Thomas C Baxter, Jr: Too big to fail – expectations and impact of extraordinary government intervention and the role of systemic risk in the financial crisis Testimony by Mr Thomas C Baxter, Jr, Executive Vice President and General Counsel of the Federal Reserve Bank of New York, before the Financial Crisis Inquiry Commission, Washington DC, 1 September 2010. *  *  *  Chairman Angelides, Vice Chairman Thomas, and members of the Commission, thank you for the opportunity to appear before you today. For the past 15 years, I have been privileged to serve as the General Counsel of the Federal Reserve Bank of New York. I welcome the opportunity to speak to you about the events that brought Lehman Brothers to bankruptcy, events that occurred during 2008 when our Nation was in the midst of the worst financial crisis it has experienced since the Great Depression. During the crisis, Federal Reserve policymakers needed to respond to a series of extraordinary and hugely consequential problems, usually with little time and imperfect information. Today I will be speaking to you about the facts surrounding one of these problems, Lehman Brothers. In 2008, my job was to provide legal advice to Federal Reserve policymakers, and so while I am happy to share with the Commission my recollections of the events that I will describe, I do not want to exaggerate my own importance.
Second, as a contingency, should the banking organizations fail to come up with a workable rescue plan, they should present an alternative plan to address the effects of a Lehman bankruptcy, because they should anticipate that would happen Monday morning. As was the case with Bear Stearns, the Government knew that a third party would have to finance a portfolio of Lehman’s illiquid assets in order to make Lehman acceptable as a merger partner. In this case, drawing upon the precedent of the rescue of Long Term Capital Management in 1998, the Government arranged for a consortium of private banks to provide the financing. And in fact, after much discussion and some disagreeable moments, the private banks agreed to do so. By Sunday, September 14, the counterparties had agreed to finance approximately $ billion of Lehman’s illiquid assets in order to facilitate Lehman’s rescue. While the structure was never finalized, it would presumably have resembled a private sector version of Maiden Lane LLC, the vehicle used to acquire the assets from Bear Stearns. The banks would have lent $ billion to their SPV, and the special purpose vehicle (SPV) would have purchased largely real estate-related assets from Lehman. This would have made Lehman more attractive to a potential acquirer. Lining up financing for the illiquid assets was a necessary condition for a rescue, but it was not sufficient. The sine qua non of the plan, as Secretary Geithner and others have pointed out, was a willing and capable merger partner.