Bernanke and Posner on Lehman

I read in an article by Mark Melin on Ben Bernanke,

Looking back with the calm, collective receptivity that time allows one to contemplate what was perhaps the most important moment in recent financial history, Bernanke looks back and concludes there was no way to save Lehman. “It wasn’t just the company itself, but the fact the markets were in panic,” he said. If they had saved Lehman, “they were afraid it might have created even more panic” by demonstrating the most desperate of all solutions, a government bailout, was required.

Compare this with what Posner wrote in 2013,

Let me give an example that illustrates both the difference between a rule and a standard and the hazards of trying to limit the exercise of discretion by the Federal Reserve. It is widely believed (including by me) that the failure of the Fed, in September 2008, to bail out Lehman Brothers precipitated the world-wide financial crisis that ensued immediately. Fed Chairman Bernanke has said that the law forbade the Fed to bail out Lehman Brothers. I am dubious. Section 13(3) of the Federal Reserve Act authorizes the Fed to lend money to a nonbank (Lehman was a nonbank bank, which is to say a financial company that provided banking services but was not regulated as a bank) in “unusual and exigent circumstances,” provided that the loan is “secured to the satisfaction of the Federal reserve bank.” Lehman did not have good security for the large loan it would have needed in order to survive, but in the emergency circumstances created by a collapsing global financial system the Fed could have declared itself “satisfied” with whatever security Lehman could have offered. For section
13(3) establishes a standard rather than a rule, and standards (even rules, as I said) usually don’t extinguish discretion. But they cramp its exercise. It would have been better had the statute just said that the Fed could lend to a nonbank if unusual circumstances justified such a loan—a looser standard, allowing more play for discretion.



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