Richard Fuld, former chairman and chief executive of now-defunct Lehman Brothers, testified before the Financial Crisis Inquiry Commission on Wednesday, September 1.
According to Fuld, 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.
“All of this resulted in a loss of confidence, which then undermined the firm’s strength and soundness,” Fuld said. “Those same forces threatened the stability of other banks — not just Lehman. Other firms were hurt by their plummeting stock prices and widening CDS spreads.”
But Fuld noted Lehman was the only firm that was mandated by government regulators to file for bankruptcy. The government then was forced to intervene to protect those other firms and the entire financial system.
“In 2007, when the U.S. housing market began to show signs of weakening, Lehman Brothers and many of its competitors had already accumulated large positions in what were considered less liquid assets. Many market observers, including government officials charged with oversight of the financial markets, believed that the problems in the subprime residential mortgage market were and would be contained.
“In retrospect, one can now see that as 2007 progressed, the weakening in the U.S. housing market was worse than predicted and spread to other sectors of the financial system.”
The firm filed for Chapter 11 bankruptcy protection on September 15, 2008, and was eventually sold to Barclays PLC.
Fuld said he believed then, and still does now, that had the Fed opened the financing window to investment banks just before the Bear Stearns problem, that decision might have provided the necessary liquidity to keep Bear Stearns operational and might have lessened the need for additional government intervention.
Still, according to Fuld, having acted, the intervention of the federal government set a precedent in the marketplace that impacted liquidity, capital formation and the expectations of creditors and stockholders for at least the next six months. At the same time, the federal government and the individual regulators involved were criticized for using taxpayers’ money to rescue a financial company, which then set another precedent of how “not” to handle the next problem.
“With Bear Stearns gone, Lehman, as the next smallest investment bank, became the focus of the marketplace and was subject to increasingly negative and inaccurate market rumors,” he said.