BULKY
`DOCUMENT
`
`(FILED ON PAPER - ENTIRE DOCUMENT EXCEEDS 100 PAGES)
`
`I Proceeding No.
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`j91219477
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`jFiling Date
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`j06/01/2016
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`jPartl 5 of j29 I
`
`Declaration of Ignacio V. Duran
`Exhibit C ( Cont.)
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`91219477
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`

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`Page 128
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`Lexis Nexis®
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`61 of 197 DOCUMENTS
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`Copyright 2009 Factiva ®, from Dow Jones
`All Rights Reserved
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`CTIVA
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`Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved.
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`mE WALL STREET JOURNAL.
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`The Wall Street Journal Online
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`September 15, 2009
`
`SECTION: OPINION
`
`LENGTH: 889 words
`
`HEADLINE: Lehman and the Financial Crisis;
`The lesson is that institutions that take trading risks must be allowed to fail.
`
`BYLINE: By John H. Cochrane And Luigi Zingales
`
`BODY:
`
`One year ago today Lehman Brothers filed for bankruptcy. The weeks that followed are among the most dramatic
`in U.S. history. They led to a massive government intervention in the financial system-an intervention that will likely
`change that system forever.
`
`Many people say that letting Lehman fail was the mistake that caused the financial crisis. To them, the lesson is that
`the government should never allow any "systemically important" financial institution to fail. If only Lehman had been
`bailed out, the story goes, we could have avoided much of a 45% drop in the S&P 500, a 4% drop in output, the rise in
`unemployment to 9.7% from 6.2%, and the $784 billion "stimulus" to top off a $1.59 trillion deficit.
`
`This story is false.
`
`The Lehman failure was not an isolated event. It was a movement in a dramatic crescendo of failures.
`
`Two weeks prior, on Sept. 7, the government took over Fannie Mae and Freddie Mac, wiping out much of their
`shareholder equity. On Sept. 16, the government bailed out AIG, lending it $85 billion. On Sept. 25, Washington
`Mutual, the nation's sixth-largest bank, was seized by the FDIC. On Sept. 29, Wachovia, the nation's seventh-largest
`
`RA Rf'T .A VS002192
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`Page 129
`Lehman and the Financial Crisis; The lesson is that institutions that take trading risks must be allowed to fail. The Wall
`Street Journal Online September 15, 2009
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`bank, was sold to avoid a similar fate. All this would have happened without Lehman. Meanwhile, the Federal Reserve
`and the Treasury Department went to Congress to ask for $700 billion for the Troubled Asset Relief Program (TARP).
`
`Which of these events set off the financial and economic crisis by freezing lending to commercial banks? The
`nearby chart shows that the main risk indicators only took off after Treasury Secretary Henry Paulson and Fed
`Chairman Ben Bemanke's TARP speeches to Congress on Sept. 23 and 24-not after the Lehman failure.
`
`On Sept. 22, bank credit-default swap (CDS) spreads were at the same level as on Sept. 12. (CDS spreads are the
`cost of buying insurance against default.) On Sept. 19, the S&P 500 closed above its Sept. 12 level. The Libor-OIS
`spread-which captures the perceived riskiness of short-term interbank lending-rose only 18 points the day of Lehman's
`collapse, while it shot up more than 60 points from Sept. 23 to Sept. 25, after the TARP testimony. (Libor-the London
`Interbank Offer Rate-is the rate at which banks can borrow unsecured for three months.)
`
`Why? In effect, these speeches amounted to "The financial system is about to collapse. We can't tell you why. We
`need $700 billion. We can't tell you what we're going to do with it." That's a pretty good way to start a financial crisis.
`
`Subsequent reporting explained why they did it: The Fed and Treasury had felt for months that they needed legal
`authority to do more bailouts, and a crisis might get Congress to vote for it. But at the time, all the public saw was that
`our government was in a complete panic.
`
`We inferred that the banks must be in much worse trouble than we thought. The ban on short sales of bank stocks
`the previous week could only reinforce that impression.
`
`It did not help that the TARP was such a transparently bad idea. The Fed and Treasury soon figured that out,
`settling on equity "injections" and a bank-debt guarantee instead. Floating a bad idea does not instill confidence.
`
`Would a Lehman bailout have averted a panic? The news would still be that Lehman failed, and markets knew
`bailouts would not last forever. After all, the Bear Stearns rescue in February had just postponed worse trouble.
