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Feds Right to Let Lehman Fail, But It's a 'Dangerous, Risky' Path, Roubini Says

Posted Sep 15, 2008 11:00am EDT by Aaron Task in Investing, Recession, Banking
Related: LEH, MER, BAC, FNM, AIG, C, JPM

After the nationalization of Fannie and Freddie last week and the government's role in JPMorgan's purchase of Bear Stearns in March, the notion of America as "bailout nation" has taken hold. This weekend, Treasury Secretary Hank Paulson sought to put an end to that way of thinking by declining to backstop a deal for Lehman Brothers.

The government was right to not intervene and bailout another distressed financial institution, says Nouriel Roubini, of NYU's Stern School and RGE Monitor.

But the government has already started down a "dangerous and risky" policy road, which resumed this weekend as the Federal Reserve announced "enhancements" to existing liquidity facilities that were created in response to the ongoing crisis.

The announced changes include:

  • Broadening of the types of securities Wall Street firms can use as collateral when borrowing from the Fed to include lower-grade debt securities and equities.
  • Stepped up schedule of so-called TSLF auctions to a weekly vs. bi-weekly basis.
  • Removal of restrictions on how much commercial banks can lend to their brokerage units.

This final point means that banks are using Federally insured deposits to support their brokerage units, which puts even greater risk on the Fed and (potentially) the FDIC, Roubini says.

Also joining Henry and me is NY Post Wall Street reporter Mark DeCambre, who notes the Fed and Treasury are faced with a tremendous number of simultaneous crises for which there is no magic bullet.

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