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Did the Fed play fair in Lehman case?

Steve Henn Oct 2, 2009

Did the Fed play fair in Lehman case?

Steve Henn Oct 2, 2009


TESS VIGELAND: It’s been more than a year now since Lehman Brothers faded into the history books. The bankruptcy of the century-old investment firm left hundreds of creditors waiting to be paid pennies on the dollar. Today’s Wall Street Journal reports that a court-appointed bankruptcy examiner is looking into whether the Federal Reserve improperly elbowed its way to the front of the line.

Marketplace’s Steve Henn picks up the story from Washington.

Steve Henn: In the days leading up to the Lehman bankruptcy, the Fed lent the investment bank billions. And after Lehman collapsed, it stepped in again to help unwind all of the bank’s pending deals.

Steve Jakubowski: It’s really the lender of the last resort for the economy and so it’s found it necessary to make sure these transactions cleared.

Bankruptcy expert Steve Jakubowski is at the Coleman Law Firm in Chicago.

Jakubowski: If the transactions didn’t clear, it’s like taking oil out of your engine.

The economy seizes up. As Lehman was collapsing, the Fed made very short-term loans to Lehman and other banks to keep the system’s wheels turning. When it was all over, the Fed got paid back first.

Now a year later, the bankruptcy court is asking, if by being first in line, the Fed was cutting off other creditors.

Vincent Rhinehart: It’s something that an examiner, I think, necessarily looks at — I don’t know that anything is ultimately going to come of it.

Vincent Rhinehart is a former Fed economist.

Rhinehart: Generally, the borrowing arrangements are written so that the Fed gets priority, so it’s intentional and they view it as effectively protecting taxpayers’ funds.

In this case — that goal of protecting the taxpayers — may not have played out exactly as intended. CitiBank and the Bank of New York ended up holding more than $130 billion in Lehman debt. Ultimately, they may just get just pennies on the dollar. And 12 months later the U.S. taxpayers have financed bailouts of both of those banks.

In Washington, I’m Steve Henn for Marketplace.

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