The Federal Reserve is crafting a policy aimed at preventing conflicts of interest

TO BE NOTED: From Bloomberg:

"Fed Seeking to Prevent Conflicts of Interest at Regional Banks

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By Vivien Lou Chen

May 9 (Bloomberg) -- The Federal Reserve is crafting a policy aimed at preventing conflicts of interest when some directors of its 12 regional banks own shares of bank holding companies supervised by the Fed.

Such investments came under scrutiny this week after revelations that the former New York Fed chairman, Stephen Friedman, as well as Minneapolis Fed Deputy Chairman John Marvin, owned stock in bank holding companies. Friedman, a Goldman Sachs Group Inc. board member, resigned May 7 from the New York Fed to avoid the appearance of a conflict.

The Fed’s “board is developing a policy to address these types of situations in the future,” David Skidmore, the central bank’s spokesman, said in an e-mail yesterday. He didn’t elaborate.

U.S. lawmakers, concerned about the record expansion of the Fed’s balance sheet to more than $2 trillion as it battles the recession, have called for greater scrutiny of the regional Fed banks, including the appointment of their presidents.

The regional banks make up the Federal Reserve system along with the Board of Governors in Washington. While they have a voice in setting central bank policy, the regional banks operate as public-private entities with nine-member boards of directors who aren’t confirmed by legislators.

Friedman, who runs the investment firm Stone Point Capital LLC in New York, was chosen for a three-year term as a Class C director in 2008, one of three directors appointed by the Fed’s Board of Governors to represent the public.

Friedman, 71, was granted a waiver to keep serving on the New York Fed board after Goldman Sachs became a bank holding company in September. He remained a Goldman Sachs director and bought company shares in December and January.

Web Site Letter

Last month, he planned to depart at the end of the year. He announced May 7 he would resign immediately, explaining in a letter posted on the New York Fed’s Web site that questions about his Goldman Sachs connections were a “distraction.”

“Although I have been in compliance with the rules, my public service-motivated continuation on the Reserve Bank Board is being mischaracterized as improper,” he said.

Thomas Baxter, general counsel of the New York Fed, said in a statement on May 7 that Friedman’s purchases of Goldman Sachs shares in December and January “did not violate any Federal Reserve statute, rule or policy.”

In addition to Class C directors, each of the regional banks has three Class A directors and three Class B directors, all six of whom are elected by member banks. Those in Class A represent the banks, while those in Class B represent the public at large.

Friedman isn’t the only Class C regional Fed board member to have owned shares in a bank.

Minneapolis Fed

The Minneapolis Fed’s Marvin was granted a waiver in January allowing him to serve while he and his family owned shares of Goldman Sachs, Morgan Stanley and Merrill Lynch & Co., now part of Bank of America Corp., Minneapolis Fed spokeswoman Patti Lorenzen said.

Marvin is chairman and chief executive of Marvin Windows and Doors in Warroad, Minneapolis. He and his family owned shares of Goldman Sachs, Merrill Lynch and Morgan Stanley valued at “well under $100,000,” she said. Ownership of the shares “was in compliance with Federal Reserve rules” when he joined the Minneapolis Fed board in 2006, Lorenzen said.

The Minneapolis Fed applied for a waiver on his behalf in November 2008, and the request was granted by the Fed’s governors in January, she said in an e-mail yesterday.

No More Purchases

“No additional shares in these companies have been purchased since they became bank holding companies,” Lorenzen said.

Berit Griffin, a spokeswoman for Marvin Windows, didn’t immediately reply to messages left at her office and e-mail address after business hours.

Lawmakers are taking a closer look at how regional Fed presidents are chosen.

The Senate passed a nonbinding budget amendment by a 96-2 vote last month that in part called for “an evaluation of the appropriate number and the associated costs” of the regional Fed banks. The measure was proposed by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and Senator Richard Shelby of Alabama, the committee’s senior Republican.

Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, said last year that he planned to probe how the district Fed chiefs are appointed and their role in setting interest rates.

The Fed regulates and supervises bank holding companies, while its regional banks conduct bank examinations.

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net"

If needed, big banks and other financial institutions should be broken up in those instances

TO BE NOTED: From the NY Times:

"FDIC's Bair Calls for 'Systemic Risk Council'

By THE ASSOCIATED PRESS

Filed at 10:33 a.m. ET

WASHINGTON (AP) -- The head of the Federal Deposit Insurance Corp. says new powers are needed to oversee companies that pose financial risks to the economy, an authority that could be shared by the FDIC and other regulators.

