WEBVTT - 38: The Fed Made a Massive Mistake Letting Lehman Go 0:00:07.320 --> 0:00:10.520 Hello, and welcome to add thoughts. I'm Tracy Alloway, executive 0:00:10.600 --> 0:00:13.600 editor at Bloomberg Markets, and I'm Joe wasn't all managing 0:00:13.680 --> 0:00:17.280 editor at Bloomberg Markets, so Joe. I was away for 0:00:17.360 --> 0:00:21.200 a few days earlier this month, and while I was away, 0:00:21.560 --> 0:00:26.160 this paper was published with the very intriguing title of 0:00:26.440 --> 0:00:29.960 the Fed and Lehman Brothers. Did you read it? Uh? 0:00:30.240 --> 0:00:32.800 If I'm going to be completely honest, I haven't read 0:00:32.800 --> 0:00:36.159 the entire thing, but I know that it's making quite 0:00:36.760 --> 0:00:41.000 some waves in the world of law and economics and 0:00:41.200 --> 0:00:45.960 banking because it has a provocative thesis about how Lehman 0:00:46.200 --> 0:00:49.720 was let to fail and whether the official story really 0:00:49.760 --> 0:00:53.920 matches what happened. Right. So it was penned by Lawrence Ball. 0:00:54.080 --> 0:00:58.080 He's a professor of economics over at Johns Hopkins University. 0:00:58.160 --> 0:01:01.560 He's also research associate at the National Bureau of Economic 0:01:01.600 --> 0:01:04.520 Research and a visiting scholar at the I m F. 0:01:04.920 --> 0:01:07.800 He is going to be our guest for today, but 0:01:08.040 --> 0:01:11.120 just before we start, you know, let's talk about the 0:01:11.120 --> 0:01:14.199 paper a bit, because, yes, you're right, the thesis here 0:01:14.600 --> 0:01:18.240 is that the FED essentially had a choice when it 0:01:18.280 --> 0:01:21.639 came to letting Lehman Brothers go back in two thousand 0:01:21.680 --> 0:01:24.160 and eight, and that when it decided to let Lehman 0:01:24.240 --> 0:01:27.160 Brothers go, that ended up being a massive mistake for 0:01:27.200 --> 0:01:31.600 the financial system, which is provocative because you'll remember that 0:01:31.720 --> 0:01:34.720 people like Ben Bernanky were quite adamant at the time 0:01:34.760 --> 0:01:37.520 that they did not have an option here. They had 0:01:37.600 --> 0:01:40.760 to let the bank fail. That's right. The basic argument 0:01:40.880 --> 0:01:43.960 at the time that the FED said was our our 0:01:44.000 --> 0:01:47.000 hands were tied. There are clear laws about when we 0:01:47.160 --> 0:01:51.600 can lend to a bank that's in distress. Lehman wasn't 0:01:51.600 --> 0:01:55.639 solvent and so forth, and they've stuck to that line 0:01:55.880 --> 0:01:58.800 after several years, even though we know what a huge 0:01:58.800 --> 0:02:02.320 disruption the collapse of Lehman cause. So it's a big 0:02:02.320 --> 0:02:04.800 deal if you know, you go back and say, actually, 0:02:04.840 --> 0:02:07.800 they could have they could have potentially build them up. 0:02:08.000 --> 0:02:10.119 And there's one other short thing I want to say 0:02:10.160 --> 0:02:13.400 about this paper before we begin. It is two hundred 0:02:13.480 --> 0:02:17.640 eighteen pages long. It doesn't have an abstract, you know, 0:02:17.760 --> 0:02:21.880 the summary that normally comes with these kinds of academic papers. 0:02:22.280 --> 0:02:24.880 And it's also kind of unusual in that when you 0:02:24.960 --> 0:02:29.120 think about academic research, especially in finance and economics, there's 0:02:29.160 --> 0:02:33.360 usually a lot of mathematical formula regression analyses things like that. 0:02:33.400 --> 0:02:36.240 This one is different because it kind of relies on 0:02:36.320 --> 0:02:39.280 a lot of information that's already out there, things like 0:02:39.360 --> 0:02:43.680 the Lehman Brothers bankruptcy examine or report of the government 0:02:43.720 --> 0:02:47.280 inquiry into the financial crisis, things like that. It doesn't 0:02:47.320 --> 0:02:50.720 read like your usual academia, right. It's almost more of 0:02:50.760 --> 0:02:54.200 a piece of investigative journalism, isn't it. Yeah, exactly. So 0:02:54.639 --> 0:02:57.200 I'm really excited to have Lawrence on the show. Let's 0:02:57.200 --> 0:03:09.160 bring him in now, Hi, Lawrence, thanks for joining us today. Hello, 0:03:09.400 --> 0:03:11.919 thank you for joining us, Lawrence. Oh, you're welcome. I'm 0:03:11.919 --> 0:03:15.720 happy to talk, all right. So let's start at the beginning. 