It's important to note that Lehman Brothers filed for bankruptcy protection under Section 11, which is different from filing for bankruptcy directly.
A direct bankruptcy filing means the company's immediate and final demise, with no recourse but liquidation and closure.
Filing for bankruptcy protection, on the other hand, allows the company to restructure its operations over the next few months, making a desperate attempt to regain profitability. The bankrupt company can continue to operate as usual, with management continuing to oversee day-to-day operations, and its stocks and bonds continuing to trade.
Therefore, after Lehman Brothers announced its bankruptcy filing, it began selling some of its assets to raise funds to fill the "hole."
On July 16, Barclays, the third-largest bank in the UK, acquired Lehman Brothers' New York headquarters, two data centers, and some trading assets for $1.75 billion.
On July 21, Nomura Holdings Inc. (NMR), Japan's largest securities firm, signed an agreement with Lehman Brothers to acquire its Asia-Pacific operations (excluding South Korea).
The next day, Standard Chartered Bank announced it would acquire Lehman Brothers' European and Middle Eastern operations.
Then, on July 28, Alliant Energy Group announced that its subsidiary, British Gas Networks, had agreed to acquire Eagle Energy Partners I, LP, from Lehman Brothers.
This move was intended to streamline Alliant Energy Group's gas supply business.
On the same day, private equity firms Bain Capital LLC and Hellman & Friedman LLC reached an agreement with Lehman Brothers to acquire the majority of its investment management businesses, including Neuberger Berman, for $2.15 billion.
On August 1, Nomura Holdings signed a second agreement with Lehman Brothers, agreeing to acquire its Indian back-office operations.
In less than three weeks, the once-glorious Lehman Brothers had been shattered beyond recognition.
Lehman Brothers had finally hit rock bottom, never to recover.
However, shortly after Lehman Brothers declared bankruptcy, on July 15th, the Federal Reserve announced it would use special authority, granted after the 1929 stock market crash, to provide an $85 billion emergency loan to the on-the-brink American International Group (AIG).
In exchange, the US government acquired a 79.9% stake in the nation's largest insurance company.
Baron's decision to bail out AIG came as no surprise.
Even before Lehman Brothers declared bankruptcy, he had already been in contact with Barclays and other institutions, seeking to "take what they needed" from Lehman Brothers' assets.
At the time, he had told Ivanta, who had come to New York and was living in a penthouse on the top floor of the Woolworth Building in Manhattan,
"Shorting Lehman Brothers would be the most successful, because the previous American bailouts of major institutions like Fannie Mae and Freddie Mac, as well as Bear Stearns, had made Lehman Brothers' CEO, Fuld, too complacent. He believed that when things got out of hand, Lehman Brothers would receive government assistance..."
"Indeed, I heard that Lehman Brothers wasn't eager in the negotiations, and was even a little perfunctory..."
Ivanta asked in disbelief.
"Although this attitude would annoy the government, would they really change their attitude and let the current crisis go on?"
"Not really. In fact, Paulson and his team needed to find a company of sufficient weight to make an example of, to warn those Wall Street bankers, to let them know that the government wouldn't always clean up their messes. Unfortunately, Lehman Brothers was the one chosen..."
Taking a deep breath, Ivanta said thoughtfully,
"Similarly, this would also alleviate the public's criticism of the Party for its overly aggressive rescue of those bankers."
"That's true. After all, this year's election won't be easy for the opposing party."
...
As Baron and Evanta discussed, the collapse of Lehman Brothers and the actions taken by the US government sparked controversy.
Some questioned why Treasury Secretary Paulson or Federal Reserve Chairman Ben Bernanke didn't directly rescue Lehman Brothers.
Furthermore, many criticized the official takeover of Bear Stearns, Fannie Mae and Freddie Mac, and American International Group.
Bear Stearns had already been in crisis before Lehman. Bear Stearns held a large number of mortgage-backed securities, and investors cashed out en masse, leading to a depletion of its cash reserves and the near collapse of the company.
At the time, New York Fed President Timothy Geithner identified this systemic risk and immediately reported it to the Federal Reserve.
The Fed and Treasury jointly intervened, with the Federal Reserve providing $30 billion in emergency support to support JPMorgan Chase's acquisition of Bear Stearns.
However, it was this action by the US government that sent a signal of aid to the market. Next, Treasury Secretary Paulson directly took control of Fannie Mae and Freddie Mac, the two mortgage lenders already embroiled in a turmoil.
The Treasury Department injected capital into Fannie Mae and Freddie Mac and acquired the associated preferred stock. Government regulators took over day-to-day operations and appointed new leaders.
Fannie Mae and Freddie Mac were the nation's two largest mortgage lenders. They were once federal agencies, and although they were later privatized, they had long received government subsidies.
Therefore, in the American public's mind, the two mortgage lenders enjoyed an implicit federal guarantee.
But for Paulson, facing the problems of Fannie Mae and Freddie Mac, there was no other option but to bail them out.
Paulson declared,
"Fannie Mae's problems expose financial markets to systemic risk, and taking over these two institutions is the 'best way' to protect markets and taxpayers."
However, Paulson's takeover of Fannie Mae and Freddie Mac ignited moral hazard in the market.
Critics also argued that taxpayers should not be bailing out these greedy corporations.
At the time, the Wall Street Journal stated:
"If the federal government had rescued Lehman Brothers after bailing out Bear Stearns and Fannie Mae, it would have signaled a government backstop for all institutions in crisis, a policy that would encourage even more reckless risk-taking."
So, when Lehman Brothers came around, Paulson's stance shifted, which is understandable.
Initially, almost everyone, including Lehman CEO Fuld, believed Paulson would not sit idly by.
However, this time, Paulson was resolute, insisting from the outset that the Treasury would not bail out Lehman Brothers.
Why did Paulson rescue Bear Stearns, Freddie Mac, and Fannie Mae, but only allow Lehman to perish?
In reality, Paulson wasn't standing idly by.
However, his strategy shifted from direct bailouts to pressuring Wall Street to contribute funds.
While mobilizing market forces to mitigate systemic risk was an ideal approach, the resulting disagreements far exceeded Paulson's expectations.
Paulson and Bernanke both recognized that their previous bailouts of Bear Stearns and Fannie Mae and Freddie Mac had triggered moral hazard in the market and drawn widespread criticism.
This time, they were determined to prevent this moral hazard from spreading, while also attempting to set an example by allowing a financial institution to fail.
After confirming that Lehman Brothers' bankruptcy was inevitable, Paulson and Bernanke presented a detailed report to George W. Bush.
Bush stated that while he didn't want to see Lehman go bankrupt, he respected Paulson's approach and didn't want the Treasury Department to directly take over Lehman.
Because this was an election year, overemphasizing government bailouts would undoubtedly undermine the Democratic Party's chances of winning.
Shortly before Lehman filed for bankruptcy, the Democratic Party's campaign platform explicitly stated,
"We do not support government bailouts of private institutions."
The government's intervention in Bear Stearns, and especially the Treasury's takeover of Fannie Mae and Freddie Mac, had embroiled Paulson and Bush in controversy.
Therefore, from an external perspective, Lehman Brothers was unlucky, falling victim to the political and market dynamics at this critical juncture.
However, it's important to note that this consequence posed even greater challenges for Lehman Brothers.