In testimony at a Senate hearing Wednesday, FDIC Chairman Sheila Bair called for a new system of supervision that prevents institutions from taking on excessive risk and becoming so large their failure would threaten the financial system.

She suggested the Treasury Department, FDIC, Federal Reserve and Securities and Exchange Commission could be members of a new ''systemic risk council'' set up to monitor large institutions and potential risks to the system.

Bair stressed again that the ''too big to fail'' policy used by the government in the financial crisis must end.

''Our current system has clearly failed in many instances to manage risk properly and to provide stability,'' Bair said.

She maintains that a mechanism is needed to resolve troubled financial institutions similar to what the FDIC does with federally insured banks and thrifts.

''We're talking about a resolution and not a bailout,'' Bair told the Senate Banking Committee. If needed, big banks and other financial institutions should be broken up in those instances, she said.

Policymakers are trying to craft a new system of financial rules to replace the ''too big to fail'' stamp put on federal policy in the financial tumult, as the government rushed in to rescue insurance giant American International Group Inc., and pumped tens of billions of dollars into Citigroup Inc. and Bank of America Corp.

The Obama administration has presented to Congress an extensive overhaul of financial regulation meant to prevent a repeat of the banking crisis. A pillar of the plan is creating a so-called systemic regulator to monitor against the risks that plunged markets worldwide into distress last year.

A ''council'' of regulators would be better equipped than a single agency to exercise that oversight, writing rules and collecting data on large institutions that pose potential risk to the system, Bair said.

For taking over and resolving financial institutions, Bair said the FDIC is well equipped to do so. She suggested Congress could give the agency the authority to resolve bank holding companies like Citigroup or Bank of America -- now under the supervision of the Fed. The FDIC now can take over and resolve only the subsidiaries of bank holding companies that take federally insured deposits.

Rep. Barney Frank, chairman of the House Financial Services Committee, and other lawmakers have proposed that the Fed assume the role of systemic regulator."

five-year commitments could hamper the central bank's ability to withdraw money from the financial system down the road

TO BE NOTED:

• MAY 1, 2009

Fed Hopes 5-Year TALF Loans Will Help Real-Estate Market

By JON HILSENRATH and LINGLING WEI

The Federal Reserve is preparing to announce new terms on one of its lending programs that officials hope will help revive the commercial-real-estate market, according to people familiar with the matter.

The program is the Term Asset-Backed Securities Loan Facility, or TALF, in which investors are given low-cost loans from the Fed and in turn use the money to buy securities backed by consumer debt. The loans in this program are three-year loans and so far have been aimed at car debt, credit-card debt and other consumer loans. The Fed is preparing to announce new loans with five-year terms to better match the needs of investors in commercial-mortgage-backed securities, an effort to boost that sector.

Officials have been reluctant to make such long-term loans, for fear five-year commitments could hamper the central bank's ability to withdraw money from the financial system down the road. They have been looking to design the expansion so the loans are less appealing in later years.

An announcement with the new terms could come as early as Friday, though, as with many of the Fed's rescue programs, discussions are often subject to last-minute changes that could alter those plans.

The $700 billion CMBS market has rallied in the past month on hopes TALF would be used to restart the market. Yields on triple-A CMBS bonds have fallen to about 10% from 12%, according to Trepp, which tracks commercial-property debt markets.

Bringing down the yields on existing debt is critical to spark new lending because, as long as investors can buy top-rated CMBS that yield as much as junk bonds, it would be unprofitable for banks to make new loans. That is because they would have to offer higher yields to attract investors, wiping out their profits.

Policy makers believe it is critical to get credit flowing to the $6.5 trillion real-estate industry because a massive amount of commercial-real-estate debt is coming due.( NB DON )

Write to Jon Hilsenrath at jon.hilsenrath@wsj.com and Lingling Wei at lingling.wei@dowjones.com"

Here’s a chart of all US recessions since 1900 and their length

TO BE NOTED: From Trader's Narrative:

"Published April 3rd, 2009 in Economy Tags: 1929 crash, depression, economy, federal reserve, NBER, recession, SEC, unemployment, US recessions.

