WASHINGTON (CN) – Former Lehman Brothers CEO Richard Fuld said Wednesday that federal regulators forced Lehman into bankruptcy by failing to grant the firm the same taxpayer bailout assistance it gave Lehman’s competitors such as Goldman Sachs and Morgan Stanley.
“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,” Fuld said in written testimony for a hearing of the Financial Crisis Inquiry Commission – the bipartisan commission appointed by Congress to look into the causes of the financial crisis.
Fuld told commissioners that the government relied on “flawed information” to deny Lehman access to collateral that would allow it to borrow from a special credit facility in the Federal Reserve.
“Had Lehman been granted that same access as its competitors,” Fuld said, “Lehman would have had time for at least an orderly wind down or for an acquisition which would have alleviated the crisis that ensued.”
Lehman filed for bankruptcy in September 2008 at the end of a weekend during which regulators negotiated with investment banks to help resolve the mortgage-backed asset crisis. Fuld said the regulators mandated that Lehman file for bankruptcy based on “incorrect rumors” that Lehman was in poor financial shape but then gave Lehman’s competitors, including Morgan Stanley and Goldman Sachs, access to collateral that helped them stay afloat.
“We had the collateral,” Fuld said. Fuld said Lehman had a strong combination of capital and liquidity in addition to operating businesses that qualified it for the federal collateral extension.
When Commissioner Keith Hennessey asked why the bank could not dissolve the false rumors if it did in fact have the capital to stay afloat, Fuld said, exasperated, “I do not know…I do not know.”
“Until and unless someone can point to someone, we’re going to spin round and round like we always have done,” Hennessey said, explaining that if Fuld could not name a hedge fund manager or someone specific who was “talking down” the firm then he would have a hard time being convinced that Lehman was in a position to stay afloat.
Thomas Baxter, General Counsel and Executive Vice President of the Federal Reserve Bank of New York, said Lehman Brothers had the same access to credit as everyone else, and said the decision to file bankruptcy was Lehman’s. “I have no question that it was their decision,” he said.
Baxter said that the Federal Reserve’s Chris Burke wrote a letter to Lehman on the day it filed for bankruptcy showing that they had access to collateral for the Fed credit facility. “There shouldn’t be doubt about this,” Baxter said. “You have it in writing.”
Baxter also said the Fed did not have the legal authority to lend money to Lehman, and said that even if it did, aiding the firm would have put taxpayers on the hook for an additional hundreds of billions of dollars.
“The potential cost to the American taxpayer, had we had the legal authority, which we did not, would lead us to say that’s not something we should do,” Baxter said.
Baxter said the Fed bailed out AIG because it had the ability to back a loan, while Lehman did not.
“At no time…did anyone at the New York Fed believe that Lehman had sufficient liquidity to withstand what was to come in September,” Baxter said in his written testimony.
Commissioner Byron Georgiou said the parties should leave the question about Lehman’s financial condition in 2008 to historians and focus on deeper causes of the crisis.
“How did you get to the position where you needed to be bailed out?” Georgiou asked Fuld.
“We could not stem the tide of the uncontrollable market forces and the false rumors that swirled around the firm,” Fuld said. “Once a bank loses the faith of the confidence of the marketplace, the bank can no longer exist,” he said.
“I clearly made mistakes,” Fuld said. “Too much commercial real estate…less liquid assets…capital,” he said. “Did we do everything right? We clearly did not. I myself did not see the depth and violence of the crisis. I did not see the contagion. We made poor judgments in timing of assets we bought and supported.” Fuld said the firm tried to address its missteps, but the swell of market failure was too great.
“I take full and total responsible for the decisions that I made,” Fuld said. “I only made those decisions, though, with the information I had at the time,” echoing his testimony before a House committee in April.
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