One Bank's Failed Attempt At Convincing Paulson And Bernanke It Was Too Big To Fail

Tyler Durden's picture

There was a time when the US would not guarantee the existence of every bank in perpetuity. When weak organizations, with or without untenable balance sheets would have to adapt to survive or simply disappear. It was known as capitalism. And it was about to change completely. However before it did, in those fateful nights before Lehman was not given the taxpayer capital "get out of bankruptcy free" card that Hank Paulson and Ben Bernanke subsequently handed out with such abandon to all other financial firms, Dick Fuld attempted to warn Chairman Ben and Secretary Hank about what would happen if Goldman got its wish of destroying its number one competitor in fixed income capital markets.

His warnings, as prescient as they may have been, fell on jaded, conflicted and unsympathetic ears. The chaos that ensued nearly destroyed the financial system, and has doomed generations of Americans to a life where the constant need for beneficial debt purchasers means that the US is now a state whose imminent default is simply one failed Treasury auction away (yet Moody's believes that the US is a safely rated AAA credit).

Just like Dick Fuld will wonder until his last day why Paulson and Bernanke allowed Lehman to fail, so will the rest of the financial world. Whose gain was Lehman's loss? The answer is so obvious, that nobody has the courage to press a full inquiry. Yet the real question is why did the Federal Reserve and the US Treasury, which by proxy represented Goldman Sachs through the actions of its non-recusing Secretary, so blatantly ignore the warnings presented black on white by Fuld. Among the points in the presentation obtained by Zero Hedge:

  • Repos default: Financial institutions liquidate Lehman repo collateral
  • Repo defaults trigger default of a significant amount of holding company debt and causes the liquidation of hundreds of billions of dollars of securities
  • Lehman swap agreements include cross default terms allowing counterparties to liquidate billions of dollars of trades and collateral at the time of their choosing. Failed trades escalate exponentially
  • Lehman trading, middle office and operations inundated by massive numbers of transactions
  • Lehman loses all control of its financial position
    • Massive global wealth destruction
    • Impacts all corporations and financial institutions
    • Retail investors/retirees assets are devastated
    • Enormous flight to quality causes flight from risk assets and financial institution capital
    • Liquidity evaporates for virtually all asset classes
    • Global economy deterioration at unprecedented levels


Only in the firm's last hours was it willing to come on the record with a true representation of reality. Alas it was too late, but just in time for firms like Goldman to set off on course of becoming unrivaled overlords of Wall Street and to have 97% profitable trading days in any given quarter.

Zero Hedge close friend Mark Pittman and colleagues have produced an unrivaled chronology and overview of the events that brought Lehman down. The links are here and here and here. His attempt to piece the various conflicts should be used as a precursor to an extended investigation by the Attorney General into just whose interests it was that Hank Paulson was serving at this critical time in America's history, and why it is that Ben Bernanke and Tim Geithner continue to march on this path of perpetuating the wealth destruction for hundreds of millions of Americans by funnelling their (rapidly devaluing) tax dollars into flawed causes, which only benefit the financial oligarchy.

What is certain, is that neither Paulson's, nor Bernanke's actions, have forestalled another bubble collapse, and in fact, through their actions have made a certainty that we are currently living in the last bubble: one whose viability is tied with the existence of America itself. Yet this bubble too will pop, and when it does and the wealth destruction, foretold in the Lehman presentation, will be exponentially more pronounced than what even Dick Fuld could imagine. But by then the Blankfeins of the world will be on a privately purchased island far, far away, leaving a destitute and bankrupt America to fend for itself. One can hope (but not expect) that whoever is currently in power, and has not been purchased by Wall Street's power interests, can stop the damage before it is terminal. One can also hope that these same people are not being currently tempted to jump on the same plane that Blankfein will be on when everything unravels.

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nope-1004's picture

Government is a pig.

jm's picture

And extremely dangerous in every respect at this point.  They are pursuing a policy of total control, and they end up with either suffocating us all or end up with total destruction.

You can't put the moral hazard back in the bottle at this point.

RobotTrader's picture

Here are the "Fab Five", obviously too big to fail...



Hedge Fund Crash

Anonymous's picture

AIG at 40 +/-, what a frigging joke! If you take away the taxpayers money, whats left????