While the stock market has perked up slightly, the economy continues to be mired in a deep recession. Unemployment, housing and other measures are still negative with no real sign of improvement.

Since 1900, there have been 22 recessions which works out to one about every 5 years. While recessions are labeled officially by the NBER, in January 2008 I pointed to a specific indicator which I believed meant that we were in a recession (by late 2007). A while later, this was confirmed by NBER.

Here’s a chart of all US recessions since 1900 and their length:

Source: Chart of the Day (using data from the National Bureau of Economic Research)

The outlier, of course, is 1929. The G-20 leaders huddled together in London to do everything to keep it an outlier and prevent an equally devastating world-wide depression..

At the start of the century there was a cluster of long recessions. These 5 recessions all happened before 1930 and were also the longest in length. The next 70+ years saw much shorter recessions.

Although you may think this was due to the institution of the Federal Reserve and its role in managing the economy, you’d be wrong. The Fed was created in December 23th, 1913. It was the SEC that came about as a result of the chaotic aftermath of the 1929 crash and ensuing depression.

Here’s a chart showing the relationship between the unemployment rate and the stock market during the past few recessions. Notice how the “bad news” of a rising unemployment rate accompanies a rising stock market. In other words, the market discounts the future and starts to rally well ahead of the turning point in the economy.

1929 crash, depression, economy, federal reserve, NBER, recession, SEC, unemployment, US recessions"

But in order to be able to contribute whatever it can, the Fed must be able to speak with clarity and credibility.

TO BE NOTED: From Econbrowser:

"The first votes are in

The Federal Reserve can't be entirely pleased with markets' reaction to its announcement on Wednesday of quantitative goals for purchases of long-term assets.

The Fed's objective in this quantitative easing is to move the inflation rate back into positive territory. Let's begin by reviewing the new consumer price index data that were also released on Wednesday by the Bureau of Labor Statistics. These numbers show further modest movement away from a deflationary tendency prior to any actions by the Fed. The seasonally adjusted February CPI was 0.4% higher than in January, which would be a 4.8% annual inflation rate if sustained for a year. Although that's plenty for one month, it nevertheless is still substantially smaller in absolute value than the drops seen in October through December.

Month-to-month percent change (monthly rate) in seasonally adjusted headline CPI. Data source: FRED.

That leaves the seasonally unadjusted CPI just 0.2% above its value from February 2008.

Year-over-year percent change (annual rate) in seasonally unadjusted headline CPI. Data source: FRED.

If we leave out food and energy, the February increase (+0.2% monthly) implies an annual inflation rate of 2.4%,

Month-to-month percent change (monthly rate) in seasonally adjusted core CPI (excludes food and energy). Data source: FRED.

and the year-over-year core inflation rate now stands at 1.8%. Both of these last two numbers are a bit below what I think the Fed should want to see, but they continue to offer comfort that we had been moving away from the deflation threat before the Fed's announcement.

Year-over-year percent change (annual rate) in seasonally unadjusted core CPI (excludes food and energy). Data source: FRED.

In discussing the Fed's announcement of its plan for quantitative easing, I wrote:

What will be the indication that we've done all we can with this tool? I would urge the Fed to be watching the exchange rate and commodity prices quite closely for an indication that the deflation tide has turned.

Exchange rate (euros per dollar). Source: Yahoo Finance.

Percent change in commodity prices between March 17 and March 20

aluminum	+6.4
coffee	+6.8
copper	+4.1
corn	+3.9
cotton	+3.2
gold	+4.0
lead	-1.7
silver	+6.3
tin	-0.4
wheat	-0.4
zinc	+0.3
crude oil	+3.9

That's why I doubt the Fed was pleased to see the dollar fall 5% against the euro last week. The Fed wanted everybody to wake up and notice that deflation is no longer on the table, but it's another thing if markets run off in the other direction fearful that a major inflation is coming. Notwithstanding, the dollar's move at the end of the week only served to undo an appreciation over the first part of the year, an appreciation that may have been unwelcome and unwarranted.

Prices of a number of commodities also zipped up about 5% on the news. Again this is a disturbing development, but again it still leaves the prices of many commodities below where they started the year, as the graph below demonstrates.

Value of prices of assorted commodities relative to value at start of year (Jan 2, 2009 = 100). Data source: WSJ commodity cash prices, via Webstract.

