before it turned out that maybe Lehman Brothers should have been rescued by the FED
It all depended on an assessment of whether the bank was bankrupt. Turns out that there was a group of FED officials who determined it was not. It was just facing a liquidity crisis: its liabilities were more liquid than assets and it could not meet its obligations.
When a bank is solvent but faces a liquidity crisis, the central bank acts as a lender of last resort: it lends money until the bank can sell the illiquid assets and pay back the loan from the central bank.
So some FED officials thought Lehman was bankrupt; others thought it was not. But the information that it was not did not reach the decision makers on time.
That does not look too good for the confidence in the financial system, does it?
No comments:
Post a Comment