25 Aug 2009

How Britain could have saved Lehman Brothers

Lehman’s bankruptcy changed the world.

It sent world economy into a precipitous decline that’s matched the Great Depression. It arguably changed the course of the US election. It was a violent economic event that will be debated for decades.

Much of the mystery surrounds the events of the weekend of the 13th/ 14th September 2008, when as one Lehman trader puts it ‘Lehman was put to sleep’.

There have been some excellent accounts of what went on at the offices of the Federal Reserve Bank of New York, the US central bank’s embassy on Wall Street. The US Frontline documentaries are superb.

Yet there is something missing from these accounts: the British angle.

Because it was Britain that held the keys for the last chance to prevent Lehman’s going bankrupt through the interest of Barclays.

I have interviewed all the key players on the UK side of the equation, and not all the accounts concur, but there are some revelatory insights.

  • Barclays was ‘a phonecall away’ from buying Lehman before the bankruptcy.
  • Hank Paulson phoned Alistair Darling in the previous week to pressurise the UK in to watering down shareholder rules.
  • Darling made it clear to Paulson that it was a matter for the FSA and that he would not be watering down British regulations to ‘expose UK taxpayers to risks taken by an American bank’. Accounts from the US suggest that Darling told Paulson: ‘We will not import your cancer’. In an exclusive interview Mr Darling denies using that form of words, but confirms the general story.

David Wessel, author of In Fed We Trust, talks to Channel 4 News about the Hank Paulson/Alistair Darling exchange.


  • The key point of debate is who will guarantee the trading liabilities of Lehman Brothers when markets open on Monday morning. The US is moving towards refusing.
  • On Friday night the FSA had originally thought that Lehman’s would be saved by Bank of America, with funding help from US authorities.
  • On Saturday morning Barclays chief John Varley phones the FSA to tell its chief executive that Barclays is ‘serious’ about buying Lehman. Both agree that the deal should only happen with a US guarantee, though Barclays believes it could make the guarantees itself.
  • The Bank of England, FSA, and Treasury are united in this approach, but the Bank is the most sceptical.
  • Varley and FSA Chief Hector Sants remain in constant touch ‘every thirty minutes’.
  • By Sunday morning, the FSA is starting to worry about the mind-boggling unwind of a potentially bankrupt Lehman International, the ailing firm’s London office. It tells the London clearing system to abandon a planned upgrade to its systems. Callum McCarthy, FSA Chairman, rings Tim Geithner, then the NY Fed boss, to make it ‘absolutely crystal clear’ that without an explicit US guarantee of Lehman’s trading liabilities, there is no British solution.

Lawrence McDonald, former Lehman Brothers bond trader and author of A Colossal Failure of Common Sense talks about how the bank was “put to sleep”.

  • When the Barclays deal fell through Paulson rings Darling on the Sunday of that famous weekend to complain ‘huffing and puffing’ as one senior source suggests, though Darling himself says the conversation was ‘good natured’. 

Mr Darling reflects: ‘I was very clear given everything I had seen in previous 12 months from Northern Rock onwards that there was no way that you would have sanctioned a situation where effectively the British taxpayer was underwriting an American bank, when the American banks weren’t prepared to do that, and the American government wasn’t prepared to do that’.
So the question arises: could Darling have helped prevent this calamitous collapse that did so much to damage the world economy?

Or did he help Britain dodge the most toxic of bullets?

The experts disagree. Intriguingly, both John Varley and the chancellor believe that much of the crisis would have occurred irrespective of the collapse.

Other tripartite sources are not so sure. They believe that what had been largely a localised crisis of the demutualised building society sector, engulfed the likes of RBS, because of the systemic effects of Lehman’s collapse.
There’s much more on this in my report. Let us know what you think.