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Ex-Merrill CEO John Thain regrets not demanding a U.S. bailout of Lehman Bros.

February 11, 2011 |  8:56 pm

The trillion-dollar question comes around yet again: Would a government bailout of Lehman Bros. in September 2008 have avoided the global financial crisis and the market crash that followed it?

Former Merrill Lynch CEO John Thain thinks so, according to testimony he gave the Financial Crisis Inquiry Commission, as revealed Friday by Bloomberg News’ Hugh Son:

Banking chiefs weren’t "strong enough" during 2008 meetings in insisting that then-Treasury Department Secretary Henry Paulson reverse his opposition to a U.S.-led rescue of Lehman, Thain told the Financial Crisis Inquiry Commission, according to audio files released yesterday.

"We collectively, the group of us, we should have just grabbed them and shaken them and said, 'Look, you guys cannot do this,' " Thain told FCIC interviewers in a Sept. 17, 2010, interview. "Allowing Lehman to go bankrupt was the single biggest mistake of the financial crisis."

"It would’ve been much less likely that TARP and all the things that followed would’ve been necessary if Lehman hadn’t been allowed to go bankrupt."

Thain, of course, sought to save Merrill by persuading Bank of America Corp. to agree to buy Merrill the same weekend that Lehman failed. And within months BofA would get $45 billion of government money under TARP, the Troubled Asset Relief Program.

The alternative view to Thain's, as expressed by Harvard University's Kenneth Rogoff, among others, is that the U.S. was so ripe for a financial meltdown in 2008 that something was bound to trigger it, even if Lehman had been saved with taxpayer money.

The Economist magazine noted in a story one year after Lehman’s collapse:

[Rogoff] believes, as he did the month before Lehman's collapse, that America had the classic preconditions of a massive financial crisis: trillions of dollars of debt secured by an inexorably deflating asset bubble. Bank write-downs already totaled more than $500 billion in August 2008. If Lehman had not been allowed to fail, some other firm would have, with similar results.

Maybe BofA/Merrill?

-- Tom Petruno