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."

Changing regulations in changing times

The Center for Capital Markets Competitiveness met to discuss whether the regulatory structure of capital markets is outdated. Participating speakers agreed that the current regulatory system is in need of modernization to deal with changing markets but disagreed over what that modernization entailed. Eugene Ludwig, the founder of Promontory Financial Group, LLC, suggested that a system that enforces less while equally regulating large and small institutions is needed. Ludwig said that power is moving to favor large institutions and that this movement was not the intention of the founders of the United States.

Harvey Pitt, CEO of Kalorama Partners, LLC, agreed that smaller regulation is necessary but also challenged the idea of how to regulate. Pitt said that too many regulatory agencies act in a reactionary manner only. He added that reacting to an issue after it has occurred is not a regulatory practice but rather an enforcement practice. Pitt said that financial institutions, especially in light of the subprime mortgage crisis, would benefit by meeting with regulatory agencies to verify compliance with standards. Pitt said markets will only be harmed by additional regulation that is undue.

Peter Wallison of the American Enterprise Institute reiterated that the US regulatory system has failed consistently because a line of people from mortgage brokers through to the market “didn’t do their jobs.” Wallison added that Congress would have protected a consumer’s option to engage in high risk mortgages had a regulatory agency gone before Congress and stated potential for widespread consumer loss. Annette Nazareth, the former commissioner of the U.S. Securities and Exchange Commission said that like democracy, capital market regulations are imperfect but still necessary.