Lehman Brothers Holdings Inc., which filed the biggest bankruptcy in U.S. history, violated its own risk-management rules with the knowledge of the U.S. Securities and Exchange Commission, a bankruptcy examiner said.
“We found that the SEC was aware of these excesses and simply acquiesced,” Anton R. Valukas, the Lehman examiner, said in a statement prepared for a House Financial Services Committee hearing today.
Valukas is scheduled to present his testimony on policy issues arising from his 2,200-page report on Lehman’s downfall. The statement by Valukas, a former federal prosecutor who spent a year and $42 million investigating Lehman, was posted on the committee’s Web site yesterday.
After Bear Stearns Cos. neared collapse in March 2008, the SEC and the Federal Reserve Bank of New York placed “embedded teams” at Lehman to gather information and monitor the firm’s financial condition, Valukas said in his prepared remarks. The heads of those institutions also spoke regularly with former Lehman Chief Executive Officer Richard S. Fuld, Valukas said.
“So the agencies were concerned,” he said. “They gathered information. They monitored. But no agency regulated.”
John Heine, an SEC spokesman, said he couldn’t comment yesterday. SEC Chairman Mary Schapiro, who is also scheduled to testify today, said in her prepared remarks that her agency might not have been able to prevent Lehman’s collapse.
“It’s not clear that anything the SEC could have done would have prevented Lehman’s bankruptcy,” Schapiro said in her statement. “It’s also clear that the SEC did not do enough as consolidated supervisor to identify certain risks and require additional capital and liquidity.”
Former SEC Chairman Christopher Cox “had direct calls with Mr. Fuld every few weeks” starting in March 2008, according to Valukas’s testimony.
Treasury Secretary Timothy F. Geithner, who was president of the New York Fed through 2008, advised Fuld in regular talks that Lehman needed to raise more capital or form an “alliance” with a stronger company. Geithner also regularly discussed Lehman with Federal Reserve Chairman Ben S. Bernanke, his boss at the time.
“The Fed and Treasury took pains to tell us that the SEC was Lehman’s regulator, and that they therefore deferred to the SEC,” Valukas said in his statement. “But former SEC Chairman Cox took equal pains to say, during our interview with him on January 8, 2010, that the SEC’s statutory jurisdiction was limited to Lehman’s broker-dealer subsidiary and that it was not the regulator of Lehman itself.”
All major investment banks including Goldman Sachs Group Inc. and Morgan Stanley voluntarily submitted to SEC regulation before Lehman’s collapse, Valukas said in his testimony.
“Despite Chairman Cox’s statement, we believe it is clear that the SEC was Lehman’s primary regulator,” he said.
Lehman filed for bankruptcy in September 2008 with $639 billion in assets. It has said it will spend five years liquidating to pay unsecured creditors as little as 14.7 cents on the dollar.
While the SEC had officials inside Lehman monitoring the firm’s financial condition, it also “maintained its role as an arm’s length regulator” responsible for investigating potential violations of securities laws, Cox said in a statement delivered to the House Financial Services Committee.
Cox, now a partner at the law firm Bingham McCutchen LLP, said it became clear after the near collapse of Bear Stearns that the SEC and Federal Reserve failed to incorporate a “total meltdown of the U.S. mortgage market” in their risk models.
The SEC had no idea that Lehman used accounting transactions to “artificially reduce its apparent leverage,” Cox said.
Geithner, in excerpts of testimony prepared for the hearing, said “there are few better examples of why we need comprehensive financial reform” than the failure of Lehman.
Lehman, which has been investigating whether any companies may have contributed to its bankruptcy, issued at least five subpoenas on April 16 to investment firms and hedge funds including Goldman Sachs, according to court filings. Short sales, or bets against its stock by investors, were of concern to Lehman even before the bankruptcy, Valukas said in his report.
Hiring lawyers at Kasowitz Benson Torres & Friedman LLP last year, Lehman said their role would be to help with an investigation and “possible prosecution of certain litigation” against parties that may have interfered with or damaged its business.
Lehman has been issuing subpoenas since a bankruptcy judge last November gave it authority to do so, requiring people or entities to produce documents and submit to “examinations.” Other companies that got Lehman subpoenas on April 16 were SAC Capital Advisors LP, Greenlight Capital Inc., Citadel Investment Group LLC and Och-Ziff Capital Management Group LLC, according to court filings.
Michael DuVally, a Goldman Sachs spokesman, and Jonathan Gasthalter, a spokesman for New York-based SAC Capital, didn’t respond to e-mails seeking comment yesterday. Devon Spurgeon, a Citadel spokeswoman, and Steven Bruce, a spokesman for Greenlight and Och-Ziff, declined to comment.
The bankruptcy case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
To contact the reporter on this story: Linda Sandler in New York at firstname.lastname@example.org.