`
`More deeply, Lehman's lesson cannot be that the government must always bail out every large financial institution.
`From the 1984 failure of Continental Illinois bank to the S&L crisis of the late 1980s, the Latin American bond defaults
`of the 1990s, the 1997 Asian crashes, the 1998 collapse of the Long-Term Capital Management hedge fund and now
`this mess, financial institutions are taking more and more risks, but their bondholders keep getting rescued.
`
`This crisis pushed our government close to its fiscal limits. The next one will be beyond what even our government
`can contain.
`
`The big banks know the government will bail them out, and they are already bigger, more global, more integrated
`and "systemic" than ever. They are making huge trading profits-profits that must someday tum to losses. Ifbrokerage
`and banking are "systemically important," they cannot be married to proprietary trading. Yet the financial-reform plans
`do not even talk about breaking up this marriage-they hope simply to regulate the behemoths instead.
`
`The blame-it-on-Lehman story leads to a dangerous complacency. Ifwe can persuade ourselves that the fault was
`just one policy mistake, forced on the feds by silly legal restrictions and not enough bailout power, everything can go
`back to the cozy way it was before.
`
`This is a convenient story for large banks that dominate the lobbying and communication effort. And it absolves the
`Fed and Treasury of facing up to their long string of policy mistakes.
`
`We don't pretend that we could have done any better. That's the point: A system with so much power vested in so
`few people, with so few rules, in which crises are managed with 2 am. conference calls, cannot possibly do better no
`matter how good the people at the top. Repeating the Lehman story lets us all ignore the fact that this system cannot go
`
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`Page 130
`Lehman and the Financial Crisis; The lesson is that institutions that take trading risks must be allowed to fail. The Wall
`Street Journal Online September 15, 2009
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`on.
`
`Messrs. Cochrane and Zin gales are professors of finance at the University of Chicago Booth School of Business.
`
`NOTES:
`PUBLISHER: Dow Jones & Company, Inc.
`
`LOAD-DATE: April 22, 201 I
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`DA Dr'T A V~l\l\")10A
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`Page 131
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`LexisNexis®
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`62 of 197 DOCUMENTS
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`Copyright 2009 Factiva ®, from Dow Jones
`All Rights Reserved
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`:ACTI
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`Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved.
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`THE WALL STREET JOURNAL.
`
`The Wall Street Journal Online
`
`September 15, 2009
`
`SECTION: REAL ESTATE; Pg. Cl
`
`LENGTH: 1481 words
`
`HEADLINE: Behind Lehman's Big Property Struggle
`
`BYLINE: By Carrick Mollenkamp and Lingling Wei
`
`BODY:
`
`A year after Lehman Brothers' collapse, the firm overseeing its bankruptcy is moving to restructure loans for 900
`properties to help salvage a battered $16 billion real-estate portfolio.
`
`The moves -- involving commercial real-estate properties ranging from huge apartment holdings to office buildings
`to a Miami condominium complex -- portend the strategies big U.S. banks are likely to undertake as they deal with their
`own troubled loans and buildings over the next 18 months, specialists say. In some cases, Lehman is generating new
`loans or even agreeing to buy condominium mortgage loans to keep projects afloat.
`
`Cleaning up this mess hasn't been easy. As the big securities firm bulked up its real-estate holdings, it ended up
`financing, for example, at least $2 billion in South Florida real-estate projects.
`
`"It's not a great time to sell today," says Bryan Marsal, chiefrestructuring officer and chief executive officer at
`Lehman, and head of Alvarez & Marsal, the advisory firm overseeing Lehman's bankruptcy proceedings. But he adds:
`"We are not passively waiting for a better market."
`
`Lehman's restructuring efforts could provide a template for other banks. U.S. banks and thrifts hold more than $1.2
`trillion in commercial mortgages backed by offices, hotels, shopping malls and apartments, according to Deutsche Bank
`
`DA Dr'T A V~l\l\'l1 o.::
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`Behind Lehman's Big Property Struggle The Wall Street Journal Online September 15, 2009
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`Page 132
`
`AG. Now, with property values down and credit still scarce, losses for the commercial-property lenders could total $115
`billion to $150 billion, according to a Deutsche report.
