  Blame the Brits!
Reported by The Big Money on Thursday, 22 October 2009 (on October 22, 2009)
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I have plenty to say about the good points you’ve all raised. But I’ll have to do that in a subsequent post, because I’m all riled up over these damn Brits.
The British government hasn’t taken much flack for what happened in September, at least on this side of the pond. But Downing Street is inextricably involved in this saga. Is it the one who really dropped the ball on Lehman, even if it did so accidentally? The Lehman failure was obviously in the works for years, but there came a threshold moment where the bid to rescue it completely fell apart. And the country that said No Deal was Britain, not America.
Britain let Lehman Brothers go bankrupt.
The story is important enough to narrate in detail. These are the final events that led to the panic of September 2008. We begin with the background context:
Lehman is so desperate it doesn’t care who buys it.
The government is so desperate it doesn’t care who buys Lehman.
A consortium of Wall Street banks are ready to pitch in with emergency financing to help take ownership of Lehman’s toxic assets.
Barclays is ready to come to the rescue and buy Lehman outright, with the help of the private Wall Street financing.
Barclays is British, so it is subject to regulations American companies aren’t. This, as Sorkin writes, means Barclays needs a shareholder vote to make the transaction official, and they don’t have time for that.
The only way to bypass that requirement is if the government were to step in.
And this is where everything, if you’ll pardon a shared British and American colloquialism, goes to shit. I resume the numerical play-by-play, this time with my armchair comments in parentheses:
Britain’s Financial Services Authority tells the Americans they’re on their own, as it’s 3:30 p.m. on a Sunday, and without a proposal to actually evaluate, time is running out. Also, they’re switching some computer software that weekend, and Lehman has forced them to delay it long enough. The technicians are getting unhappy. (Yes. One of the reasons the global financial system toppled was because some programmers were getting antsy. Surely they would have been happy playing another game of Halo while they waited.)
The Americans force Christopher Cox—by all accounts a hapless, incompetent, inexperienced individual who happened to be in charge of the SEC—to call the Brits. Sorkin says Cox was the one to do it because Lehman technically fell under the SEC’s purview, so it made the most sense for him to pick up the phone. (Imagine Paulson, Geithner, Bernanke, and Cox as members of a high-school class assigned to do a group project on the French revolution together. While working on the project it’s obvious Cox doesn’t know what he’s doing. And yet, because Cox’s grandparents studied abroad in France, the group decides to make him present the group’s work to the class. And now imagine that the entire grade for the project is based on the quality of the presentation. This is how stupid an idea it was to put Cox on that call. You’re telling me Paulson, Geithner, and Bernanke hadn’t redefined enough legal boundaries already—the Bear Stearns deal, the Barclays/Lehman matchmaking, the Goldman Sachs conflicts-of-interest—that a more competent member of our financial team couldn’t pick up the phone? Grade: F on the presentation, F for effort, F on the whole project.)
Cox, predictably, fails. But because the Brits have turned petty! “Look, you should understand, one of the great problems for us at this end is not actually being properly kept in the loop of what you’re up to,” said Callum McCarthy, head of the British Financial Services Authority. “You must understand, we’re hearing things late in the day. We could have told you earlier which ones would run into problems and which ones wouldn’t.” (A note to Callum McCarthy: Suck it up. Should the Americans have been in better touch? Yes. But it’s not like we were dilly-dallying! Just look at Henry Paulson’s phone logs.)
Coming to his senses, Paulson gets involved and calls Alistair Darling, his contemporary in the UK. Darling has been talking for most of the day with his folks about whether to approve the Barclays deal. Sorkin says he had “deep misgivings” because Barclays didn’t have the time to inspect Lehman’s books thoroughly. (Oh, Alistair, you’re right! But being right here makes you so wrong historically. You know who else didn’t have time to inspect Lehman’s books? The counterparties, hedge funds, and money market accounts that were all tied into its rotting corpse. Which is why you should have just said yes.)
Paulson and Darling talk, but no dice. Darling won’t budge. Paulson later says Darling doesn’t “want to import our cancer.” (Well, Alistair, instead of cancer you got the plague.)
The team wonders whether to ask Bush to call Gordon Brown. They decide on no. (This is a point against the Americans. Would it have really been such a hassle for Bush to call Brown? Especially considering the gates of hell that were about to open?
Now, all of this is obviously benefited by hindsight. We know that letting Lehman spoil was a poor move now, and at the time governments weren’t as concerned. But this gets to a point we’ve discussed: whether Henry Paulson was a good Treasury secretary to have around during the crisis. I’m with Paul—we needed Paulson on that wall. The alternative is Darling, a man who failed to recognize the global nature of this crisis. In crisis, I’ll take overzealous over overcautious any day.
Links: Full news story
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