Lehman downfall triggered by mix-up between London and Washington

[Joanne98]

• Communication breakdown revealed in first-hand accounts of bank collapse
• Blame game goes on as G20 ministers prepare for crucial London talks

A breakdown in communications at the highest level between the US and the UK led to the shock collapse of the investment bank Lehman Brothers in September last year, a Guardian/Observer investigation has revealed.

The downfall of Lehman, which triggered the biggest banking crisis since the Great Depression, came after a rescue bid by the high street bank Barclays failed to materialise.

In London, the Treasury, the Bank of England and the Financial Services Authority all believed that the US government would step in with a financial guarantee for the troubled Wall Street bank. The tripartite authorities insist that they always made it clear to the Americans that a possible bid from Barclays could go ahead only if sweetened by US money.

But in Washington, the former Treasury secretary Hank Paulson has blamed Lehman's demise on Alistair Darling's failure to let Washington know of his misgivings until it was too late. Paulson has told journalists that during a transatlantic phone call the chancellor said he was not prepared to import the American "cancer" into Britain – something Darling strongly denies.

With finance ministers and central bank governors from the G20 countries meeting in London on Saturday, the first-hand accounts of those handling last year's events underline a rift between London and Washington over who was to blame for the demise of Lehman, which triggered a month of mayhem on the financial markets.

Lehman's demise sent shock waves around an already fragile financial system and raised fears that any bank, anywhere in the world was vulnerable to collapse. Within three days, HBOS had been rescued by Lloyds TSB. A month later RBS, HBOS and Lloyds were propped up with an unprecedented £37bn of taxpayer funds.

Hector Sants, the chief executive of the Financial Services Authority, said: "I have sympathy for the US authorities given the complexity of the problems they faced that weekend but I do believe it was a mistake to let Lehman's fail." As well trying to find a solution for Lehman, the US authorities were also aware that Merrill Lynch was on the brink and that weekend it was taken over by Bank of America.

While admitting the UK authorities had botched Northern Rock a year earlier, Sants said the collapse of Lehman had more dire consequences. "Without the future market shock created by Lehman Brothers' collapse, RBS may not have failed," said Sants.

"Was Lehman the cause or was it the manifestation? It was our view that if Lehman had been supported you would not have seen such a dramatic reduction in liquidity."

Continued>>>
http://www.guardian.co.uk/business/2009/sep/03/lehman-collapse-us-uk-blame

[DavidDvorkin]

1. I'm shocked to learn

that the US and UK governments don't have telephones!