Monday, December 29, 2008

Gordon Brown and the Lehman failure

It's an interesting story. Gordon has an almost comical emphasis on blaming decisions made in the USA for the global financial crisis. He regularly cites the subprime mortgage loan implosion as the ignition of the crisis but also the 15 September 2008 bankruptcy of Lehman Brothers as the accelerant -- the latter a generally recognized policy mistake that did send the crisis to a new level. But what was Gordon's role in it? He sees it as an American decision (as other accounts, such as this one from Andrew Gowers tend to do), as he said quite clearly in his pre-Christmas news conference --


And the system itself, the tripartite system [of financial regulation] working well.

Prime Minister:

Well I was talking about the tripartite system and the tripartite system is the Bank of England, the Treasury and the Financial Services Authority, and they came together to look at the big decisions that you have got to make in relation to the financial system. We had to make difficult decisions on Northern Rock. To be quite frank we didn’t want to nationalise Northern Rock, we would have preferred not to do it, but the market deteriorated. I think you have got to bear in mind that what actually happened last autumn, only a few months ago, was when Lehman Brothers collapsed in the States and wasn’t given support by the US government, that was their choice. A totally different set of events followed from that where people had no confidence in any financial institution at all and so that sparked a very different wave of actions that had to be taken and considered.

Here's the problem. The Wall Street Journal (subs. req'd) has a blow-by-blow account of that fateful weekend in September, and a non-decision by the UK government plays a key role in it. Specifically, Lehman Brothers believed it had a deal on the 14th, a Sunday, to be taken over by Barclays, but Barclays needed shareholder approval to confirm the agreement --

At Lehman that [Sunday] morning, Mr. Fuld [Lehman CEO] told his board of directors to gather at the firm's offices. By noon, he expected, the board would be able to approve Lehman's sale to Barclays.

One hurdle remained: To ink a Lehman deal, Barclays needed a shareholder vote. There was no way to get one on a Sunday. Barclays would need the U.S. or British government to back Lehman's trading balances until a vote could be held.

Government approval never came, though there are diverging views on why. Some blame the U.S. government for refusing to commit resources. Others say the British government refused to entertain a deal they worried would expose England (sic) to unnecessary risk.

This is crucial. Barclays was not looking for an open-ended government guarantee or a subsidy (its subsequent behaviour confirms its aversion to government capital infusions). Only a guarantee of Lehman as a counterparty until it could get shareholder approval to buy Lehman. It ended up owning chunks of Lehman anyway, but after the bankruptcy, the step which everyone agrees deepened the crisis to the point of no return.

So who in the UK government considered, but turned down, the Barclays request for a bridging guarantee of Lehman Brothers?

UPDATE 19 JANUARY 2009: The Wall Street Journal story is confirmed by a specific source --

The hitch was “much more technical,” Baxter [New York Federal Reserve’s general counsel Thomas Baxter] said.

“The problem for plan A relates to, what do you do in the period between the announcement of a merger and the actual closing of the merger?” Baxter said. He said plan A failed because Barclays couldn’t guarantee the trading obligations.

Barclays agreed to acquire Lehman after a syndicate of banks consented to backstop a new entity that would take over $55 billion to $60 billion of Lehman’s troubled assets, according to people familiar with the negotiations. The deal fell apart when the U.K.’s Financial Services Authority refused to sign off on the Barclays purchase that day and U.S. officials refused to take further steps to save the deal.

FINAL UPDATE 28 JANUARY: Perhaps the Davos Forum event looking at the critical 36 hours in the Lehman failure will shed light on the possible role of Gordon Brown or Alistair Darling in it.

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