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Lehman Crisis Could Add to Stimulus Pressure

Non-intervention at Treasury, Fed seen adding to Congressional urgency.

WASHINGTON — This time, the government decided less was more.

This story first appeared in the September 16, 2008 issue of WWD.  Subscribe Today.

But just as the executive branch chose not to intervene, it appears the crisis that brought down Lehman Brothers and led to the sale of Merrill Lynch will turn up the pressure for the legislative branch of the government to pursue a second financial stimulus package.

Treasury Secretary Henry Paulson Jr. on Monday said he supported the decision made by the Securities and Exchange Commission and Federal Reserve over the weekend not to extend the government rescue measures provided to Freddie Mac and Fannie Mae, and earlier to Bear Stearns, to Lehman Brothers and other troubled financial institutions as the right way to “strengthen and enhance” U.S. financial markets. The nonintervention, he said, would be crucial to keeping U.S. markets running smoothly and addressing concern about the credit markets.

“Today we are looking forward,” Paulson said. “This weekend’s discussions made clear that both market participants and regulators in this country and abroad recognize the need to support market stability and remove uncertainty as they address current challenges. I am committed to working with regulators and policymakers — including Congress — to take necessary and appropriate steps to maintain the stability and orderliness of our financial markets. And I will engage with regulators and policymakers around the world to that end.”

Following a meeting with President Bush on Monday about the events that unfolded over the weekend, Paulson said he had consistently stated the root of the current U.S. financial instability is in the housing market, which led to the Fannie Mae and Freddie Mac bailout.

“There is a reasonable chance that the biggest part of our housing correction can be behind us in a number of months, not two or three months, but in months as opposed to years,” Paulson said.

He also said the government was “dealing with the tools it has,” but that long-term regulatory changes were needed if the crisis was to be fully addressed. Paulson stressed he thought the U.S. commercial banking system is “a safe and a sound one,” and that consumers should not worry about their savings and checking accounts as the financial crisis continues to unravel.

When asked why Bear Stearns was treated differently than Lehman Brothers, Secretary Paulson said the situation in March with Bear Stearns was very different than the one this month. He stated that he never thought it was “appropriate” to put taxpayer money on the line with Lehman.

Not surprisingly, news of the financial crisis prompted another round of barbs between the two presidential candidates, who are fleshing out their economic proposals on the stump in the final stage of campaigning before the election on Nov. 4.

“Eight years of policies that have shredded consumer protections, loosened oversight and regulation and encouraged outsized bonuses to ceo’s while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression,” said Barack Obama, the Democratic presidential nominee.

Tapping into the angst of the American public over the economy, Obama sought to draw a link between his rival, Republican presidential nominee John McCain, and the unpopular policies of President Bush.

“I certainly don’t fault Sen. McCain for these problems, but I do fault the economic philosophy he subscribes to. It’s a philosophy we’ve had for the last eight years,” Obama said.

McCain said, “The crisis in our financial markets has taken an enormous toll on our economy and the American people.” He commended the Federal Reserve and Treasury Department for refusing to back a taxpayer bailout of Lehman Brothers.

He said a McCain administration would “replace outdated and ineffective patchwork quilt of regulatory oversight in Washington and bring transparency and accountability to Wall Street.”

Democrats on Capitol Hill, who are crafting a second economic stimulus package, used the crisis to underscore the need for assistance from the federal government to jump-start the economy. Sen. Carl Levin (D., Mich.) said the crisis on Wall Street could generate some Republican support for the measure.

“Republicans have got to see what we see and feel in their own states, which is a great deal of uncertainty on the part of the public about this economy,” said Levin.

Congress expects to take up a second economic stimulus bill this month but its prospects for passage are uncertain because Bush administration officials, including Paulson, and Republicans in Congress have indicated the benefits of the first stimulus legislation, which put billions of dollars directly in the pockets of the public, have not been fully realized.