Lehman 'was forced into bankruptcy' by regulators, former CEO testifies
Thursday, September 2, 2010
U.S. regulators acting on "flawed information" denied Lehman Brothers the bailout assistance that its Wall Street competitors received, dooming the investment bank to collapse, former company chief executive Richard S. Fuld said Wednesday.
In remarks before the Financial Crisis Inquiry Commission set up by Congress, Fuld testified that Lehman gave government regulators a number of options for saving the company but that these were rejected. He said the regulators just weeks later extended similar measures to other Wall Street banks.
"Lehman was forced into bankruptcy not because it neglected to act responsibly or seek solutions to the crisis, but because of a decision, based on flawed information, not to provide Lehman with the support given to each of its competitors and other nonfinancial firms in the ensuing days," Fuld said.
Fuld - a central figure in the crisis, criticized for taking too much risk - argued that the sudden collapse of Lehman and the resulting shock to markets could have been avoided as late as the weekend before, had the government taken action.
After Lehman filed for bankruptcy on Sept. 15, 2008, the financial crisis deepened as credit markets almost froze.
"Lehman would have had time for at least an orderly wind-down or for an acquisition, which would have alleviated the crisis that ensued," Fuld said.
Two years after the investment bank went bankrupt, Fuld remained resolute in his view that the company should not bear the brunt of the blame.
Although Fuld has previously made similar but less pointed remarks on Capitol Hill, they have been largely ignored. This time, however, members of the commission put U.S. regulatory officials on the defensive, to explain why they did not take aggressive action to save the bank.
Philip Angelides, chairman of the commission, noted that "political consideration" may have been a reason why U.S. officials tabled a proposal to help Lehman merge with another firm. He cited e-mails from Federal Reserve officials that said a rescue might look bad in the press.
Thomas Baxter, general counsel of the Federal Reserve Bank of New York, said Wednesday that Lehman had access to the Fed's lending facilities before filing for bankruptcy, which gave the bank time to seek alternatives.
"The Federal Reserve did not 'allow' Lehman Brothers to die," Baxter contended.
He drew a distinction between Lehman and American International Group, which received a bailout the same week Lehman collapsed. Baxter said AIG, which received $182.3 billion, had sufficient resources to back a loan.
Scott Alvarez, the Fed's general counsel, said there were a number of reasons why the central bank did not offer Lehman the opportunity to take a bailout. First, he said, the Fed did not think it had the authority to do so, and, even if it did, it did not think Lehman could repay the government.
"If the Federal Reserve had lent to Lehman that Monday, this hearing and all other hearings would only have been about how we wasted taxpayers' money," Alvarez said.
He said Lehman's situation was different from that of Bear Stearns - which was saved when the Fed helped arrange a purchase by J.P. Morgan Chase - because Bear Stearns had a prospective buyer.
The 10-member Financial Crisis Inquiry Commission is charged with writing the official account of the financial meltdown and reporting whether specific financial institutions would have lived or died without exceptional government assistance.
Wednesday's hearing was the first of a two-day inquiry into the expectation and impact of extraordinary government intervention. Fed Chairman Ben S. Bernanke and Federal Deposit Insurance Corp Chairman Sheila C. Bair are set to testify Thursday.
The FCIC's final report is due in December and is likely to contain mounds of internal documents from banks and government agencies regarding the actions they considered and took during the crisis.