Commodity prices are quite sensitive to the level of real economic activity. If we had been about to repeat a global Great Depression with attendant significant U.S. deflation, maybe $35 oil could be justified. And if the Fed has now successfully communicated that's not going to happen, a commodities rebound might be quite appropriate.

But I think we also have to worry about whether this might be the start of a replay of what we saw a year ago, when excessively expansionary Fed policy provided fuel for commodity price speculation. In January of this year, Fed Chair Ben Bernanke offered this ex post appraisal of the Fed's policy in early 2008:

The [FOMC's] aggressive monetary easing was not without risks. During the early phase of rate reductions, some observers expressed concern that these policy actions would stoke inflation. These concerns intensified as inflation reached high levels in mid-2008, mostly reflecting a surge in the prices of oil and other commodities. The Committee takes its responsibility to ensure price stability extremely seriously, and throughout this period it remained closely attuned to developments in inflation and inflation expectations. However, the Committee also maintained the view that the rapid rise in commodity prices in 2008 primarily reflected sharply increased demand for raw materials in emerging market economies, in combination with constraints on the supply of these materials, rather than general inflationary pressures. Committee members expected that, at some point, global economic growth would moderate, resulting in slower increases in the demand for commodities and a leveling out in their prices--as reflected, for example, in the pattern of futures market prices. As you know, commodity prices peaked during the summer and, rather than leveling out, have actually fallen dramatically with the weakening in global economic activity. As a consequence, overall inflation has already declined significantly and appears likely to moderate further.

Bernanke seemed here to be taking the position that since the Fed got the long run correct-- the end of 2008 brought strong disinflationary pressures and commodity prices collapsed-- it was OK to ignore the commodity price boom of early 2008. I disagree with that assessment. In my opinion, the oil price increase of 2008:H1 was highly destabilizing for the economy and a key factor that turned an economic slowdown into a recession. One of the lessons for monetary policy that we should draw from the recent behavior of real estate and commodity prices is that the Fed can't ignore the consequences of its actions for speculative prices, even if (or perhaps, particularly if) that speculation reflects a basic misreading of fundamentals. If commodity speculators are erroneously about to declare the bull game is back, that in my mind would be a development that would require the Fed to scale back its plans for quantitative easing.

How would I handle that in practice? I think the best strategy is for the Fed to lay all its cards on the table face up, telling everybody exactly what it is hoping to achieve and how it is going to do it. The Fed needs to communicate that it's not going to allow the price level to fall, but it's also not going to allow runaway commodity prices. So why not announce a specific target of, say, 2-3% for headline inflation, which implies a direct commitment that the Fed will become more cautious if it observes a response to its actions of items such as oil and food? This could be accompanied by statements from Fed officials along the lines that they're watching commodity markets and exchange rates closely for an indication that quantitative easing has accomplished all it set out to do.

All this requires acknowledging from the outset that there is only so much the Fed can accomplish in this situation, a premise that in my mind has considerable merit. But in order to be able to contribute whatever it can, the Fed must be able to speak with clarity and credibility.

If the moves we saw in exchange rates and commodity prices this week are the end of the story, then I think all is well. But if they are the beginning of a new trend, the Fed will need to react."

In any case, Lehman's collapse is not evidence for the No Failure policy.

From Clusterstock:

"The New Yorker's Economics Dude: Lehman Matters!

John Carney|Mar. 16, 2009, 12:03 PM|4

Print

Tags: Economy, Lehman Brothers, Federal Reserve, Financial Services, TARP, Bailout, Treasury

James Surowiecki is the guy the New Yorker pays to explain the economy and the stock market to its readers. He's also running a great blog called "The Balance Sheet" these days. And recently he decided to wade forth into the debate over Lehman Brothers.

Surowiecki takes as his starting point the paper from Stanford economist John Taylor that argues that the credit market crisis last fall was not spurred by Lehman going under so much as uncertainty about the effects of government action. Taylor's central piece of evidence is the movement of 3-Month Libor, which didn't go into panic mode until well after Lehman collapsed. The timing, he argues, is more closely linked to the bailout than Lehman's collapse.

Surowiecki thinks that Taylor's evidence doesn't support this conclusion.

