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Wall Street did not fight the Bush Administration hard enough to save itself by preventing regulators from walking away from Lehman Brothers on that fateful weekend in September 2008, said John Thain Merrill Lynch’s former CEO.
None of the Wall Street banking chiefs “strong enough” during the fateful weekend of Sept. 13-14 meetings at the New York Federal Reserve Building to insist that then-Treasury Secretary Henry Paulson change its mind to a government-led rescue of Lehman, Thain told the Financial Crisis Inquiry Commission, according to audio files released late last week.
“We collectively, the group of us, we should have just grabbed them and shaken them and said, ‘Look, you guys cannot do this,'” Thain told FCIC interviewers in a Sept. 17, 2010, interview.
“Allowing Lehman to go bankrupt was the single biggest mistake of the financial crisis,” Thain said.
Worried that the government wouldn’t help Merrill Lynch, straining under losses on mortgage-related securities, Thain called Kenneth D. Lewis, then-CEO of Bank of America, immediately after hearing that Lehman would file the largest bankruptcy in US history and not be saved, to suggest a “strategic transaction.” Merrill’s board approved a $29-per-share deal, valuing the firm at about $50 billion, the next day, Thain said.
Bank of America would later receive $45 billion in two rounds of government aid, some of which was needed because of losses on Merrill’s assets. The firm repaid the funds in 2009.
Just days before Lehman’s demise, Paulson convened CEOs including Thain, Lloyd Blankfein of Goldman Sachs and Jamie Dimon of JPMorgan Chase to try to get the banks to help fund a rescue.
The banking executives said at that meeting their firms were weakened by the crisis and couldn’t contribute about $20 billion to backstop Lehman’s bad assets, Thain said.
Had Uncle Sam provided that support, the $700 billion Troubled Asset Relief Program may not have been needed, he said.
Barclays or Bank of America probably would have bought Lehman’s profitable operations, he said.
“The complete freezing of the credit markets that came after Lehman made the situation much, much worse,” Thain said. “It would’ve been much less likely that TARP and all the things that followed would’ve been necessary if Lehman hadn’t been allowed to go bankrupt.”
Paulson allowed Lehman to fail because of political considerations, including lawmaker criticism of the Bear Stearns rescue, said Thain, who is now CEO and chairman of commercial lender CIT Group.
The argument presented later by regulators that they lacked the legal authority to save Lehman was “never raised” during discussions that weekend, Thain said.
Lehman’s collapse and AIG’s bailout the same week contributed to the biggest rewrite of financial rules since the Depression as lawmakers sought to limit risk and create a way to unwind risky companies. Financial firms have gotten bigger and more systemically important in the last decade, Thain said.
“They’re more interconnected, there are fewer of them, and there are zillions and zillions of derivative contracts that connect them, all contributing to the ‘too big to fail’ problem,” he said.
Curtis Ritter, a spokesman for CIT, declined to comment, and Michele Davis, a spokeswoman for Paulson, didn’t immediately return a call.