Fuld fights back in Lehman failure testimony

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Lehman Brothers’s former CEO, Richard Fuld, in his appearance before the U.S. House Financial Services Committee last week blamed rumors, timing, regulators, and a “crisis of confidence and a run on the bank” for the fall of the investment firm.

Fuld denied having any knowledge of the Repo 105 transactions, and the accounting for these transactions, which the Lehman court examiner’s bankruptcy report has found questionable. He could face lawsuits from Lehman’s creditors from questions raised by the bank examiner’s report about Lehman’s disclosures.

The committee was conducting its examination of Lehman’s bankruptcy in the context of proposed regulatory reform. Fuld’s testimony followed appearances by Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke, and Securities and Exchange Commission Chairman Mary Schapiro as committee members sought to find out why Lehman failed and other firms were bailed out, and what kind of authority regulators would need to prevent such a bankruptcy in the future.

“One day we had a firm and the next day we did not. It hurt a lot of people and that is something I will have to live with." Fuld told the committee.

"Our problem was that we could not convince the world we had the capital to survive this – we lost $25 billion of liquidity in two days", Fuld began explaining just as the panel cut him off, the New York Post reported.

At one point in the dramatic hearing Fuld declared: "We were risk-averse."

Rep. Charlie Wilson (D-OH) said: "How can you say that?”

Fuld answered: "I know I walked right into that. Our commercial real estate investments were conservative, but they were victims of terrible timing.”

Fuld passed near Anton Valukas, the Lehman bankruptcy examiner, who also testified, as he entered the hearing room, according to a WSJ.com live blog.

In his prepared remarks, Fuld had written that the bank examiner’s report distorted the facts on the Repo 105 transactions and the press distorted the examiner’s report with the result being Lehman employees were vilified.

Fuld also wrote, “I have absolutely no recollection whatsoever of hearing anything about Repo 105 transactions while I was CEO of Lehman. As CEO, I ran more of a ‘what do I really need to be focused on’ mentality. I was focused on less-liquid assets – commercial real estate, residential mortgages, and leveraged loans. I was not focused on the most highly liquid securities. I was not focused on government securities that could vary between $50 billion and $100 billion a day. My focus was more about what could impact our capital.”

Valukas told the committee that “A fact-finder concluded that [Fuld], in fact, did know and acted upon information he knew or should have known,” according to a New York Times report. “There was at least one witness who testified that he discussed Repo 105 transactions with him and that there were documents sent to him by e-mail and otherwise, which reflected the Repo 105 transactions.”

Valukas noted that Lehman failed to disclose the transaction to regulators and to the public. The SEC did not know about the transactions, Schapiro said. Bernanke said that the Fed had no knowledge of the transactions either.

Fuld also faced questioning about his compensation and recent sales of his home and an art collection.

Geithner's predecessor, Henry Paulson, submitted prepared remarks to the committee in which he said",The government must have the authority to wind down, and eventually liquidate, nonbank financial institutions in a manner that prevents harm to the system as a whole", according to the Las Vegas Sun. "We sorely felt the need for this authority at the time of Lehman's failure, and, had we had it, I think the situation would have ended quite differently."

Geithner said that at the time of the Lehman bankruptcy, the New York Fed had no supervisory authority over an institution with Lehman’s structure, an investment bank holding company. Bernanke said that the SEC was the primary regulator of Lehman. Schapiro said that the SEC was understaffed and, under the Consolidated Supervision Entity program, the SEC either lacked the authority or the resources to oversee Lehman.

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