"Taylor’s assumption in his paper is that investors would have known right away how severe the repercussions of Lehman’s bankruptcy would be. But this is simply untrue—for whatever reasons (some suggest fraud, others panic), the hole in Lehman’s balance sheet was much bigger than people initially thought it would be, which meant that the losses its lenders suffered were much bigger than anticipated. (One study suggests that the chaotic nature of Lehman’s bankruptcy alone cost creditors tens of billions of dollars.) As the magnitude of the losses became clearer, so too did banks’ risk aversion, since Lehman’s failure seemed to demonstrate starkly the risks of lending to any other big financial institution."

As regular readers know, we've been making the lonely argument that the government's failure to rescue Lehman was not a disaster. We think Surowiecki's point here actually supports our case. The only problem is that he construes the revelation of "the magnitude of the losses" too narrowly. What caused the panic was that the collapse of Lehman signalled to market participants that the magnitude of losses throughout the financial sector was far greater than had been anticipated.

Importantly, nothing about a rescue of Lehman would have avoided this outcome. Lehman's collapse into a government rescue or bankruptcy would still have set off the alarm signals. The simultaneous collapses of AIG and Merrill Lynch were also occurring, and Citigroup was soon viewed to be in critical condition. In short, it was the desperate situation of the financial sector rather than the failure to rescue Lehman that almost destroyed the financial system.

Surowiecki seems to disagree. He writes that "thinking about what Lehman’s failure tells us about how we should deal with tottering financial institutions today," concluding that we must stop implosions at all costs.

This debate matters because Lehman is constantly invoked by those who want to convince us that Lehman’s failure was a catastrophe and want to encourage us to avoid "No Failure" as our future policy. In other words, they are arguing that the risks of allowing failure are far greater than the damage to markets caused by propping up failed firms. We have our doubts, although we're willing to acknowledge that this could be the correct view. In any case, Lehman's collapse is not evidence for the No Failure policy."

Me:

Don the libertarian Democrat (URL) said:

Mar. 16, 10:39 PM

"What caused the panic was that the collapse of Lehman signalled to market participants that the magnitude of losses throughout the financial sector was far greater than had been anticipated."

"It seems far more likely that what was occuring prior to the collapse of Lehman fed by a lack of information about the dire financial condition of the financial sector."

From the Sunday before the Lehman bankruptcy:


"The head of bond fund Pimco, Bill Gross, said a Lehman bankruptcy risks an "immediate tsunami" because of the unwinding of derivative and credit swap-related positions worldwide in the dealer, hedge fund and buyside universe."

"If Lehman were to file for bankruptcy, credit spreads for all corporates are expected to widen dramatically, causing large losses to investors, including those without any direct exposure to Lehman."

"Update 4:50 PM: Cash Mundy in an earlier comment highlighted Nouriel Roubini's reading on the consequences of a Lehman unwinding:

It is now clear that we are again — as we were in mid- March at the time of the Bear Stearns collapse — an epsilon away from a generalized run on most of the shadow banking system, especially the other major independent broker dealers (Lehman, Merrill Lynch, Morgan Stanley, Goldman Sachs). If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system. That is the reason why the Fed has convened in emergency meetings the heads of all major Wall Street firms on Friday and again today to convince them not to pull the plug on Lehman and maintain their exposure to this distressed broker dealer."


"NEW YORK -- A rare emergency trading session opened Sunday afternoon to allow Wall Street dealers in the $455 trillion derivatives market reduce their exposure to a potential bankruptcy filing by Lehman Brothers.

U.S. regulators and bankers were making last-ditch efforts on Sunday to prevent toxic assets from ailing Lehman Brothers spilling into global markets and rupturing investor faith in the international financial system.

"This is an extremely, and I stress extremely, rare event. It also speaks to the more general notion that, in today's highly disrupted financial markets, the unthinkable is thinkable," said Mohamed El-Erian, the chief executive of Pimco, the world's biggest bond fund, based in Newport Beach, California."

Where, in any of this, do you find a lack of understanding how dire the situation was? As near as I can tell, before the bankruptcy, people were saying that Lehman going bankrupt mattered because of the consequences of Lehman going bankrupt. I can't find anyone saying that if Lehman goes Bankrupt, then we'll know things are bad. They knew how bad things were.

Importantly, nothing would have changed if Lehman had been rescued.

