Was Lehman the Fed’s Sacrificial Lamb?

The credit crunch has reared its ugly head again. Lehman Brothers, the venerable 158 year old Wall Street firm, was allowed to fail when there would be no guarantees from the Federal Reserve for Lehman’s toxic paper for a potential white knight  Ala the J.P. Morgan/ Bear Stearns deal. All the potential suitors packed up and went home when they couldn’t get a sweetheart deal from the Fed like J.P. Morgan got for Bear Stearns. Why was Lehman not bailed out like Bear Stearns, Fannie Mae and Freddie Mac?

With political pressure from Congress and in the media, it certainly does appear that Lehman Brothers was a sacrificial lamb. Despite denials from the company, the financial problems that they might have been facing have been well documented in the media the last few months; and did not have a warp speed cash crisis that developed with  Bear Stearns. Why was there no action taken to thwart a Lehman bankruptcy and the repercussions, Vis-a-vis  the counter-party risk fallout? Was Lehman allowed to fail because of all the negative sentiment in the media of our nation becoming a Socialist power since the Fannie Mae/Freddie Mac bailout and the taxpayer’s outrage that ensued?

By all accounts, AIG is in the midst of a crisis that places them to be next in line for failure. They have asked for a 40 billion dollar lifeline from the Fed to avoid a credit ratings downgrade which may be their death knell. According to  Credit Suisse analyst Thomas Gallagher, who  wrote in a research note”Liquidity is clearly under pressure now with over $13 billion of additional collateral posting required for (the company) in the event of a ratings downgrade,”. NY State announced today that AIG will be allowed to borrow 20 billion from AIG subsidiaries. Where is the other 20 billion dollars going to come from? If Warren Buffet does not come to the rescue, my guess is that the money comes from the Federal Reserve and the United States Treasury.

There is certainly a lot of blame to go around for Lehman’s failure starting with senior management as to why their balance sheet had so much leverage and bad bets. There was also ample time to come up with a rescue/restructuring plan to possible avoid bankruptcy. With the Federal Reserve having to deal with the  AIG crisis at the same time, and possibly many other problem companies right around the corner, may have allowed Lehman Brothers to become a political sacrificial lamb.

What do you think? Your feedback is welcome.