The bankruptcy of Lehman Brothers remains the largest in U.S. history, with debts reaching $619 billion, a record that has yet to be broken. People often ask: for such a massive bankruptcy, why didn’t the head office of the Federal Reserve in Washington DC handle it? Why was it left to the regional Federal Reserve Bank of New York?
The answer is very simple. Lehman Brothers was headquartered in New York, just like Bear Stearns. Both institutions were under the jurisdiction of the Federal Reserve Bank of New York. Since the United States is divided into 12 Federal Reserve districts, each regional Fed operates independently within its district. No one, not even the Fed Chair in Washington, can interfere in the affairs of a regional Reserve Bank.
This also underscores how the Fed in Washington is independent of the White House. No president can dictate its actions. When Timothy Geithner, then president of the New York Fed, worked to address the crises at Lehman Brothers and Bear Stearns, he collaborated directly with Treasury Secretary Henry Paulson.
At G7 meetings, beyond the summits, the most significant gatherings are those of Finance Ministers, which occur four times a year. Other ministerial meetings often happen only once or twice annually. The full title, “Meeting of Finance Ministers and Central Bank Governors,” reflects how in many countries central banks are under the authority of finance ministers.
However, in the United States the situation is different. When Barack Obama was sworn in, he immediately nominated Timothy Geithner, then president of the New York Fed, to be Treasury Secretary, and the Senate confirmed him. Remarkably, Geithner became the only Treasury Secretary in modern history without a political party affiliation, maintaining his independence. In a dramatic twist, just one day prior he had been working under Fed Chair Ben Bernanke, and the next day he became Bernanke’s superior.
This kind of extraordinary career leap embodies the American Dream and helps explain why so many people aspire to study and work in the United States. Sometimes what feels like a scene from a TV drama can come true if you work hard and seize the right opportunity.