Jim B's picture

What reality puts AIG at $40.  Without our money they would not exist!  It must be some good drugs!

Anonymous's picture

Really a $2 stock because of the 1 for 20 reverse split. But even that is at least $2 too expensive!

Silver Bullet's picture

Safest equities to buy: Citi, AIG, Fannie and Freddie.

We (feds) are not only to pot commited to let these institutions to fail, we are also to deep to let the share price to go to zero.

mule65's picture

Short mauling time!

MinnesotaNice's picture

The chaos that ensued nearly destroyed the financial system, and has doomed generations of Americans to a life where the constant need for beneficial debt purchasers means that the US is now a state whose imminent default is simply one failed Treasury auction away..

Its only fitting that the USG lives Treasury Auction to Treasury Auction... like the it's citizenry lives unemployment check to unemployment check.


Anonymous's picture

What goes up must come down!

Anonymous's picture

Wrong. Sir Isaac Newton is currently at Guantanamo undergoing enhanced interrogation techniques.

RobotTrader's picture

Here are some more crack-addled BDI junker plays on fire today:


Chart Engine

Daedal's picture

As long as the public is complacent, and it currently is, then our govevernment will continue to march the peoplemmings off the cliff. The tipping point will come at some point, and there will be some sort of revolution when the veil of ignorance no longer overshadows the vast majority of the public.

Steak's picture

Ok this is something that REALLY gets under my skin.  If I'm off base here I would love to be corrected.  Frankly I think it is sheer lunacy to say letting Lehman fail caused the crash.  Its a convenient excuse used by those with a lack of imagination or an ass to cover.

Every big investment house in the US knew that Lehman was on the ropes.  It was also widely held conventional wisdom that the govt would bail Lehman out of this pickle.  So the investment houses did what they've been trained to do.  They placed leveraged bets in all their myrad forms on Lehman debtholders being backstopped.  When the backstop didn't come the investment banks were forced to liquidate assets to cover the losses and a mini deflationary spiral ensued.

The market crash was because hubiristic banksters across the spectrum saw bets go bad and were forced to cover...NOT because Lehman's failure in itself destabalized the system.

That whole gun to the temple of taxpayers argument was bullshit then and its bullshit now.  The system will collapse because the foundations are rotten, and we fail ourselves if we believe for one second that to save the banksters is to save the world.

Jim B's picture

Agreed!  The core of system is rotten with debt and leverage

Daedal's picture

Not to put words in the author's mouth, but I'm inclined to think he/she would agree with you. The point of the article, I think, is to demonstrate that (while rightfully not jusftified) Lehman was too big to fail based on our Government's definition, and it was still allowed to fail b/c Government was in the pocket of GS... And therein is part of the 'rotten' problem.

Miles Kendig's picture


The issue of TBTF was cemented by the forced liquidation of Lehman through bankruptcy creating the narrative that this could not be allowed to happen again to safeguard America itself.  What a racket!  The forced destruction to 30 trillion to create 24 trillion and a monopoly gift wrapped with our tax money and what remains of our "assets".  All powered through the narrative of fear.  Time to call their bluff.

TumblingDice's picture

Great article. The thing I want to know is where that plane is headed. My best guesses are Brazil, New Zealand or Switzerland.

Ned Zeppelin's picture

Time for Paulson to take the perp walk he so richly deserves. Where is Cuomo and is the warrant ready yet?

Anonymous's picture

Post industrial business model:

Buy a bank replace management with your co-conspirators. Go on an M&A gobblefest of other smaller banks consolidating large sectors of finance.
Make sure you write plenty of options making you indispensible to your counterparties.
Lend, lend, lend on the Ponzi principles after coopting gov't and regulation to weaken any restraints.
Make fantastic returns early in the cycle where you bonus yourself and cronies unbelievable sums while unloading skyhigh stocks to the 401K, retail investors, widow&orphan crowd. Buy options against your own soon-to-explode portfolio. Let the carnage begin (having shorted the bank's shares hard). Crash the market.
Have government use dilutional funny money and taxpayer backing to recapitalize somewhat. Buy stocks at the low on inside info, play games with gov't collusion in debt purchases, use funny money to game commodities, equities, etc.

Wait for wave 2, 3, 4 of the same to play the up/down cycle until all the nation's gold flows to you.


