Question

In: Finance

Why did the government bailout Bear Stearns, Fannie Mae, Freddie Mac and AIG but not Lehman?

Why did the government bailout Bear Stearns, Fannie Mae, Freddie Mac and AIG but not Lehman?

Solutions

Expert Solution

The Government bailed out Bear Stearns, Fannie Mae, Freddie Mac and AIG because they felt that impact would be far worse as compared to Lehman if these companies go bankrupt. Here are some issues that Lehman was facing and they couldn't find support from the government.

Liquidity Issue:

  • Federal Crisis Inquiry Commission had a belief that the Lehman had not enough collateral against which loans can be provided
  • The concern was that whether Lehman has enough asset or not
  • Lehman was widely viewed by market participants as insolvent

Legal Issue:

  • Under section 13(3), Federal reserve can lend the money in the case of “unusual and exigent circumstances but this needed approval from Treasury secretary and Fed’s governing board.
  • TARP (Troubled asset relief program) enacted after the collapse of Lehman
  • In case of other firms like Bear Stearns Fannie Mae, Freddie Mac and AIG, they had a belief that these companies have liquidity issue and the assets are there that can be used as a collateral and failure of these companies would have far more effect than that of Lehman.
  • Government has already rescued Bear Stearns in March, so politically it looked unviable to rescue another firm

Others:

  • On September 14, deal with Barclays Bank called off as authority from the UK had concerns about the liquidity
  • Offer by Korean Development Bank at $23/share was declined by Lehman

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