I don’t like or agree with Soros, but I thought this was revealing:
In the past, whenever the financial system came close to a breakdown, the authorities rode to the rescue and prevented it from going over the brink. That is what I expected in 2008 but that is not what happened. On Monday September 15, Lehman Brothers, the US investment bank, was allowed to go into bankruptcy without proper preparation. It was a game-changing event with catastrophic consequences.
For a start, the price of credit default swaps, a form of insurance against companies defaulting on debt, went through the roof as investors took cover. AIG, the insurance giant, was carrying a large short position in CDS and faced imminent default. By the next day Hank Paulson, then US Treasury secretary, had to reverse himself and come to the rescue of AIG.
But worse was to come. Lehman was one of the main market-makers in commercial paper and a large issuer of these short-term obligations to boot. Reserve Primary, an independent money market fund, held Lehman paper and, since it had no deep pocket to turn to, it had to “break the buck” – stop redeeming its shares at par. That caused panic among depositors: by Thursday a run on money market funds was in full swing.
The panic then spread to the stock market. The financial system suffered cardiac arrest and had to be put on artificial life support.
How could Lehman have been left to go under? The responsibility lies squarely with the financial authorities, notably the Treasury and the Federal Reserve. The claim that they lacked the necessary legal powers is a lame excuse. In an emergency they could and should have done whatever was necessary to prevent the system from collapsing. That is what they have done on other occasions. The fact is, they allowed it to happen.
I don’t think Timothy Geithner is a wunderkind. I think he is directly responsible for this mess and he is being billed as some type of boy genius that will now save the day. Here is what his wikipedia page says about it: “he is believed to have played a pivotal role in both the decision to bail out AIG as well as the government decision not to save Lehman Brothers from bankruptcy.”
Plus, he is a tax cheat.
So I’ll use the Soros assessment that the Lehman bankruptcy was the catalyst and I say that Geithner was instrumental in that. Why do we think the same people that got us into the mess will be the ones that can get us out?
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