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Hank Paulson blames FSA for Lehman collapse

Former US Treasury Secretary Hank Paulson has blamed the FSA for the collapse of Lehman Brothers in his new book On The Brink.

In extracts from the book, obtained by The Telegraph, Paulson was enraged by the FSA’s decision not to offer a guarantee which would have enabled Barclays to buy Lehmans.

“The British screwed us”, were his words on receiving the news.

However, other accounts of events suggest the Chancellor Alistair Darling did agree to waiving certain regulatory restrictions to allow a deal, so long as the US Treasury would share the risk.

Former Lehman trader Lawrence McDonald, quoted in The Telegraph, says: “I have been told that Darling was willing to do it 50:50 and that it was Paulson who said no.”

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Comments

There are 23 comments at the moment, we would love to hear your opinion too.

  1. I can sympathise with Hank but does he not know what the FSA stands for?

    Financial Swinging Authority: Basically we all get screwed!!!!

  2. The government and the FSA between them should make sure that all investors in structured products backed by Lehmann’s should be compensated, not through the indivdual complaints process, but as a matter of course.

  3. I am no lover of Alistair Darling but I would never believe a Yank. If you ask me I think it was a cock up all round and that someone had to been seen to pay and that was Lehmans. It was also a message to the others that if you do not put your house in order you could be next !

  4. Incompetent Regulators Awards Team 1st February 2010 at 10:54 am

    When are the policymakers going to wake up? The FSA is the problem in all of these matters as they have helped no one but themselves. It’s has self vested interest now as the regulatory machinery is so big politcicain are frightened of shutting these useless quangos (F-PAck) down for fear of unemployment! Not a good reason to keep bad quangos in business.

  5. And what about the collapse of With Profits, the steady destruction of all but the HNW end of the IFA sector and the near collapse of a number of major UK banks?

    Is there anything at all about which the FSA can hold its head high and say We did a good job without it costing the industry a king’s ransom?

  6. I totally disagree with Anonymous | 1 Feb 2010 10:36 am. Whenever someone buys an investment, they are warned of the risk of losing money thus the need to diversify across a wide range of ‘strong’ investments. Compensation should only be considered where the investor was mis sold. Like Warren Buffett always says, never invest in what you don’t understand.

  7. mmm Government and a Bank doing a deal to by pass regulation…… I’m shocked!!!!!
    This sort of thing just doesn’t happen in our Great Regulatory Britain.

  8. You must be joking 1st February 2010 at 11:37 am

    I have to agree with Lovemore (great name by the way!).

    Why should people be compensated if they are aware of the risks? (In the case of structured products the CP risk included).

    Next we’ll be calling for compensation when a horse doesn’t come in.. “well you see Mr Ombudsman, I put £20 on “Threeleggeddonkey” in the National at 250/1 and it didn’t come in, infact, it didn’t even finish, so I’d like to claim my £20 back!”.

    Where will it end?

  9. Surely not! If it had been the fault of our beloved FSA they would not have awarded themselves with a £33 million bonus last year now would they?

  10. A lot of these matters are “beyond my ken”.
    I take it that a flawed business model built upon sand, overpaid characters who gamble with other people’ money had nothing to do with the collapse then??

  11. … how apt given THAT’S how Greenspan/Bernanke/Paulson have left the US economy … …

    Or should it have read: ‘I’m alright Jack’ (obv the yanks won’t understand that one)

    And anyway, dissing the FSA is the sole job of us badly-treated IFAs, not some fomer US banker!! Tch!!

  12. My recollection is that it was indeed Mr Paulson who turned down the deal. What did he expect? The Yanks tried to offload their problems with a major US financial company onto the UK taxpayer. I’m a simple soul but that sounds to me as if they were attempting to get UK Treasury guarantees for US companies and their US clients/customers.
    I think it was very generous of the UK to even think of a 50/50 deal and anyway the track record of the Americans is p… poor. They only ‘help’ anyone out if they can see a way to turn things to their advantage. They have played ‘hardball’ and ‘screwed’ us Brits. many times before. It looks as if we played this quite sensibly for once, shall we say ‘medium hard ball’, and Hank doesn’t like it. Boo-hoo!
    Stop trying to screw us!

  13. The FSA was absolutely right in this case to “screw the US”, as Hank Paulson so succinctly puts it. Would the readers of Money Marketing rather that the UK had exposed itself to the financial disaster that was Lehman’s without any assurances from the US government that it would share the risk? Or is this just another excuse for disgruntled IFAs to have a go at the regulator?

  14. FSA to blame?,surely not. They may have their problems but they are never wrong, aren’t they?!!!

  15. … how apt given THAT’S how Greenspan/Bernanke/Paulson have left the US economy … …

    Or should it have read: ‘I’m alright Jack’ (obv the yanks won’t understand that one)

    And anyway, dissing the FSA is the sole job of us badly-treated IFAs, not some fomer US banker!! Tch!!

  16. Hank Paulson is a moron

    The only people responsible for Lehman Brother’s collapse are Lehman Brothers and the ineptitude of the US Treasury in promoting securitisation. This is one decision the FSA got right in not writing a blank cheque.

