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

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.