0:03:16.000 --> 0:03:20.960 What prompted you to choose this particular topic for research, 0:03:21.160 --> 0:03:24.520 given that you know, it's now almost a decade from 0:03:24.919 --> 0:03:27.840 Lehman Brothers collapse, and a lot of people would be 0:03:27.919 --> 0:03:31.360 happy just forgetting that it ever happened. Well, first of all, 0:03:31.360 --> 0:03:34.320 I started it four years ago, so it's four years 0:03:34.400 --> 0:03:37.880 less uh far in the past when I started. And 0:03:38.480 --> 0:03:42.440 there's a basic motivation. Like most macro economists, I was 0:03:42.680 --> 0:03:46.240 interested in what caused a great recession? And the answer 0:03:46.400 --> 0:03:49.240 is the financial crisis? What was the big event and 0:03:49.280 --> 0:03:53.440 the financial crisis Leman Brothers? So why did Lehman Brothers fail? 0:03:54.040 --> 0:03:58.000 And like a lot of people, I had some doubts 0:03:58.040 --> 0:04:01.320 about the story that we couldn't save them, even though 0:04:01.360 --> 0:04:04.960 we couldn't save everybody else. So I just started looking 0:04:04.960 --> 0:04:10.280 into that. And you mentioned the Bankruptcy Examiners report and 0:04:10.280 --> 0:04:13.720 the Financial Crisis and Greek Commission report. There's quite a 0:04:13.760 --> 0:04:18.960 bit of easily accessible information from these investigations. A lot 0:04:19.000 --> 0:04:22.560 of people give opinions about the crisis without knowing that's 0:04:22.560 --> 0:04:24.320 actually there are actually a lot of facts out there 0:04:24.360 --> 0:04:26.800 that you can look up. So you mentioned that you 0:04:26.839 --> 0:04:31.640 were skeptical of the original story that was told. Um, 0:04:31.680 --> 0:04:34.000 you know, give us yours to sink summary of that 0:04:34.160 --> 0:04:37.800 story and what tipped you off earlier on or early 0:04:37.880 --> 0:04:42.320 on that um you know, may not fully explain what happened. Well, 0:04:42.360 --> 0:04:46.919 the story is fairly simple. The the law Section three 0:04:46.960 --> 0:04:51.640 in the Federal Reserve Act says could only land if 0:04:51.640 --> 0:04:56.000 there is satisfactory security, which is generally interpreted to be 0:04:56.160 --> 0:05:00.560 enough collateral so that the fat is protected even if 0:05:00.560 --> 0:05:04.200 the loan does not take back and the position the 0:05:04.279 --> 0:05:07.560 Fed officials is that that condition was not met, that 0:05:08.360 --> 0:05:12.800 the amount of collateral that Lehman had was much less 0:05:13.000 --> 0:05:15.520 than the amount of money they would have needed to 0:05:15.560 --> 0:05:19.760 borrow to survive, So they didn't have satisfactory security. So 0:05:20.160 --> 0:05:22.640 it wasn't legal in that sense, their hands were tied. 0:05:23.520 --> 0:05:27.919 And I guess what made me wonder is just having 0:05:27.920 --> 0:05:30.400 read a fear amount about it that they that was 0:05:30.480 --> 0:05:35.640 never backed up with any numbers or any analysis. It 0:05:35.760 --> 0:05:39.960 was just given on authority that these other firms had 0:05:40.000 --> 0:05:43.400 plenty of collateral and Lehman had not nearly enough collateral. 0:05:44.040 --> 0:05:45.920 So I just started to look to look into that. 0:05:46.240 --> 0:05:49.599 So how did you actually go about calculating how much 0:05:49.680 --> 0:05:52.880 collateral Lehman would have had? Because I mean, Joe and 0:05:52.920 --> 0:05:56.039 I both know having covered markets in finance for a 0:05:56.080 --> 0:06:01.520 long time, that valuing a bank's balance sheet, particularly in 0:06:01.960 --> 0:06:04.640 September two thousand and eight, when a lot of this 0:06:04.680 --> 0:06:08.520 stuff was very liquid, is incredibly difficult and relies on 0:06:08.680 --> 0:06:11.800 a whole bunch of subjective assumptions. Right, It's hard in 0:06:11.920 --> 0:06:16.960 normal times, let alone in a period of extreme acute crisis. Well, 0:06:17.360 --> 0:06:21.800 in terms of valuing assets, I used the best available, 0:06:21.920 --> 0:06:24.400 but I think it's