Failed Lehman Rescue Efforts : Myths, Facts, and Lessons

The collapse of Lehman in mid September 2008 was a momentous event. Yet whether Lehman really had to fail is an issue that has not received the kind of scrutiny it deserves. The reason for that seems to be the public statement made by then Treasury Secretary Paulson and then Fed Chairman Bernanke that they did not have legal authority to lend to Lehman given Lehman's lack of adequate collateral, an official legal statement which, taken at its face value, left little meaningful scope for further inquiry. The present paper brings those officials' claim under closer scrutiny and concludes that they had the wherewithal to save Lehman within their legal authority. The paper goes on to make an economic case that Lehman should have been saved given a clear and present danger of a tidal wave of contagion in the event of a Lehman collapse