Move out with your yachts, jet aircraft, and gold bullion to an undisclosed far off and well protected location to live in high style (Paraguay).

Watch it burn to the ground.

Now that's capitalism writ large.

Anonymous's picture

Maybe Fuld told Paulson too many time to fuck himself in the past. You would think they are all grownups. Maybe, just maybe, it is a kindergarten all over again.

ptoemmes's picture

Perhaps this will get it's own topic.


All I have to say is you're shittin' me.  I/we should not be surprised I suppose.


Sweeping regulatory reform of the financial sector—thought to be a 2009 legislative given just four months ago—may now come down to a piece-meal approach, with the White House and its allies happy to see a couple prized components signed into law this year.

“I think it’s unraveling,’ says former FDIC Chairman William Isaac. “It is hard for me to see how this legislation gets done this year.”

Though no one is saying that publicly on Capitol Hill, advocates are facing a lack of momentum going into the current session.





Silver Bullet's picture

Finally, some good news. Oh wait, more of the same. I'm sure all this talk of financial regulation reform will continue to get even less play through the msm.

Gordon_Gekko's picture

Death by guillotine is not enough punishment for these a--holes.

Sancho Ponzi's picture

DRYS Top 5 holders include RenTec, Fidelity Investments and Fidelity International. What a shock!


FreddyInBangkok's picture

are BananaB & CrookedP worth more alive to us than dead?

very simple question.

FreddyInBangkok's picture

fact is this crowd has caused Western people masses gross loss of face

which loss is unforgiveable. no different east or west.

i'm thinking Vlad the Impaler's sort of terms ... no rage or anger




FreddyInBangkok's picture

"One can hope (but not expect) that whoever is currently in power, and has not been purchased by Wall Street's power interests", ...


small hope. Euro royals & their reps dispersed across the globe ... a thousand years of plutocracy doesn't end here. more like 5000 years. remember Maximus Pontificus happened upon Rome at precisely the right monent.

Anonymous's picture

What a wonderful world!

The joys of Govt-Corp Fascism:

February 1, 2006 - Ben Bernanke appointed Chancellor of Germany, I mean the Federal Reserve.

May 2008 - Reichs Chancellor Hank Paulson pushes through stimulus package for re-armament of Germany, I meant US economy.

Weekend of Monday Sept. 13, 2008 - Night of the Long Knives.

Hank Paulson finally triumphs over detested SA, (I mean Lehman), enemy leader Richard Fuld. Rumor has it that Fuld was murdered while caught with pants down having sex with Spintrians.

March 9, 2009 - kristallnacht, night of shattered dreams, rebirth of 1000 year Fascist Reich. Or at least 1000 days of Fed induced bubble magic.

August 25, 2009 - Chancellor Bernanke appointed Führer und Reichskanzler of Greater Germany, again I mean the North American Union.

March 12, 2010 - Mexico absorbed via de facto annexation into Greater Germany, again I mean North American Union, known as the Anschluss.

June 22, 2012 - NAU invades new Soviet Union formerly known as Venezuela for Lebensraum and Oil.

August 15, ? - Global Govt-Corp Fascist Empire collapses under own weight after years of endless wars and untold deaths into the billions.

Anonymous's picture

"It was known as capitalism". Ha!

The good old legend of "government-independent capitalism"...

Capitalists and the Governments had a love story for centuries, since the begginings of capitalism...

Make a search for:

Dutch West India Company

Dutch East India Company

British East India Company

Japanese Zaibatsu

Otto von Bismarck and german private companies in the 19th century (Krupp AG, Thyssen AG, Bayer AG, Deutsche Bank...)

"Modern state is just a committee for managing the common affairs of the whole bourgeoisie" (Karl Marx)

agrotera's picture

Damn it, i hate to be accused of being a drunken sailor but anyonw who was paying the f@#$ attention noticed that the Lehman trade totally helped  their survivors get throught til the secret treasury pass the money out bankheist after F@#$%^%* TARP was passed. We live in a F@#$$%%^ banana republic... Until the public understands the power that the privately held federal reserve holds, we are perpetually F@#$%^!!!!!!!!!!!!!!!!!!!!!!!!!!!

Abolish the f@#$%^& Fed and put in jail all the banksters who made laws to make legal the bankheist of2008!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!












Anonymous's picture

Your third link is the same as second ... the third installment is actually at