probably the best available evidence, which 0:06:24.440 --> 0:06:29.120 is analyzes done at the time by Barclays and by 0:06:29.320 --> 0:06:33.120 Bank of America, which we're both considering acquiring Lehman and 0:06:33.160 --> 0:06:37.120 so looked over its balance sheet very carefully and um 0:06:37.200 --> 0:06:40.120 and then also by the constortium of Wall Street firms 0:06:40.160 --> 0:06:42.560 that was famously gathered at the New York FED to 0:06:42.560 --> 0:06:46.440 analyze the situation. They all looked very carefully at the 0:06:46.440 --> 0:06:49.600 balance sheet and came up with different numbers about how 0:06:49.680 --> 0:06:54.520 much Leman overvalued their assets, and the numbers were remarkably 0:06:54.560 --> 0:06:58.039 consistent and in the range of fifteen the thirty billion 0:06:58.120 --> 0:07:02.919 dollars of overvaluating, which puts them on the borderline of 0:07:02.960 --> 0:07:07.160 solvency and insolvency. So one interesting in these papers you 0:07:07.200 --> 0:07:10.800 actually come up with the number for the amount of 0:07:10.800 --> 0:07:15.280 assets that would have been acceptable as collateral for FED liquidity, 0:07:15.280 --> 0:07:17.880 and you put it at a hundred and thirty one 0:07:18.040 --> 0:07:22.360 billion worth of assets, which means that Lehman probably could 0:07:22.360 --> 0:07:24.920 have stayed in business if it had received a loan 0:07:25.080 --> 0:07:28.280 of something like eight billion. Walk us through how you 0:07:28.440 --> 0:07:32.720 how you made that calculation? Okay, So, so that calculation 0:07:32.880 --> 0:07:37.800 the hundred and thirty one billion came primarily from looking 0:07:37.920 --> 0:07:44.120 at financial statement, which is again all the original documents 0:07:44.160 --> 0:07:46.680 are on the websites of both the Financial Requests Inquiry 0:07:46.680 --> 0:07:51.960 Commission and Bankruptcy Examiner. A financial statement of Lehman, which 0:07:51.960 --> 0:07:55.840 I believe was intended for their quarterly report for the 0:07:55.920 --> 0:07:59.800 third quarter, which never got issued because they declared bankruptcy. 0:08:00.200 --> 0:08:03.320 And actually that the hundred thirty one billion dollars were 0:08:03.800 --> 0:08:08.600 assets that were specifically eligible to be collateral that the 0:08:08.720 --> 0:08:11.800 fends lending facility and the primary deal or credit facility, 0:08:12.240 --> 0:08:15.720 and those were actually not the same that the assets 0:08:15.720 --> 0:08:19.560 with the questionable evaluations were things like private equity and 0:08:19.640 --> 0:08:24.320 real estate projects. There's a lot of subjectivity. One billion 0:08:24.320 --> 0:08:32.040 dollars were primarily securities where valuation was reasonably straightforward based 0:08:32.040 --> 0:08:36.600 on market prices. So I got that from the essentially 0:08:37.120 --> 0:08:40.360 uh Lehman's financial statement that they were preparing, and then 0:08:40.760 --> 0:08:45.920 I estimated that they would need billion dollars of support. 0:08:46.679 --> 0:08:50.720 That is pretty speculative, but it's based on a mixture 0:08:51.000 --> 0:08:54.760 of what had happened in the last week, how many 0:08:54.840 --> 0:08:58.600 WE purchase agreements they had lost and so on, and 0:08:59.400 --> 0:09:01.960 various in colonel forecasts at what was going to happen 0:09:02.000 --> 0:09:05.960 the next week. Also the Federal Reserve did there's no 0:09:06.080 --> 0:09:08.920 evidence of the FAT booked very carefully at the issue. 0:09:08.960 --> 0:09:13.080 Over the last weekend in the summer. They did stress 0:09:13.160 --> 0:09:16.120 tests what would happen if there was a run on Lehman, 0:09:16.840 --> 0:09:20.800 and they had numbers for, well, what if a bunch 0:09:20.840 --> 0:09:24.840 of the prime brokerage customers flee, how much catually lose, 0:09:25.360 --> 0:09:28.400 how much casually lose if there's this kind of collateral call, 0:09:28.480 --> 0:09:32.280 and so on. So I relied on that. Also in 0:09:32.320 --> 0:09:35.480 your research, you pointed out that there were some a 0:09:35.520 --> 0:09:38.760 couple of voices at the FAT. I believe we said, 0:09:39.200 --> 