`
`Such losses were on display in Lehman's own portfolio, where one group of properties dropped in value by an
`estimated $5.4 billion between the weekend it filed for bankruptcy and Dec. 31. Those stemmed in part from from a
`deteriorating market and overly lofty "marks," or valuations, by Lehman before the bankruptcy, according to court
`proceedings.
`
`The 66 people overseeing the Lehman portfolio, in addition to 250 outside contractors, represent the "biggest
`real-estate workout department in the U.S.," Mr. Marsal says. Inside his office, a whiteboard details the projects his firm
`has been working on as it deals with creditors and federal bankruptcy court to wind down Lehman. Mr. Marsal said it
`could take three to five years to work through the loans and equity stakes in properties.
`
`The workout process is creating haves and have-nots. Among the Lehman borrowers that haven't been successful in
`restarting loans from Lehman following the bankruptcy, according to documents filed in the Lehman bankruptcy
`proceedings, are developers of Laurel Cove, a Williamson County, Tenn., golf-and-residential development. The loan
`for the project ended up with a Lehman unit in Bermuda and is being overseen in separate court proceedings. The
`developers have stopped the project with just nine of 18 holes completed. Philip Jones, president of Tentara Partners
`Inc., which is overseeing the project, said, "This project will be successful once all this is behind us."
`
`New details also are emerging about the borrowers that did business with Lehman. Among them is Las Vegas
`developer Kenneth Jowdy. Mr. Jowdy and other investors used Lehman loans to fund sprawling golf-course and
`residential developments in Mexico, Texas and Tennessee. Investors in one project allege in a suit filed in Los Angeles
`Superior Court in June that Mr. Jowdy falsified financial statements as part of his loan application to Lehman for the
`Mexican project and that Mr. Jowdy arranged for porn stars and strippers to attend company-funded functions.
`
`The group suing Mr. Jowdy allege Mr. Jowdy mismanaged the project and wasted millions of dollars. A spokesman
`for Mr. Jowdy said the Cabo San Lucas, Mexico, project is on track and a golf course will be open next month. The
`spokesman also said the suit offers no proof porn stars and strippers were hired.The spokesman says the lawsuit's
`allegations "are preposterous, absurd and not based in fact."
`
`In addition, distressed-debt buyers such as hedge fund Paulson & Co. have acquired Lehman debt and formed an
`ad-hoc creditors group monitoring Mr. Marsal's moves, calling for more disclosure to ensure creditors are kept up to
`date on decisions that could affect their return. A Lehman spokeswoman said the restructuring team has been
`communicating with all creditors and providing information in public filings as required by bankruptcy law. A
`spokesman for Paulson declined to comment.
`
`An advantage for Mr. Marsal is that the bankrupt Lehman doesn't have to worry about big write-downs. Other
`banks are less willing to take write-downs.
`
`U.S. banks have been unwilling to restructure real-estate loans because that would force them to mark down the
`value of their holdings and lead to increased capital costs, according to many specialists. Mr. Marsal says the loan
`restructurings that Lehman is undertaking today are a window into the types of loan workouts other banks will pursue
`this year and next.
`
`"A lot of banks don't want to take write-downs and take over properties. Now we're out of the business, so we don't
`have that [concern]," Mr. Marsal says.
`
`Lehman's efforts to deal with a Miami condominium project provide one look into how Mr. Marsal's firm is
`operating. In 2006 and 2007, Lehman and a subsidiary provided more than $522 million in construction and mezzanine
`loans to Miami developer WSG Development Co., which planned to use the money to build a 580-condominium project
`called Canyon Ranch Living-Miami Beach. The idea behind the project was that condo buyers would be able to utilize
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`DA Dr<T A V~l\l\'l1 Ot:
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`Behind Lehman's Big Property Struggle The Wall Street Journal Online September 15, 2009
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`Page 133
`
`spa and fitness facilities managed by Canyon Ranch, a well-known health and fitness facility operator. But after the
`project was completed in 2008, the project stalled. Just 209 units had been sold, so there wasn't enough money for WSG
`to repay debts owed to Lehman and its subsidiary. WSG didn't respond to requests for comment.
`
`Lehman had its own problems in 2008 as it tried to raise cash and stay afloat. In the spring of last year, for example,
`the Lehman subsidiary used the construction loans on the Miami project as collateral for a $238.9 million loan from
`Fortress Investment Group LLC, the private-equity and hedge-fund group that specializes in distressed debt.
