continued, the bridge idea was one that policymakers didn't seriously entertain.

"We thought it was a bridge to nowhere," Baxter said.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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