0:09:43.480 actually Lehman probably would be solvent, they do have enough 0:09:43.640 --> 0:09:48.000 collateral to merit a bailout, but that they weren't really 0:09:48.000 --> 0:09:52.560 listened to what happened there. So that is something that 0:09:52.679 --> 0:09:55.160 I don't know firsthand. That there was a very interesting 0:09:55.280 --> 0:10:00.120 article in two thousand and fourteen by James stewar Or 0:10:00.200 --> 0:10:03.640 in another New York Times reporter, which was based on 0:10:03.760 --> 0:10:08.240 anonymous sources from the New York Fed. And again there, 0:10:08.520 --> 0:10:10.360 if you want to be careful about it, there are 0:10:10.360 --> 0:10:14.280 actually two distinct issues, one about how much collateral they 0:10:14.280 --> 0:10:17.480 had per a loan, and the second about their asset 0:10:17.559 --> 0:10:21.480 over evaluation and solvency, which are related but different questions, 0:10:22.040 --> 0:10:25.160 And the way this New York Times article was reported, 0:10:25.720 --> 0:10:28.400 the New York Fed people were looking at the over 0:10:28.480 --> 0:10:32.679 evaluation and solvency issue and seemed to have can't counter 0:10:32.880 --> 0:10:35.240 roughly the same conclusion that I did of that it 0:10:35.320 --> 0:10:39.480 was a close call whether they're net worth was a 0:10:39.480 --> 0:10:42.560 little bit positive or a little bit negative. The New 0:10:42.640 --> 0:10:47.240 York Times article also reports that this that this analysis 0:10:47.280 --> 0:10:51.240 never made it to senior policymakers. So one of the 0:10:51.240 --> 0:10:54.840 more striking things I thought in the paper was you 0:10:54.880 --> 0:10:59.040 actually look at other bank bailouts undertaken by the FED 0:10:59.200 --> 0:11:02.760 and the US front, including you know, Bear Sterns earlier 0:11:02.840 --> 0:11:05.840 in two thousand and eight, and then later on Morgan 0:11:05.920 --> 0:11:10.120 Stanley and Goldman Sachs also got some liquidity access from 0:11:10.160 --> 0:11:14.920 the FED, and you point out that those operations were 0:11:14.920 --> 0:11:18.960 actually done on far more favorable terms than what we're 0:11:19.640 --> 0:11:23.439 potentially being asked of Lehman Brothers. At the same time, Yes, 0:11:23.559 --> 0:11:28.080 absolutely so. In my reading of the evidence, Lehman Brothers 0:11:28.200 --> 0:11:34.440 just needed overnight, well collateralized lending through the FED lending facilities. 0:11:34.520 --> 0:11:38.400 But I guess what Morgan Stanley and Goldman Sachs received 0:11:38.800 --> 0:11:42.959 in large quantities was what also needed and that and 0:11:43.040 --> 0:11:45.240 that was quite safe. Again, it was lending one day 0:11:45.240 --> 0:11:48.480 at a time with big haircuts on the collateral. The 0:11:48.800 --> 0:11:52.400 loans to the I G and too Maiden Lane, which 0:11:52.440 --> 0:11:56.079 brought the bear stret certains assets were risk here. I 0:11:56.120 --> 0:12:00.120 mean a I G is quite striking. The collateral or 0:12:00.160 --> 0:12:05.320 the a I G loan consisted largely of stock equity 0:12:05.360 --> 0:12:10.320 ownerships and a I G S insurance subsidiary, and Fed 0:12:10.640 --> 0:12:14.679 River officials have said things like that was good collateral. 0:12:15.080 --> 0:12:19.040 It guaranteyed every penny of the money we lent. But 0:12:19.160 --> 0:12:23.760 I've never seen evaluation of that. And they're actually in 0:12:24.400 --> 0:12:27.800 again looking at the publicly available documents. There's some fragment here. 0:12:27.920 --> 0:12:32.880 There's some fragmentary evidence in the form of power point 0:12:32.920 --> 0:12:36.160 presentations of the New York Fed which seemed to call 0:12:36.240 --> 0:12:40.520 in the question how healthy these insurance companies are and 0:12:41.240 --> 0:12:44.199 how much they're really worth. As I say, it's fragmentary, 0:12:44.280 --> 0:12:48.200 but they've they're they've never given an account. Actually, another 0:12:48.440 --> 0:12:52.319 side story is that I repressed some documents about the 0:12:52.640 --> 0:12:55.599 I G loan under the Feet of Information Act, and 0:12:56.080 --> 0:13:00.319 the FED declined to provide them, and I them