`
`To close that loan, the Lehman subsidiary agreed to pay outsize interest of London interbank offered rate plus 6%.
`
`To prevent Fortress from foreclosing on the condo complex and to end the high interest payments due to Fortress,
`Lehman's restructuring team got court approval in June to pay off the Fortress loan. Fortress didn't respond to a request
`for comment.
`
`Mr. Marsal and his team faced another difficult choice. The Lehman unit had the option to foreclose on the project,
`but Lehman's restructuring team would have faced the same challenges in trying to sell the condos, according to court
`papers. So Lehman and Mr. Marsal launched a "mortgage financing program" that effectively puts Lehman back in the
`condo-lending business.
`
`Under a plan that received court approval, a lender is providing loans to condo borrowers and Lehman has agreed
`to purchase as much as $200 million worth of the condo loans.
`
`The project is moving forward. Mr. Marsal says sales have perked and that 32 units have been sold since May.
`
`Some restructuring moves also are helping other banks that had teamed with Lehman. One stems from the October
`2007 purchase of Archstone-Smith, a real-estate investment trust that owns 70,000 residential units, by a partnership
`between Lehman and Tishman Speyer Properties.
`
`To complete the deal, Lehman, Bank of America Corp. and Barclays PLC arranged $15 billion in financing, $9
`billion of which was sold to Fannie Mae and Freddie Mac. When the mortgage market seized up, Lehman retained
`about $3 billion of the loans, according to a bankruptcy court filing. Bank of America and Barclays were also sizable
`lenders on the deal, the document said.
`
`Soon after the deal closed, stock prices of apartment REI Ts fell sharply. Last year Archstone was generating cash,
`but not enough from apartment rent or selling assets to pay interest on the debt, according to people familiar with the
`situation. If the Archstone project fell into default, the lenders would have to put the debt on nonaccrual status, forcing
`the banks to set aside reserves for potential loan losses.
`
`In a move supported by Bank of America and Barclays, Lehman sought bankruptcy-court approval to provide
`Archstone $485 million in additional funding. Representatives for Barclays and Bank of America declined to comment.
`A Tishman representative didn't respond to a request for comment.
`
`That new funding, including $227 million from Lehman and the rest from Barclays and Bank of America, now is
`covering the interest costs to the banks in what is effectively a circular movement of cash that keeps the loan current.
`
`Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com and Lingling Wei at lingling.wei@dowjones.com
`
`NOTES:
`PUBLISHER: Dow Jones & Company, Inc.
`
`LOAD-DATE: April 21, 2011
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`Page 134
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`63 of 197 DOCUMENTS
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`Copyright 2009 Factiva ®, from Dow Jones
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`FACT I VA
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`(Copyright (c) 2009, Dow Jones & Company, Inc.)
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`THE WALL STREET JOURNAL.
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`The Wall Street Journal
`
`September 14, 2009 Monday
`
`SECTION: Abreast of the Market; Pg. Cl
`
`LENGTH: 983 words
`
`HEADLINE: Lehman Legacy Alters Global Markets --- Short-Sellers Took Flak as Stocks Fell, But Did Ban Help?
`
`BYLINE: By Tom Lauricella
`
`BODY:
`
`In the depths of the financial crisis a year ago, short sellers were blamed for driving some of the world's biggest
`financial institutions to the brink of ruin. Regulators around the globe responded with emergency bans on selling those
`stocks short.
`
`Those bans have nearly all disappeared. It isn't much harder now to bet against companies than it was before the
`crisis. The prohibitions didn't stop stocks from tumbling and some say hampered trading.
`
`The legacy of the crisis may tum out to be rules that address longstanding controversies with short selling and
`attempt to prevent selling frenzies like those that occurred last fall. Still, critics of short selling, including some in
`Congress, haven't stopped their calls for tighter rules, even though there is little evidence these restrictions are effective.
`
`Calling last year's ban a "disaster" for the smooth functioning of the stock market, Charles Jones, a finance
`professor at Columbia University, says the SEC has "moved toward a 'sand in the gears' approach of just slowing" the
`short sellers, he says.
`
`It is a similar story around the globe. In the United Kingdom, Australia, France and Germany, the focus is either on
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`Page 135
`Lehman Legacy Alters Global Markets --- Short-Sellers Took Flak as Stocks Fell, But Did Ban Help? The Wall Street
`Journal September 14, 2009 Monday
`
`increased disclosure of short positions or prohibitions on "naked" short selling -- selling the stock without having the
`borrowed shares to deliver to the buyer, something already outlawed in the U.S. and the subject of stricter SEC
`regulations.
