Richard Fuld testifies on WednesdayJONATHAN ERNST
Regulators sparred with the former chief executive officer of Lehman Brothers Holdings Inc. Wednesday over the decisions that led to the firm's demise almost exactly two years ago, an event which nearly sent the financial system into the abyss.
U.S. regulators did not "allow" Lehman to fail, a senior lawyer for the Federal Reserve said in testimony before a congressional panel, but worked diligently to save it, abandoning the effort only when an eleventh-hour deal to sell the firm collapsed.
Richard Fuld, formerly Lehman's CEO, countered that his firm's downfall was directly linked to choices made by the U.S. government. "Lehman was the only firm that was mandated by government regulators to file for bankruptcy," he said. "The government then was forced to intervene to protect those other firms and the entire financial system."
Lehman's bankruptcy, the largest in U.S. history, remains the single most controversial episode of the financial crisis. The firm's demise on Sept. 15, 2008, unleashed chaos in global markets and led to bailouts for American International Group Inc. and some of the nation's largest banks.
Wednesday's testimony, before a panel charged with investigating the causes of the financial crisis, highlighted that there are still unresolved questions surrounding Lehman's collapse, particularly in the communications between the firm and U.S. regulators.
Getting to the bottom of those uncertainties is critical. In the coming months, U.S. authorities will roll out a plethora of new rules aimed at lessening the risks that large financial institutions pose to the system as a whole. Preventing a repeat of a Lehman-like scenario - which unfolded in what one insider described Wednesday as "an atmosphere of extreme turmoil, anxiety, and a level of chaos" - is the top priority.
The financial reform package approved by Congress earlier this summer takes "positive steps to put away the notion that firms are 'too big to fail,' " said John Chrin, a former senior investment banker and fellow at Lehigh University. From now on, market players know "there's a potential that the company could go to zero and the government isn't going to step in," he said.
Wednesday's hearings highlighted the struggle, back in 2008, to determine just how far the government should go to save a financial institution. In every major case except Lehman, U.S. regulators either facilitated a sale to another firm or orchestrated an outright rescue. "We came very close" to saving Lehman, testified Thomas Baxter, general counsel at the Federal Reserve Bank of New York.
On that fateful weekend in New York, he said, Barclays was willing to acquire Lehman, and a consortium of banks had agreed to provide financing. The sticking point: someone had to guarantee Lehman's trading obligations while the transaction closed.
Barclays couldn't do it without a shareholder vote, which would take days or weeks, and U.K. authorities refused to waive such a requirement. The Fed, Mr. Baxter said, also couldn't make such a guarantee, because it didn't have the legal authority to do so.
Mr. Fuld, once nicknamed "The Gorilla" for his aggressive manner, was calm but defiant, challenging the claim that the Fed couldn't extend further help to Lehman. On Sept. 14, the day before Lehman filed for bankruptcy, the Fed announced it would expand its loans to investment banks. Mr. Fuld said he first believed that such assistance would solve Lehman's crisis, only to be informed 45 minutes later that the aid wasn't available to Lehman.
Mr. Baxter contested Mr. Fuld's version of events, but others, too, painted a vivid portrait of the breakdown in communication between regulators and the ailing firm. Harvey Miller, Lehman's bankruptcy lawyer, said that in a meeting on Sept. 14, regulators refused to explain why they couldn't help Lehman, repeatedly telling them to return to the firm's offices and prepare a bankruptcy filing.
While Mr. Fuld insisted that "uncontrollable market forces" and "incorrect perceptions" were responsible for Lehman's failure, he allowed for some mistakes. "If you asked me if we did everything right, we clearly did not," he told the panel. "I myself did not see the depth and violence of the crisis. I did not see the contagion. I believe we made poor judgments in timing for the assets we bought and for the businesses we supported."