in 0:13:00.400 --> 0:13:05.040 federal court and I lost. So uh so we said, 0:13:05.080 --> 0:13:08.480 we don't have very much information about how valuable so 0:13:08.679 --> 0:13:11.079 a i g. Was lent eighty five billion dollars and 0:13:11.200 --> 0:13:14.160 whether the collateral was worth more or less than eighty 0:13:14.200 --> 0:13:18.640 five billion dollars. We have very little idea. So why 0:13:18.679 --> 0:13:21.520 didn't the FED bailout Leman? I mean you say they 0:13:21.800 --> 0:13:27.000 theoretically or for your research, they had the numbers could 0:13:27.040 --> 0:13:31.400 have backed it up. What ultimately was the reason? Yeah, 0:13:31.600 --> 0:13:34.160 why didn't they do it? That? Well? So I think 0:13:34.360 --> 0:13:36.840 based on my research is easier to say why they 0:13:36.920 --> 0:13:39.439 did not do it, what's not the reason and what 0:13:39.640 --> 0:13:42.160 is the reason. So my main point is that was 0:13:42.320 --> 0:13:47.120 not an absence the legal authority. They had the legal authority. 0:13:47.200 --> 0:13:50.960 And also in the extent of real time record, there 0:13:51.040 --> 0:13:53.400 was no discussion that do we have legal authority or 0:13:53.440 --> 0:13:56.800 don't we have legal authority? What way? What they were discussing, 0:13:56.920 --> 0:13:59.839 and this is not an original point with me, was 0:14:00.400 --> 0:14:05.560 politics of the matter. So, in particular, Henry Paulson, who 0:14:05.640 --> 0:14:08.079 seemed to have been in charge of the decision making, 0:14:08.960 --> 0:14:12.520 has been quoted by many people are saying, I can't 0:14:12.559 --> 0:14:15.480 do it again, needing a bailout. I can't be mr 0:14:15.640 --> 0:14:20.800 bailout again. In the record of emails between government officials 0:14:20.880 --> 0:14:23.360 over that weekend, there are things like, we can't do this, 0:14:23.640 --> 0:14:25.480 the press will kill us if we if we do 0:14:25.640 --> 0:14:28.920 this so again. This is not an original point with me, 0:14:29.080 --> 0:14:32.920 but the the idea that there was political pressure against 0:14:32.960 --> 0:14:36.520 bailouts is consistent with the evidence that I've seen, along 0:14:36.640 --> 0:14:41.520 with not fully appreciating how damaging the bankruptcy would be. 0:14:41.760 --> 0:14:44.840 I think nobody was an unprecedented event and they were 0:14:44.880 --> 0:14:49.080 worried about it, but there was hope that maybe they 0:14:49.120 --> 0:14:51.360 could contain the damage and it wouldn't be so bad. 0:14:51.880 --> 0:14:56.520 Do you think that was an objectively wrong judgment that 0:14:56.720 --> 0:14:59.760 should have been known at the time, or that something 0:15:00.160 --> 0:15:05.400 okay in retrospect. Clearly the Lehman failure was economically damaging, 0:15:05.480 --> 0:15:08.400 but it wasn't necessarily obvious that it was going to 0:15:08.480 --> 0:15:11.080 be so bad. That's a good question. I would say 0:15:11.160 --> 0:15:16.320 it was not necessarily obvious because it was an unprecedented event, 0:15:17.360 --> 0:15:21.080 but there was the fact that markets had already seen 0:15:21.920 --> 0:15:25.600 the Bear Stearn's problem and seeing problems that Lehman and 0:15:26.160 --> 0:15:30.560 UM and the FED was taking various measures to trying 0:15:30.560 --> 0:15:34.360 to contain the damage, increasing their lending to other investment banks, 0:15:34.440 --> 0:15:38.000 and several other things. So I I can imagine in 0:15:38.120 --> 0:15:41.600 real time arguing it either way. So I don't think 0:15:41.600 --> 0:15:44.960 it was obvious at the time that it was going 0:15:45.040 --> 0:15:48.000 to be as disastrous as it actually was. Actually, just 0:15:48.080 --> 0:15:52.440 for example, some specific things that happened the whole episode 0:15:52.640 --> 0:15:57.600 with the Reserve primary fund breaking in the box and 0:15:58.200 --> 0:16:01.040 that leading to the run on a market funds and 0:16:01.120 --> 0:16:04.520 the breakdown of the commercial paper market. That was very 0:16:04.600 --> 0:16:08.480 damaging and that was a big surprise to everybody. So 0:16:08.760 --> 0:16:11.240 this paper has been four years in the making, it's 