`
`"The real story is that a much more stringent rule set on borrowing [stocks] has been made," says Brian Fagen, a
`managing director in the equities division at Barclays Capital.
`
`Last October, the SEC adopted a temporary rule -- made permanent this summer -- that bars a brokerage firm from
`shorting a stock for itself or another account if its client fails to deliver that stock within the time limits set by SEC
`rules.
`
`At the time the rule was adopted last fall, such failures to deliver were rampant in the market, fueling criticism that
`short sellers were flouting the rules and ganging up on stocks to drive them down and make big profits. In the first nine
`months of2008, the number of stocks with large numbers of shares that hadn't been delivered to investors for an
`extended period never sank below 407 issues and rose as high as 702, according to Wall Street Journal research. Over
`the past six months, the number of stocks on the "threshold securities" lists of major exchanges has dropped to an
`average of just 74 each day.
`
`Daily figures for shares that aren't delivered within the required three-day settlement period show a similar trend. In
`the 12 months through September 2008, 14 of every 100 shares traded weren't delivered on time. Since then, the rate of
`delivery failures is down to an average of four shares per hundred.
`
`Such a targeted approach is far from what happened a year ago. U .K. regulators acted first after the collapse of
`Lehman Brothers, banning new short selling of financial stocks on Sept. 18, 2008. The SEC followed quickly with its
`own ban on what would eventually total nearly 1,000 stocks -- roughly one-fifth of listed U.S. stocks. The SEC ban
`lasted until Oct 8.
`
`In the less than three weeks the ban was in place, the Dow Jones Industrial Average fell 16%.
`
`Later, a study by the agency's Office of Economic Analysis concluded that it was "long sellers" -- investors who
`had bought stocks thinking they would go up -- who were selling the most during stock declines. Short sellers, the study
`said, became more active when stocks rose sharply.
`
`Credit Suisse found the ban made stock pricing less efficient, which in tum can make buying or selling a stock
`more costly for investors. The firm's data showed the difference between prices at which banned stocks could be bought
`and sold, the bid and asked prices, doubled during the ban. After the ban was lifted and short selling slowly resumed,
`spreads fell back to about 65% above preprohibition levels the third week of October.
`
`Traders expect regulators outside the U.S. to take their cues from the SEC. But ifthe markets become volatile
`again, some say they would act on their own. The Australian Securities and Investments Commission warned that it
`"would not hesitate to reimpose the ban immediately" if it felt short-selling could potentially harm Australia's financial
`system.
`
`The SEC is still considering a significant change, involving a new version of the "uptick" rule, which essentially
`allowed short sales only at a price higher than the previous trade -- a rule deemed outdated and eliminated in 2007.
`During the crisis, the lack of an uptick rule was cited by many as enabling short sellers to drive stock prices lower.
`
`Under consideration is a proposal barring short sellers from initiating a trade, on the theory that would make it
`harder to continuously sell a stock at lower and lower prices. Instead, the short sellers could only sell their borrowed
`shares when another investor places a buy order. Investors who already owned a stock and wanted to sell would face no
`restrictions on selling.
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`RA RC'T. A V4':0f\11 QQ
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`Page 136
`Lehman Legacy Alters Global Markets --- Short-Sellers Took Flak as Stocks Fell, But Did Ban Help? The Wall Street
`Journal September 14, 2009 Monday
`
`The SEC is seeking comments on its proposals, including whether new rules should be in place all the time or
`triggered when a stock posts a big decline, such as a 10% drop.
`
`Dan Mathisson, a managing director at Credit Suisse, argues that the experience of last year's ban shows that
`limiting short selling hampers the broader market. But if a rule is implemented it should be with a trigger, he says.
`"Without the circuit breakers it's a bit ridiculous. Why slow down shorting on stocks that are shooting up?"
`
`Columbia University's Mr. Jones notes the vitriol aimed at short sellers has faded a year after the crisis. "When
`stock prices are tanking, people hate short-sellers," he says. "Right now stock prices have been rising, so you don't hear
`as much about the 'evil' short sellers."
`
`Tom McGinty contributed to this article.