  17. Lehman’s had the same credit rating as RBS. For those who say investors in Lehman backed structured products should not be compensated answer this – why should taxpayers have compensated depositors in RBS? Why compensate one and not the other in exceptional circumstances that nearly saw the end of capitalism?

  18. Lehman brought it on themselves. If Barclays had bought them out then that surely Barclays would be in a similar mess as Lloyds. Maybe the yanks are going to start calling the UK the axis of evil…

  19. I see said the blind man. The FSA block the bail out of Lehman Brothers. Lehman Brothers fails and with it all the structured products backed by Lehman. The FSA then retrospectively reviews IFA sales of Lehman backed structured products in order that the IFA can be hung out to dry! Time we were rid of this Will no one rid me of this troublesome regulator!

  20. I read the article and thought ‘I’m sure Julian Stephen’s and his ilk will post lots of anti FSA comments’. Sure enough, there they are!

    Boring…boring…..boring

  21. The conservstives have got it right get shot of the FSA. 20000 bullets should be enough.

    But perhaps not when they realise the whole point of a Quango, is to deflect the problem/s away from Parliament. At the same time spending large amounts of industry money, while the industry in turn screws investors.

    Commonly known as ‘ what goes round comes round’

    One must welcome the fact that George Bush and Ton were not big enough to pick on China,
    while certain small muslim countries are proving a large bite to swallow.

  22. The Yanks blaming others for their own shortcomings.
    Now there’s a surprise !!

  23. It is understandable that Hank wants to re-write history, as the Lehman’s collapse was the spark that blew up the whole powder keg in autumn 2008.

    It was reported in the media at the time that the UK had offered to participate in a rescue of Lehman’s to prevent a collapse and the market contagion that ensued. It was also widely reported that Hank Paulson had refused.

    “The collapse of Lehman came after the US Treasury refused to bail out the embattled 158-year-old bank, a crucial shift after its support in March for a Wall Street rescue of the failing Bear Stearns.” The Times, September 16th 2008.

    “By not giving UK bank Barclays a guarantee for Lehman’s trading obligations as part of a deal to buy the business, analysts say the US Treasury has put a line under its willingness to use public money to rescue banks which have made wrong decisions. BBC News, website 16 September 2008.

    “Lehman had tried everything to avoid this fate. Its chief executive, Dick Fuld, had peppered his counterpart at Bank of America, Ken Lewis, with phone messages urging him to use his stronger institution to mount a rescue. Fuld even persuaded George Walker, a non-executive director of Lehman who was a cousin of President Bush, to put in a call to the Oval Office with a last-ditch appeal for a bailout, over the head of treasury secretary Henry Paulson. The president refused to answer the phone.”

    “In the final hours of a weekend of desperate negotiations to save the bank, a bid from Barclays had been the last hope. Fuld was waiting for news at his antique-stuffed office, which took up almost a quarter of the executive suite on the 31st floor of Lehman Brothers’ midtown headquarters, overlooking the Hudson River. Down at the New York Fed, Cohen and Lehman’s chief operating officer, Bart McDade, rang him to tell him that no deal was forthcoming because the British bank was unable to proceed without a US government backstop against liabilities.”

    The Guardian, 4th September 2009.

    The Bank of England publicly expressed reticence about bank bail outs and government guarantees on the grounds of “moral hazard”.

    It is not clear that Paulson knew what he was doing at the time of the collapse.

    “Henry Paulson, the former U.S. Treasury Department secretary, just said in a CNBC interview that in the midst of the Lehman Brothers collapse he had no idea what to do and was so afraid he excused himself from an emergency meeting on the matter and called his wife.” Chicago Tribune 1st February 2009.

    It was also reported at the time that the US part of Lehman’s had tried (successfully?) to transfer a large sum of money just before it collapsed from the UK to the US. The sum was at least £1bn. It is understood that the UK administrators are still investigating this and it and other sums may be subject to a legal dispute with the US administrators.

    “On the eve of its collapse Lehman Brothers Europe held $32 billion in client assets. So far, only $13.3 billion have been returned.” Source Deutsche-Welle.de/Reuters. 30/12/09.

    It has also been reported that Paulson was a former Goldman Sachs partner. Goldman Sachs benefited by the terms of the Lehman’s collapse as a major counterparty, not to mention the reduced market place competition, subsequently. Allegations of this affecting his decision making at the time are probably wide of the mark.

    The US role in sub-prime and the creative financial products used to transfer the risk to UK and European institutions has been widely reported. The role of the trader Bernie Madorf has been widely reported, not to mention AIG.

    It was the US regulators that should have covered these market risks. The FSA and FOMC should have been in communication about AIG’s activities in London if there were concerns.

    Attempting to put the blame on the FSA for the collapse of Lehman and the whole credit crunch and financial market collapse is a little disingenuous, especially if the published evidence about the events leading to the collapse elsewhere suggest Paulson’s interpretation is incorrect.

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