0:16:11.280 --> 0:16:14.720 been out for um, I guess a little over a week. Now, 0:16:15.160 --> 0:16:18.480 what reaction have you gotten. Have you received angry phone 0:16:18.520 --> 0:16:23.080 calls from Ben Burnanki or Hank Paulson that sort of thing. Uh? No, 0:16:24.000 --> 0:16:28.120 Ben Brankian Hank Paulson have not shared their thoughts at 0:16:28.120 --> 0:16:30.960 any about the paper with me. To be honest, the 0:16:31.040 --> 0:16:34.920 reaction that received is similar to reactions I've received other 0:16:35.040 --> 0:16:40.480 papers critical of the Federal Reserve that people I know 0:16:40.560 --> 0:16:43.760 with the Federal Reserve don't like it, and most other 0:16:43.840 --> 0:16:46.880 people do like it. It's interesting vote on the left 0:16:46.960 --> 0:16:49.000 wing of the political spectrum and the right wing of 0:16:49.080 --> 0:16:52.160 the political spectrum, there's a lot of suspicion of the 0:16:52.200 --> 0:16:54.760 Federal Reserve. And actually, much as I'd like to say 0:16:54.840 --> 0:16:58.240 that my people have read my paper carefully and it's persuasive, 0:16:59.040 --> 0:17:03.680 obviously people's actions are based on their preconception. So I 0:17:04.080 --> 0:17:06.160 think a lot of people who were skeptical the FAD 0:17:06.280 --> 0:17:09.280 have have appreciated that people who work for the FAD 0:17:09.400 --> 0:17:11.840 or are very close to the fans felt like you 0:17:12.040 --> 0:17:16.160 mentioned some people at the FED and how they've reacted 0:17:16.160 --> 0:17:19.840 to the paper. I think when I was discussing this 0:17:20.000 --> 0:17:22.399 with some of my contacts who used to work at 0:17:22.400 --> 0:17:25.199 the New York FED in particular, one of the main 0:17:25.320 --> 0:17:29.480 criticisms they had was that you rely on sort of 0:17:29.600 --> 0:17:34.480 third party sources journalistic research, some of which full disclosure 0:17:34.880 --> 0:17:37.159 was mine back in two thousand and ten. About the 0:17:37.200 --> 0:17:41.239 Maiden Lane portfolio. My former New York FED contacts, they 0:17:41.280 --> 0:17:45.159 say things like that Maiden Lane analysis could have benefited 0:17:45.320 --> 0:17:48.720 from a regression analysis that would have actually revealed that 0:17:48.800 --> 0:17:53.080 the FED was buying very low grade collateral inflated prices. So, 0:17:53.600 --> 0:17:56.360 if anything, the paper could have been more forceful had 0:17:56.440 --> 0:17:59.119 it done some of the more traditional things that you 0:17:59.240 --> 0:18:03.840 find in macroeconomic papers. Okay, well that's interesting. So there 0:18:03.840 --> 0:18:06.400 are a couple of points there. I mean, I think 0:18:06.680 --> 0:18:10.560 both my paper and you're reporting on me in lane, 0:18:10.640 --> 0:18:14.600 if I may say so, I mean uses direct evidence 0:18:14.640 --> 0:18:20.040 about facts, and you actually had data on which securities 0:18:20.080 --> 0:18:23.080 exactly we're in the portfolio and what their ratings were, 0:18:23.840 --> 0:18:27.800 and that's just data. So I think, actually, um, again, 0:18:27.840 --> 0:18:33.040 there's lots of primary material out there that was gathered 0:18:33.119 --> 0:18:35.440 by the Financial Crisis Inquiry Commission, and I grew for 0:18:35.520 --> 0:18:38.040 the examiner of both of whom had subpoena power, and 0:18:38.080 --> 0:18:41.159 I think that's what I rely on mostly. I mean, 0:18:41.200 --> 0:18:44.760 as far as the point about regression analysis, I guess 0:18:44.840 --> 0:18:48.120 the simple answer to that is that one can add 0:18:48.200 --> 0:18:51.840 up numbers about what assets they have and add up 0:18:51.920 --> 0:18:57.600 numbers about what liquidity drains they would have had based 0:18:57.640 --> 0:19:01.560 on information about those things, and I'm not sure that 0:19:02.320 --> 0:19:06.080 high power statistics would add very much. Is there any 0:19:06.359 --> 0:19:11.600 particular lesson for policy makers now from your research, or 0:19:12.040 --> 0:19:15.920 is this something that was kind of hyper specific to 0:19:16.080 --> 0:19:21.040 an event and important for the historical record but may 0:19:21.119 --> 0:19:27.359 not necessarily be applicable in situations going forward. I would 0:19:27.400 --> 0:19:29.920 say that there are some lessons. I think for any 0:19:30.560 --> 0:19:35.280 any historical episode of this magnitude that understanding what happened 0:19:35.359 --> 0:19:38.359 is almost sure to have some lessons. In this case, 0:19:39.400 --> 0:19:41.440 a lessons at a couple of different levels. I think 0:19:42.320 --> 0:19:46.320 the fact that, or the my view that there could 0:19:46.359 --> 0:19:50.960 have been a better resolution of the crisis is important. 