From Clusterstock:

"Why Rescuing Lehman Would Not Have Helped

John Carney|Mar. 12, 2009, 4:41 PM|8

Print

Tags: Wall Street, Lehman Brothers, Federal Reserve, Financial Services, TARP, Bailout, Treasury

We've noted before the remarkable resilency of the prevailing orthdoxy on the collapse of Lehman Brothers. Many market watchers are absolutely unshakable in their belief that the government's failure to arrange a rescue of Lehman precipiated an financial calamity. So time and again, we've found ourselves in the lonely role of attempting to exorcise this idea from our bewitched friends.

Sam Jones at the Finacial Times' Alphaville is the latest to mount a defense of orthodox view. His best piece of evidence is a graph showing that banks more than doubled the cash they held in reserve at the Federal Reserve. In ordinary times, banks are loathe to hold much cash beyond regulatory requirements because they earn so little (often nothing) on that money. They'd rather put it to work. So the cash hoarding Jones shows does indicate that the bans were racked with fear after Lehman collapsed.

So we have no argument when Jones says that the banks anticipated - or were already experiencing - an interbank lending collapse after Lehman went down.The question, however, is not whether Lehman's collapse put the fear of God into the markets. It whether is the government's failure to rescue Lehman caused the panic.

We have a different interpretation of events. It seems far more likely that what was occuring prior to the collapse of Lehman fed by a lack of information about the dire financial condition of the financial sector. Many banking executives and investors had convinced themselves the Bear Stearns had been brought down by a liquidity shortage and a "bear hunt" by short sellers. They were complacent about the huge balance sheet holes in the financial institutions.

The collapse of Lehman was like a beacon of truth about the financial sector. The long dishonesty or delusion collapsed, and brought down banks' confidence in each other with it. AIG and Merrill Lynch were also revealed, at the same time, to be financial cripples. Citigroup became suspect, in part because regulators had apparently concluded it couldn't possibly bailout Lehman or Merrill.

Importantly, nothing would have changed if Lehman had been rescued. The bailout of Lehman Brothers would not have concealed the deep disfunction that head spread throughout the banking system. It would simply have encouraged the disfunction in the way Bear Stearns had. Banks would still have been distrustful, panicked even. They would have demanded that the implicit guarantee of the financial sector become explicit, which is what wound up happening anyway.

That is to say, it was the colllapse of Lehman that set off the problems in the sector. But it was not the failure to mount a rescue. Lehman's collapse was a signal that would have sounded just as loudly even if it had been bailed out by the government. Credit markets froze because banks realized the banking system was sick almost to death. Rescuing Lehman would have done little, probably nothing at all, to alleviate this."

Me:

Don the libertarian Democrat (URL) said:

Mar. 12, 7:07 PM

The reason that Lehman going bankrupt caused the panic was because the government was expected to not let that happen. That's why the government immediately stepped in on AIG and Merrill and Money Market Accounts. The alternative would be that letting Lehman fall would have rallied the markets, or moved them on to Plan B sans government aid. There was no such plan.

Actually, on the Sunday before Lehman, many investors said that if Lehman fell Merrill might follow. I've heard no evidence that they said that it didn't matter.

As for Taylor's argument, there are 3 alternatives:
1) Government intervenes
2) Government dithers
3) Government declines to intervene

If 3 was what the investors and markets were looking for, then 2 should have been better than 1. After all, no action is better than some action under that view. Only the lack of 1 could have caused a problem while the government dithered.

There are all sorts of quotes by actual actors in this drama, including China, that have said that they understood that the US government had implicitly guaranteed these assets, and did not expect the US government to let Lehman go bankrupt.

As for it wouldn't have mattered, it made all the difference because it set off a Calling Run. For anyone who sees this through Fisher's eyes, this is the onset of Debt-Deflation. The alternative is not a scenario of zero losses, but one in which there is a more orderly unwinding of losses sans panic. The two events are not the same. The onset of Debt-Deflation has made this crisis much worse.

I'll reiterate one point again: many investors knew that the situation was dire and that Lehman was a disaster. Otherwise, nothing would have happened immediately, but it did. Your scenario is that everything was changed by the depth of Lehman's problems. Everybody but you knew about that on Sunday, otherwise the special trading session and deal with the B of A or Barclays might have worked.

Banks did not freeze because they were in trouble: they knew that. They froze because they thought that they might be on their own. That's obvious by the fact that they immediately requested government intervention. By your scenario, their stock price should have immediately fallen to zero, which would have happened w/o government intervention.