Ex-Lehman CEO says regulators refused to save firm

WASHINGTON — The former chief of Lehman Brothers told a panel investigating the financial crisis that the Wall Street firm could have been rescued, but regulators refused to help — even though they later bailed out other big banks.

Richard S. Fuld Jr. told the Financial Crisis Inquiry Commission at a hearing that Lehman did everything it could to limit its risks and save itself in the fall of 2008.

"Lehman's demise was caused by uncontrollable market forces, and the incorrect perception and accompanying rumors that Lehman did not have sufficient capital to support its investments," Fuld testified.

Fuld accepted responsibility for mistakes made that saddled Lehman with some $60 billion in bad investments. But he said Lehman proposed measures to federal regulators that could have saved the firm, and "each of those requests was denied."

Other financial firms later received the government assistance that Lehman was denied, Fuld said.

Lehman was "mandated" by regulators to file for bankruptcy on Sept. 15, 2008 — the only firm ordered to do so, he said.

"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," said Fuld.

But Thomas Baxter, general counsel of the New York Federal Reserve, insisted that the Fed lacked the legal authority to provide a government guarantee of Lehman's obligations to its trading partners or other aid the firm sought. Hundreds of billions worth of collateral would have been needed to secure a guarantee of that magnitude, he said.

"Lehman didn't have it," Baxter told the panel.

Panel chairman Phil Angelides said there appeared to be "a conscious policy decision" by the Fed not to rescue Lehman.

Lehman's bankruptcy was the biggest in U.S. history and triggered a panic in financial markets.

Through hours of testimony Wednesday, Fuld repeated that Lehman had reduced its risks and held adequate capital. But it fell victim to a classic run on the bank.

After the subprime mortgage bubble burst in 2007, complex investments called credit default swaps — which insured against default of securities tied to the mortgages — collapsed. That helped bring the downfall of Lehman.

U.S. government officials declined to rescue Lehman. Instead, they injected tens of billions of dollars into other financial firms.

Charlotte, N.C.-based Wachovia had a huge amount of business in adjustable-rate mortgages, enticing borrowers who later defaulted on their home loans. In late September 2008, the FDIC, the Federal Reserve and the Treasury Department found that Wachovia posed a "systemic risk to the financial industry and the economy," FDIC official John Corston said in his testimony.

Aided and prodded by the government, Wells Fargo acquired Wachovia. The $12.7 billion deal, announced in early October 2008, created an institution with operations in 39 states and the District of Columbia.

Under the landmark financial overhaul law enacted in July, regulators are empowered to shut down financial institutions whose collapse could threaten the system.

At the hearing, regulators defended allowing Lehman Brothers to collapse and justified supporting the purchase of Wachovia. The regulators said both decisions made sense under the circumstances.

But Angelides said regulators failed to look at the potential damage to the financial system until 2007. And when the crisis began to gather force, regulators declined to rescue Lehman but pumped billions of dollars into other teetering financial institutions, such as American International Group Inc., he said.

"One was in and one was out," said Angelides.

Scott Alvarez, general counsel of the Federal Reserve, and Corston said their agencies lacked the legal authority to check on the banks for potential systemic risk. They were limited to overseeing their individual financial soundness.

"We didn't have the tools to do anything other than what we did," Alvarez testified.

Robert Steel, the former Wachovia CEO, said FDIC Chairman Sheila Bair directed Wachovia in late September 2008 to enter into talks with Citigroup Inc. as a potential buyer.

The FDIC had decided not to provide aid to Citigroup or Wells Fargo in acquiring Wachovia.

The negotiations with Citigroup "proved extremely complicated and difficult," Steel said.