`
`Short Spreads
`The difference between bid and asked prices on stocks subject to
`the short-selling ban compared with the Dow Jones Industrial
`Average, In hundredths of a percentage point.
`
`Ban period
`
`II Ro:;tri::-t,;-d :;tocks
`i::cH :..c
`1~i
`
`80
`
`60
`
`16
`
`12
`
`8
`
`4
`
`0
`
`12
`Sept. 2008
`
`19
`
`26
`
`3
`Oct
`
`10
`
`17
`
`24
`
`License this article from Dow Jones Reprint Service
`
`NOTES:
`PUBLISHER: Dow Jones & Company, Inc.
`
`LOAD-DATE: May 9, 2013
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`Page 137
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`64 of 197 DOCUMENTS
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`Copyright 2009 Factiva ®, from Dow Jones
`All Rights Reserved
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`FA TIVA
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`(Copyright (c) 2009, Dow Jones & Company, Inc.)
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`THE WALL STREET JOURNAL.
`
`The Wall Street Journal
`
`September 14, 2009 Monday
`
`SECTION: Pg. Al
`
`LENGTH: 2759 words
`
`HEADLINE: Lehman's Legacy: Government's Trial and Error Helped Stem Financial Panic
`
`BYLINE: By David Wessel
`
`BODY:
`
`It was only a year ago that the world economy was enveloped in a financial panic of such dimensions that, if one
`believes Federal Reserve Chairman Ben Bernanke, it threatened to produce a calamity as bad as the Great Depression.
`Today, the economy is far from vigorous. Unemployment remains high. Huge swaths of the financial system remain on
`government life-support. But the global recession appears over, and now forecasters are arguing over the pace and
`sustainability of recovery. Leaders of the world economy are breathing an audible sigh ofrelief, and talking about the
`"ex it strategy."
`
`President Barack Obama goes to Wall Street Monday, the anniversary of Lehman Brothers' collapse, to deliver a
`cautious victory speech. He will discuss the administration's plans "to wind down government involvement in the
`financial sector," and will push for immediate action on regulatory changes needed to prevent future crises. With Wall
`Street executives, as well as government officials, in attendance, the president also will admonish "to avoid a return to
`the practices on Wall Street that led us to the financial crisis and to recognize their obligation to help produce a wider
`recovery on behalf of the American people."
`
`With a modicum of hindsight now available, do governments and central banks deserve credit for preventing
`catastrophe? The early verdict from most scholars, executives and government insiders is yes.
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`Lehman's Legacy: Government's Trial and Error Helped Stem Financial Panic The Wall Street Journal September 14,
`2009 Monday
`
`On the question of which of dozens of extraordinary interventions -- rock-bottom interest rates, surging government
`spending, billions of taxpayer dollars injected into banks, sweeping government guarantees -- made the biggest
`difference, there's less agreement.
`
`"It was a period of tremendous experimentation," says Columbia University economist Frederic Mishkin, who left
`the Fed board in August 2008. "When you're faced with a crisis of this magnitude, if you take the view that every
`measure that we take has to be exactly right, you don't do anything."
`
`Experts say the leading candidates for most-successful moves are those that leveraged the credit and credibility of
`the U.S. government to replace broke and beleaguered private financial institutions and markets. The moves shored up
`rapidly dissipating confidence in the financial system before panic damaged it irreparably, and kept credit flowing while
`bankers and government officials debated how to rebuild banks' depleted capital.
`
`Specifically, the Treasury rushed last fall to shield money-market mutual funds from what resembled a
`I 9th-century bank run, and the Fed bypassed banks and markets by giving loans to credit-starved industrial companies.
`Then the government force-fed capital to the banks and, perhaps more importantly, guaranteed nearly all new bank
`borrowing so banks wouldn't all shrink simultaneously. More recently, the Treasury's "stress tests," to the surprise of
`their many critics, allowed big banks to take steps crucial toward renewed health.
`
`One sign of success is the parade of people stepping up to take credit for what seemed, just a few months ago, an
`unpopular bailout of Wall Street. Mr. Bernanke, in speeches and interviews, recites the litany of Fed innovations.
`Former Treasury Secretary Henry Paulson is finishing a book that highlights the political risks he took last year to save
`the economy. Mr. Obama and Treasury Secretary Timothy Geithner emphasize steps taken since January, a case that
`Treasury will detail in a report to be issued Monday that it calls "The Next Phase."
