Hank Paulson's Foresight, and Vikram Pandit's Ignorance

During my long slog through the entire Lehman Examiner's Report, I came across lots of interesting-but-not-mind-blowingly-important bits of information, and I'm going to try to highlight my favorite ones. These two both come from the handwritten notes of Thomas Fontana, head of risk management in Citi's Global Financial Institutions group. The notes in question were taken during meetings at the New York Fed on the Sunday before Lehman failed (Sept. 14, 2008).



First, we learn that Vikram Pandit, CEO of one of the largest bank holding companies in the world (Citigroup), apparently didn't know what Section 23A was. For non-finance types, Section 23A is the law that governs transactions between commercial banks and their non-bank affiliates. If you've ever worked at a big bank, you know what 23A is — unless, apparently, you're the CEO. This definitely isn't a lawyers-only thing either — Fontana is a risk manager, and he was so surprised that he felt compelled to write, "VP [Vikram Pandit] doesn't know what 23A is?" Oh, Vikram.





Next, Fontana's notes appear to indicate that Hank Paulson foresaw that Lehman's bankruptcy filing would cause problems in the money markets, and was concerned about money market funds breaking the buck — which, of course, actually happened, and caused a devastating run on the U.S. money markets. The conventional wisdom has been that policymakers were completely blindsided by the run on money market funds (I know I didn't expect it either). But in Fontana's notes, taken during a meeting with Geithner and Paulson just before Lehman filed for bankruptcy, right under "Hank Paulson" it says "Funds breaking the buck . . . ." (I'm terrible at deciphering other people's handwriting, so I don't know what it says right after that.) In any event, I thought it was interesting that contrary to popular belief, Paulson actually was concerned about money market funds breaking the buck as a result of Lehman's bankruptcy filing — that it wasn't some out-of-nowhere problem that no one had anticipated.