Why Did The Fed Let Lehman Fail?

New documents have been made public which raise questions about the decision to let Lehman fail.  They indicate that the issue of Lehman's solvency depended upon the value of Lehman's assets.  A bank is insolvent if the value of its liabilities exceed the value of its assets.  Two teams at the NY Federal Reserve made an effort to place a value on Lehman's assets.  One team determined that Lehman's assets were greater than its liabilities.  Another team determined that Lehman was insolvent.  Private banks were also asked to determine the value of Lehman's assets.  They placed a low value on Lehman's assets.

The principle players in the decision to let Lehman fail were the US Treasury Secretary, the Chairman of the Fed and the President of the NY Fed.  They decided to let Lehman go into bankruptcy.  That decision accelerated the run on the global banking system and led to the Great Recession.  Each of them claimed that they did not have the legal authority to rescue Lehman.

Several questions were raised about the decision to let Lehman fail.  If the Fed decided to rescue Lehman, the value of its assets would have risen.  The decision not to rescue Lehman caused the value of its assets to decrease in value.  Some argue that the Fed had the legal authority to rescue to rescue Lehman but it chose not to use that authority.  The Treasury Secretary made it clear that he did not want to be known as "Mr. Bailout" and that he was not prepared to use public funds to rescue Lehman.  The decision to let Lehman fail may have been made for reasons beyond the legal authorities of the Fed and the Treasury to provide the necessary support to the bank.