Fed Caused Lehman Bankruptcy, Says Former CEO

Ex-Lehman Brothers Chief Excutive Richard Fuld told members of the Financial Crisis Inquiry Commission on Wednesday that the Federal Reserve (Fed) helped create the domino effect that put the 2008 Wall Street collapse in motion.

In a hearing on Capitol Hill, Fuld denied speculation that bad judgment on his part led Lehman to fail. Instead, Fuld said in prepared remarks that “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 non-financial firms in the ensuing days.”

Fuld pointed to rumors in 2008 that Lehman did not possess the necessary capital to back its investments as one of the reasons it went bankrupt. Additionally, Fuld lamented the fact that the federal government chose not to deem his former company as being ‘too big to fail.’

“Had Lehman been granted that same access as its competitors…Lehman would have had time for at least an orderly wind down or for an acquisition which would have alleviated the crisis that ensued,” said Fuld.

Today’s hearing is one of a series that have been held by the commission as it prepares to release a report on the 2008 financial collapse to the President and Congress by mid-December. The commission will hear from both Fed Chairman Ben Bernanke as well as Federal Deposit Insurance Corporation (FDIC) Chair Sheila Bair tomorrow.

Congress questions Lehman Brothers CEO

Chairman and CEO of Lehman Brothers Holdings Richard Fuld Jr. said that his company's fall could have happened to anyone because "nobody expected such decline" in the housing market. Rep. Jim Cooper (D-Tenn.) said that while Fuld claimed this could have happened to any company, "it didn't happen" to other companies.

Fuld said that Lehman Brothers's capital was in good shape on September 10, five days before the company filed for bankruptcy. Rep. John Sarbanes (D-Md.) called Fuld's account of the fall of the company "implausible."

Fuld said closing the mortgage business of Lehman Brothers down would have been a good idea in retrospect, but others would have considered that "irrational" at the time. Rep. Peter Welch (D-Vt.) said that companies had taken the business of mortgage lending, and "put it on steroids."

Rep. Chris Van Hollen (D-Md.) said that the previous compensation packages Fuld had accumulated (Fuld said he received about $350 million in compensation while at Lehman Brothers) should be given to the shareholders of the company. Fuld said he suffered financially from his company's bankruptcy considering he was "the single largest shareholder."

Fuld said that while he gave the U.S. Securities and Exchange Commission (SEC) high marks, "the overall regulatory system has to be redone." Rep. Diane Watson (D-Calif.) said that the SEC was either "unable or unwilling" to regulate companies such as Lehman Brothers.

Who's to blame for Lehman Brothers bankruptcy?

The general consensus was "jail not bail" for Lehman Brothers CEO Richard Fuld, Jr., at a hearing by the House Committee on Oversight and Government Reform on the causes and effects of the Lehman Brothers bankruptcy. This view was held by the Committee, panel, and Code Pink protestors (who were eventually thrown out of the hearing). Congressman Jim Cooper (D-Tenn.) said, "Is this Wallstreet or a casino? Lehman did not find itself in this situation by accident. It as the unlucky draw of a consciously made gamble." Dr. Luigi Zingales of the University of Chicago pointed out that by bailing out these investment banks, we are giving them incentive to gamble at the cost of taxpayers down the line.

Nell Minow of the Corporate Library said that Fuld, "intentionally surrounded himself with people who are complicit. These were people who were getting side payments from the company. They had no incentive to provide any kind of independent oversight." Minow said that by doing so, Fuld created a false idea of the value of his company. These false ideas created high leverage rates, leaving little security in times of economic trouble, and eventually the downfall of Lehman Brothers. Minow proposed a general rule be mandated to pay executives based on the value of business rather than the volume of business. Peter Wallison of the American Enterprise Institute agreed that the only protection taxpayers have at this point is more government regulation.

Additionally, Congressman Dennis Kucinich (D-Ohio) said, "there is an apparent conflict of interest permitting Treasury Secretary Paulson, former CEO of Goldman Sachs, to be involved in these discussions on the survival of Lehman Brothers." The panel agreed it was clear that Goldman Sachs benefits from Lehman Brothers going under, due to the competitive market they're in. As long as Goldman Sachs' interest is in Paulson's pocket, Kucinich says, his role in the bailout goes "against the free market."

Today at Talk Radio News

Pentagon Correspondent Dawn Casey will attend Secretary of Defense Robert M. Gates's honor cordon to welcome Denmark's Minister of Defense Soren Gade. Legal Affairs Correspondent Jay Goodman Tamboli will cover the Supreme Court arguments in Altria v. Good dealing with lawsuits against tobacco companies. The Washington Bureau will also be covering the House Oversight and Government Reform Committee's hearing on "The causes and effects of the Lehman Brothers bankruptcy," a discussion at the Woodrow Wilson Center on "North Ossetia's geopolitical entanglements," a protest by Vietnam veterans and Vietnam's victims of Agent Orange to have the Supreme Court consider their lawsuit against chemical companies, a discussion at the Institute for Policy Studies on "War, peace, and the 2008 presidential race," the American Enterprise Institute for Public Policy Research's discussion on "Beyond Georgia: Securing America's allies on Russia's periphery," and an address by World Bank Group President Robert Zoellick on "Development and the implications from the global financial crisis."