Here's an interesting tidbit I turned up reading Larry Summers' Financial Times columns this weekend. It's from June 29 of last year:

[I]t needs to be recognised that in the months ahead there is the real possibility that significant financial institutions will encounter not just liquidity but solvency problems as the economy deteriorates and further writedowns prove necessary. Markets are anticipating further cuts in financial institution dividends; regulators should encourage this to happen sooner rather than later and more broadly to reduce stigma. They should also recognise that no one can afford to be too picky about the timing or source of capital infusions and rapidly complete the review of regulations that limit the ability of private equity capital to come into the banking system. Most important, regulators should do what is necessary, including possibly seeking new legislative authority, to assure that in the event of an institution becoming insolvent they can manage the resolution in a way that protects the system while also protecting taxpayers. It was fortunate that a natural merger partner was available when Bear Stearns failed – we may not be so lucky next time. [emphasis added.]

Next time, of course, was Lehman Brothers. And the Fed and Treasury didn't intervene because, they said, they lacked authority to do so. As Paulson explained last November:

[A]s the company reached a critical moment, Fed Chairman Ben Bernanke, New York Fed President Tim Geithner, SEC Chairman Chris Cox and I sought to do everything we could to avert a Lehman failure. We gathered industry leaders the weekend of September 13th to explore all possible options. I was actively engaged in the process as we encouraged two potential buyers to make offers. Each examined Lehman's books, but neither was willing to go forward without off-loading billions of dollars of assets that they considered had substantial unrealized losses.

Treasury and the Federal Reserve had no authority to resolve this problem. Federal law, and in particular the Anti-Deficiency Act, prohibits Treasury from spending money, lending money, and guaranteeing or buying assets without Congressional approval. The Federal Reserve can and does lend on a secured basis, but only if it expects not to realize losses. The Fed couldn't legally lend against the Lehman assets if it expected that loan to result in a loss of any size; this was much different than the case with Bear Stearns.

I tried to put together an industry consortium to facilitate the transaction by purchasing the off-loaded assets, but once the potential buyer failed to obtain regulatory approval, the entire transaction disappeared. Without any federal authority to intervene, we had no choice but to do everything possible to try to mitigate the consequences of a Lehman failure.

Did they not get the FT at Treasury or something?

--Noam Scheiber