0:19:51.080 --> 0:19:53.399 What one reason is that, as I'm sure you know 0:19:53.600 --> 0:20:00.640 that dot Frank Act limits effectibility to rescue financial institutions, 0:20:01.440 --> 0:20:05.119 and it's actually, again, this would be complex, but but 0:20:05.160 --> 0:20:08.359 it's possible that what they could have done for Lee 0:20:08.440 --> 0:20:11.080 men actually there there would actually be legal barriers in 0:20:11.160 --> 0:20:14.640 the future. So I think it's relevant us. It's relevant 0:20:14.760 --> 0:20:19.119 for that. It's also in terms of Fed governance or politics. 0:20:20.320 --> 0:20:23.359 The Federal Reserve talks a lot about how they are 0:20:24.119 --> 0:20:31.000 independent of politics, and in this episode that doesn't completely 0:20:31.119 --> 0:20:34.520 ring true because of Kenry Paulson, the Treasury Secretary's role 0:20:34.560 --> 0:20:38.760 and dictating policy. The Federal Reserve officials also talk a 0:20:38.880 --> 0:20:43.160 lot about the principle of transparency about their policy actions 0:20:43.800 --> 0:20:47.240 and the reasons for their policy actions, and I don't 0:20:47.240 --> 0:20:51.000 think they were very transparent in this episode. Alright, So 0:20:51.119 --> 0:20:53.040 tell us what you're working on now or are you 0:20:53.359 --> 0:20:57.639 taking a break after penning this two d page report, 0:20:57.760 --> 0:21:00.399 which is quite hefty. Well, when we're you know now 0:21:00.600 --> 0:21:04.760 is largely did different things that I put off by 0:21:05.680 --> 0:21:08.399 they're going put off because of this project. I do 0:21:08.640 --> 0:21:13.520 mainly spend my professional life doing more traditional research, So 0:21:13.680 --> 0:21:17.320 I run regressions to estimate the philips current relationship between 0:21:17.359 --> 0:21:22.240 insolation and unemployment and things like that, like a regular macroeconomist. 0:21:22.359 --> 0:21:25.680 So I'm going back to that for a while. I 0:21:25.760 --> 0:21:29.879 don't I'm not sure what if anything, I might do 0:21:30.600 --> 0:21:34.320 related to the financial crisis in the future, you know, 0:21:34.440 --> 0:21:39.000 on on this question real quickly about sort of macroeconomics. 0:21:39.080 --> 0:21:43.159 I know it's always tough to talk about counterfectuals, but 0:21:43.240 --> 0:21:46.200 when I think of like that period, I see the 0:21:46.359 --> 0:21:50.560 Layman collapses sort of being a catalyzing force for some 0:21:50.800 --> 0:21:54.640 of the actions taken by both Congress and the Fed 0:21:54.800 --> 0:21:57.879 to start to turn the economy around. And so we 0:21:57.960 --> 0:22:00.520 had this massive collapse, but then we got TARP, and 0:22:00.600 --> 0:22:03.119 then we got you know a few months later, we 0:22:03.240 --> 0:22:08.200 got QUEI one and so forth. Had Layman been saved? 0:22:09.320 --> 0:22:12.119 Do you have any sort of vision of what the 0:22:12.240 --> 0:22:15.520 economic trajectory would have been would have been shallower, but 0:22:15.640 --> 0:22:20.119 a longer uh declined down something like that. Like, what 0:22:20.440 --> 0:22:24.040 is the sort of in your view alternate history scenario 0:22:24.240 --> 0:22:29.120 had they billed out Layman? Good question question, What would 0:22:29.119 --> 0:22:31.520 a kind of factual history like in in this in 0:22:31.600 --> 0:22:34.760 an alternate history novel if you were writing it, and 0:22:34.960 --> 0:22:37.199 and in that history they had bailed out Layman, how 0:22:37.240 --> 0:22:40.200 do you see things having played out? Because there was 0:22:40.280 --> 0:22:43.359 obviously still deep problems