`
`A big question will be debated for decades: Whether Mr. Bernanke and Mr. Paulson could or should have kept
`Lehman Brothers from bankruptcy a year ago this month. They insist today that Lehman was so battered it hadn't any
`collateral to secure a Fed loan; their critics say there must have been a way had there been the will. By a 3-to- I margin,
`three dozen economists surveyed by The Wall Street Journal reject the Bernanke-Paulson claim that they were legally
`impotent as Lehman teetered.
`
`Lehman's collapse coincided with and contributed to a classic panic, breeding such distrust among banks that they
`were reluctant to lend even to each other. In the weeks that followed, the Fed and Treasury leapt to keep insurance titan
`American International Group Inc. from following Lehman into bankruptcy proceedings. Messrs. Paulson and Bernanke
`begged Congress for $700 billion, initially saying they would buy bad assets but instead pumping the cash directly into
`banks. At the urging of the two men, the Federal Deposit Insurance Corp. stamped the U.S. government guarantee on
`newly issued debt of nearly all banks.
`
`The consensus inside and outside government is that the deep recession would have been even deeper had these
`steps not been taken. "The financial markets were close to collapsing. Consumer spending already was dropping," says
`economist Anil Kash yap of the University of Chicago's Booth Graduate School of Business. "If they had said:
`'Liquidate! Wring out the excesses!' it would have been substantially worse."
`
`There are dissenters. Stanford University economist John Taylor says Lehman was "a jolt," for sure, but he
`observes that financial markets didn't panic immediately. Rather, he argues, it was the government's response -- the
`muddled roll out of Treasury's $700 billion Troubled Asset Relief Program and frightening Bernanke-Paulson rhetoric -(cid:173)
`that provoked panic. "They said [to Congress]: 'If you don't do this, and even if you do, it could be the next Great
`Depression,"' he says. "Those things, I think, were the worst."
`
`Mr. Bernanke scoffs at that. A "strong and unprecedented international policy response ... averted the imminent
`collapse of the global finance system," he said recently. Mr. Paulson has said he sees the situation similarly. Mr.
`Geithner, meanwhile, seeks credit for what was done last year, while he headed the New York Federal Reserve Bank.
`
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`Lehman's Legacy: Government's Trial and Error Helped Stem Financial Panic The Wall Street Journal September 14,
`2009 Monday
`
`He said Thursday that those efforts "succeeded in achieving the vital, but narrow, objective of preventing a catastrophic
`systemic meltdown."
`
`Large doses of monetary and fiscal policy -- the Fed pushing interest rates to zero in December 2008 and the blast
`of tax cuts and spending increases that Mr. Obama pushed -- appear to be boosting the economy now, most economists
`agree. And even most of those critical of the Fed's handling of Bear Steams, Lehman and AIG concede that after those
`steps were taken, the global financial system needed government intervention. Economists, officials and other observers
`say that among the more unusual measures, the following had the most oomph over the past year.
`
`In September 2008, top officials focused on the aftermath of Lehman's bankruptcy didn't think that any sizable
`money-market fund still had Lehman short-term IOUs in its portfolios, the officials now acknowledge.
`
`They were wrong. The original money-market fund, the $63 billion Reserve Primary Fund, did. Even before it
`became public that losses on Lehman IOUs meant the fund couldn't maintain the traditional $I-a-share price, people
`began to pull billions out of that fund and others in what was a classic run. In the 24 hours after the Lehman bankruptcy,
`Reserve Primary Fund investors tried to withdraw $24.6 billion, less than half of which was actually paid to them.
`
`Bank deposits have been insured by the FDIC since the 1930s, but $2.5 trillion in money-market funds weren't.
`That didn't stop the Treasury and Fed from rushing to the rescue. The Treasury, which didn't yet have any TARP
`money, dipped into a kitty created decades ago to support the U.S. dollar, and guaranteed money-market investors that
`they wouldn't lose their money.
`
`The worry wasn't only the confidence and savings of millions of Americans who had money in the funds, widely
`consider nearly as safe as insured bank deposits. The nation's industrial corporations had come to rely on short-term
`borrowing from the money-market funds, selling the funds short-term IOUs called commercial paper. Money-market
`funds had become a parallel banking system, taking household savings and lending to corporate borrowers -- but
`without any of the shock absorbers that conventional banks had.
`
`So while the Trea