One problem any large organization — be it the United States government or a multinational financial services corporation — faces is that it’s hard for the guy at the top to fully figure out what’s happening. Economics of Contempt pulls out an interesting, and slightly frightening, example from the handwritten notes of Thomas Fontana, head of risk management in Citi’s Global Financial Institutions group, from a September 14, 2008 (i.e., right before Lehman went under) meeting at the New York Fed:
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.
Good stuff. We also learn in the same post that Treasury Secretary Hank Paulson expressed specific concern that if Lehman failed it would cause big problems for money market funds, which is precisely what happened after Lehman did fail. There’s a been a common assumption that it was allowed to fail because policymakers in general, and Paulson in particular, didn’t appreciate this risk but perhaps they did.