with all the bad mortgages that 0:22:43.880 --> 0:22:47.119 a Layman um a Layman rescue wouldn't have changed that. 0:22:47.280 --> 0:22:50.320 So how do you see the next several quarters and 0:22:50.520 --> 0:22:55.119 years playing out had they not let Lehman fail? So 0:22:55.359 --> 0:22:59.080 with with the obvious qualiplication that nobody knows, my guests 0:22:59.119 --> 0:23:02.120 would be. I think my guess would be it might 0:23:02.280 --> 0:23:08.159 be the latest. It might be like the collapse of 0:23:08.240 --> 0:23:11.920 the tech bubble, or like the savings and loan crisis 0:23:12.000 --> 0:23:14.560 of the nineteen eighties. I mean, it was a real 0:23:15.080 --> 0:23:18.600 problem in financial markets and people lost money in it, 0:23:19.640 --> 0:23:22.119 who would have had a dampening effect on the economy. 0:23:22.640 --> 0:23:26.840 But I think the scale the financial collapse and the 0:23:27.040 --> 0:23:32.680 scale of the Great Recession UM could have probably been avoided. 0:23:33.960 --> 0:23:36.439 All right, Lawrence Paul, we're going to leave it there. 0:23:36.480 --> 0:23:39.560 Thank you so much for joining us today. Than thank 0:23:39.600 --> 0:23:47.119 you very much. All right, Joe. So, I think that 0:23:47.359 --> 0:23:50.840 was a really good summary of what would otherwise probably 0:23:50.920 --> 0:23:53.159 take a good hour or so to read. What do 0:23:53.240 --> 0:23:54.879 you think? Oh? I thought I thought that was a 0:23:54.960 --> 0:24:00.560 fascinating conversation. I like anything that involves multiple years of 0:24:00.640 --> 0:24:05.080 meticulous research until one event to really shed light on 0:24:05.240 --> 0:24:07.840 something that, you know, it's probably just sort of hazy 0:24:07.920 --> 0:24:11.640 in people's mind. It's probably hazier in my mind than yours, 0:24:11.680 --> 0:24:14.920 because you have you did, you did reporting that got 0:24:15.000 --> 0:24:20.280 cited in the research. No. I love any work like 0:24:20.520 --> 0:24:23.119 this type of thing. Yeah, and I'm surprised that this 0:24:23.320 --> 0:24:26.199 paper has you know, it's been making some waves up 0:24:26.280 --> 0:24:28.639 but I'm surprised it's not getting more attention because it 0:24:28.720 --> 0:24:33.560 really synthesizes basically all the criticisms UM you could level 0:24:33.680 --> 0:24:37.040 at the FED or at US Treasury over that time era. 0:24:37.320 --> 0:24:41.560 And I think it's important to bring it up again now, 0:24:41.840 --> 0:24:46.600 specifically the point about how officials might have misjudged the 0:24:46.760 --> 0:24:51.120 impact of a Lehman Brothers collapse, because nowadays, as you know, Joe, 0:24:51.359 --> 0:24:56.000 we're facing so many more unknowns, right. Lehman Brothers collapse 0:24:56.080 --> 0:24:58.320 was a complete unknown back in two thousand eight, and 0:24:58.400 --> 0:25:01.040 now it seems like we're facing a throwing laundry list 0:25:01.200 --> 0:25:04.760 of unknown macroeconomic risks that no one really knows how 0:25:04.840 --> 0:25:07.480 they'll play out either. Yeah, I tend to, you know, 0:25:07.600 --> 0:25:10.960 when I think back about the decisions made in summer 0:25:11.080 --> 0:25:12.919 of two thousand and eight and early two thousand nine, 0:25:13.040 --> 0:25:14.680 I sort of, you know, there was this sort of 0:25:14.960 --> 0:25:17.200 fog of war type feeling where you're right in the 0:25:17.280 --> 0:25:19.159 middle of it and you don't know what decisions are 0:25:19.200 --> 0:25:21.960 going to prove correct, and you don't know what's going 0:25:22.160 --> 0:25:25.480 to um have been a mistake. But it really is 0:25:26.200 --> 0:25:29.880 worth examining in detail, even if it's several years later, 0:25:30.359 --> 0:25:32.280 the exact choices that were made. And I think he 0:25:32.440 --> 0:25:35.160 was spot on that any sort of his proper historical 0:25:35.280 --> 0:25:39.040 record of this stuff does potentially have, um have lessons 0:25:39.160 --> 0:25:41.720 for the things that we face today. Right, There's nothing 0:25:41.760 --> 0:25:45.960 better than financial crisis hindsight, isn't that in your Twitter bio? Yeah, 0:25:46.640 --> 0:25:50.360