One-time CEO of one-time firm says he can't recall Repo 150; Fed apparently unaware as well
The former chief executive of Lehman Brothers will tell House lawmakers Tuesday that he has "absolutely no recollection whatsoever" about an accounting maneuver that a bankruptcy examiner says the company used to mask its perilous financial condition.
Richard Fuld, Lehman's former CEO, said he does not recall seeing any documents related to the so-called Repo 105 accounting gimmick, according to testimony prepared for a House hearing Tuesday.
Last month, an examiner appointed by the bankruptcy court to investigate the Lehman debacle issued a 2,200-page report. It found that the firm masked $50 billion in debt by using the so-called Repo 105 accounting maneuver
Since the report came out, interest has grown on Capitol Hill among lawmakers seeking to find out if the accounting gimmick was widely used by Wall Street firms to hide their debt.
Tuesday's hearing before the House Financial Services Committee is the latest attempt to probe the matter and comes as the Obama administration is urging passage of a sweeping financial regulatory overhaul.
Fuld, who hasn't appeared before Congress since October 2008, says in prepared remarks that the report "distorted the relevant facts" and that the accounting complied with standard practices.
"The result is that Lehman and its people have been unfairly vilified," he said.
The examiner, Anton Valukas, discovered that Lehman put together complex transactions that allowed the firm to sell "toxic" securities — mainly those made up of mortgages — at the end of a quarter. That wiped them off its balance sheet, avoiding the scrutiny of regulators and shareholders. Then the bank quickly repurchased them — hence the term "repo."
Treasury Secretary Timothy Geithner will testify at the hearing that Lehman's collapse highlights why the Obama administration's proposal to reform the financial system is needed.
"Lehman's disorderly bankruptcy was profoundly disruptive," Geithner said, according to prepared remarks. "It magnified the dimensions of the financial crisis, requiring a greater commitment of government resources than might otherwise have been required. Without better tools to wind down firms in an orderly manner, we are left with no good options."
Geithner's predecessor, Henry Paulson, is not appearing at Tuesday's hearing. In written remarks, he supported several pieces of the Obama administration's proposed financial reforms, without mentioning the bill itself.
"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," Paulson wrote. "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."
The chairman of the Securities and Exchange Commission, Mary Schapiro, also is scheduled to testify on Tuesday. She will say that after Lehman's rival Bear Stearns nearly collapsed two years ago in a government-managed sale, the SEC had little ability to prevent Lehman from going under.
She did, however, concede that the SEC "did not do enough" to oversee the five largest investment banks, even though it had authority over them since 2004. That oversight program, she said, was "insufficiently resourced, staffed, and managed from its inception."
Lawmakers are also likely to question Schapiro about the SEC's case against Goldman Sachs. The agency filed civil charges Friday against the venerable Wall Street firm, claiming the bank misled investors about mortgage-linked securities.
Federal Reserve Chairman Ben Bernanke, also scheduled to testify, said the central bank wasn't aware that Lehman used the accounting move. And even if the Fed did know, it wouldn't have changed the Fed's view that the company was in bad financial shape, according to Bernanke's prepared remarks.
Although the SEC was Lehman's chief regulator, the Fed began to monitor the firm after trouble surfaced in the financial industry.
Two Fed employees were placed at Lehman to keep tabs of the company's cash position and its general financial condition, Bernanke explained. Beyond information gathering, the employees had no authority to regulate Lehman's disclosures, capital standards, risk-management practices or other business activity, Bernanke pointed out.
The Fed and other government agencies were unable to engineer a private-sector rescue of the failing firm or come up with some other solution. Lehman was forced to declare bankruptcy — the biggest in U.S. history — in the fall of 2008. That threw financial markets in the United States and around the globe into crisis.
Bernanke said the case underscores the need for Congress to pass a sweeping financial overhaul. That legislation includes a mechanism to allow the government to safely wind down ailing financial companies whose collapse could take down the entire financial system and the broader economy.
