“Other firms were hurt by their plummeting stock prices,” Fuld, 64, told the Financial Crisis Inquiry Commission at a hearing in Washington today. “Lehman was the only firm that was mandated by government regulators to file for bankruptcy. The government was then forced to intervene to protect those other firms and the entire financial system.”
Lehman, the biggest underwriter of mortgage-backed securities at the top of the U.S. real estate market, filed the largest bankruptcy in the country’s history in September 2008, with $639 billion in assets, roiling markets and exacerbating the credit crisis. The securities firm succumbed to the subprime mortgage crisis it helped create after surviving railroad failures of the 1800s and the Great Depression in the 1930s.
“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.
The collapse of New York-based Lehman and the bailout the same week of insurer American International Group Inc. contributed to the biggest rewrite of financial rules since the Depression as lawmakers sought to limit risk and create a process to unwind risky firms. The U.S. also rescued automakers.
Fed lending facilities had “calmed markets” and allowed Lehman time to seek a solution to its “myriad problems,” said Thomas Baxter, general counsel for the Federal Reserve Bank of New York, in prepared remarks for the hearing. “At no time, however, did anyone at the New York Fed believe that Lehman had sufficient liquidity to withstand what was to come in September.” Baxter said that AIG, with profitable insurance underwriting units, was unlike Lehman in that it had sufficient resources to back a loan.
The rescue of AIG, which was unable to obtain private- sector funding as Lehman faltered, swelled to $182.3 billion after regulators determined that allowing the insurer to fail would further hobble the financial system.
The FCIC’s hearing today is called “Too Big to Fail: Expectations and Impact of Extraordinary Government Intervention and the Role of Systemic Risk in the Financial Crisis.” Also addressing the panel was Robert Steel, the former CEO of Wachovia Corp., the lender acquired by Wells Fargo & Co. after the government facilitated a deal for his company to be purchased by Citigroup Inc.
“The government had deemed Wachovia too big to fail, Lehman fell into a different bucket and we have lots of questions why,” said Tucker Warren, a spokesman for the FCIC.
The 10-member bipartisan FCIC was created by Congress to study the causes of the worst economic slump since the 1930s. The commission, led by former California Treasurer Phil Angelides, is scheduled to report its findings to Congress and President Barack Obama by December.
Fuld said Lehman sought permission in September 2008 to convert to a bank holding company, asked for its Utah bank to be able to raise deposits to boost liquidity and proposed a ban on naked short selling. Regulators turned down the requests and then aided other firms with relief similar to what Lehman had asked for, he said. Morgan Stanley and Goldman Sachs Group Inc. were allowed later that month to become banks.
‘Victim of Circumstance’
Federal Reserve General Counsel Scott Alvarez, speaking to the FCIC today as part of a separate panel, said Lehman never applied to become a bank holding company, and that the Fed denied Lehman funding in the firm’s final days because Lehman lacked sufficient collateral to guarantee repayment.
“They failed not because the government wasn’t willing to help them but because they were a victim of the circumstance and the economy and some bad decisions that they had made through the years,” Alvarez said.
Fuld rejected the notion that Lehman had an “aggressive risk posture,” and said the firm “pursued everything we possibly could have to have prevented what occurred on that Sept. 15.”
Fuld said that “rumors” about insufficient capital were false and that his company had raised funds and cut exposure to less-liquid assets by almost half. Regulators earlier in 2008 helped JPMorgan Chase & Co. acquire faltering securities firm Bear Stearns Cos. and criticism of the deal may have set a precedent “of how not to handle the next problem,” Fuld said.
Harvey Miller, the lawyer with Weil, Gotshal & Manges LLP who is Lehman’s lead bankruptcy attorney, said the response from the New York Fed “was not illuminating” when the company asked if there was an evaluation of the consequences of the firm’s failure. At the time of its collapse, Lehman was party to more than 10,000 derivatives contracts relating to about 1.7 million transactions, he said in prepared remarks for the commission.
Fuld was warned months before the bankruptcy by then- Treasury Secretary Henry Paulson that Lehman might fail if it continued to report losses without finding a buyer or formulating a survival plan, according to bankruptcy examiner Anton Valukas’s March report.
‘Depth and Violence’
Fuld never assumed the U.S. government would bail out his company, he told lawmakers in April. He said he personally failed to realize the “depth and violence” of the financial crisis, and that Lehman showed “terrible timing” by boosting its investments in commercial real estate.
Barclays Plc, the U.K.’s third-biggest bank, bought Lehman’s brokerage for $1.54 billion a week after Lehman filed for bankruptcy. Lehman has sued Barclays, saying the London- based bank should pay it as much as $11 billion for making an allegedly undisclosed “windfall.”
Lehman used off-balance sheet transactions called Repo 105s to downplay its leverage in late 2007 and 2008, creating a “materially misleading picture” of the firm’s condition, Valukas said. Fuld was “at least grossly negligent in causing Lehman Brothers to file misleading periodic reports,” according to the March report.
Fuld said in April testimony that he had “absolutely no recollection whatsoever” about the Repo 105 transactions while he was CEO.