Working Paper: NBER ID: w22410
Authors: Laurence Ball
Abstract: Why did the Federal Reserve let Lehman Brothers fail? Fed officials say they lacked the legal authority to rescue the firm, because it did not have adequate collateral to borrow the cash it needed. This paper summarizes a monograph that disputes officials’ claims (Ball, 2016). These claims are incorrect in two senses: a perceived lack of legal authority was not why the Fed did not rescue Lehman; and the Fed did in fact have the authority for a rescue.
Keywords: No keywords provided
JEL Codes: E52; E58; E65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fed's assertion of lacking legal authority to rescue Lehman (G28) | incorrect (Y60) |
| Lehman had sufficient collateral to secure a loan (G33) | could have mitigated liquidity crisis (F65) |
| Fed's inaction (E52) | not legally mandated (J89) |
| Fed's inaction (E52) | choice influenced by political considerations and misjudgment (D70) |
| Fed facilitated Lehman's failure (G28) | restricting access to liquidity support (E51) |
| restricting access to liquidity support (E51) | directly led to bankruptcy (G33) |
| Failure to rescue Lehman (G33) | decision made by Treasury Secretary Henry Paulson (G28) |
| decision made by Treasury Secretary Henry Paulson (G28) | influenced by political opposition to bailouts and underestimated repercussions (F65) |