By Steven Rattner
Thursday, December 3, 2009.
When the Senate Banking Committee welcomes Federal Reserve Chairman Ben Bernanke for his confirmation hearing today, the questioning is sure to be sharp, yet another chapter in the unceasing second-guessing of the government’s handling of the Wall Street meltdown.
Almost since the first cracks in Wall Street’s facade appeared more than two years ago, commentators and politicians of all stripes have questioned whether the Fed and, equally, the Treasury made proper decisions as they faced the worst financial crisis in 75 years.
It is very much the Banking Committee’s responsibility to satisfy itself about Bernanke’s qualifications and the overall management of the financial crisis. It is also appropriate for other oversight groups to conduct their own inquiries.
But much of the barrage of criticism is unfair, and some of it is simply ignorant.
Take, for example, the drumbeat of criticism for the decision to let Lehman Brothers fail. Conveniently forgotten by critics is the fact that until the consequences of Lehman’s bankruptcy became evident, the refrain from all quarters after the bailout of Bear Stearns in the spring was that the next floundering bank needed to be allowed to fail to teach Wall Street a lesson (preserve “moral hazard,” to use the jargon).
Shortly after Lehman’s filing, Allan Meltzer, a distinguished monetary economist, commended the Fed for letting Lehman go, telling PBS that “within a few days, just a few days, Barclays was there buying up some of Lehman’s assets.” A year later, Meltzer had a different view: “Allowing Lehman to fail without warning is one of the worst blunders in Federal Reserve history.”
More recently, a government oversight report came out swinging against the handling of the AIG bailout, suggesting in particular that the Fed and the Treasury should have demanded concessions from the banks that were counterparties to AIG’s hundreds of billions of dollars of credit insurance contracts.
That criticism sounds good, but like much after-the-fact commentary, it’s off-base. Once the Fed and the Treasury concluded (correctly) that an AIG bankruptcy posed unacceptable systemic risks, the government immediately lost any bargaining power to demand concessions. The result was a very unfortunate windfall for the counterparty banks, but what was the realistic alternative?
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