- Associated Press - Wednesday, September 1, 2010

The former chief of failed investment giant Lehman Brothers told a Capitol Hill panel investigating the financial crisis that the Wall Street firm could have been rescued, but regulators refused to help — even though they later bailed out other big banks.

Richard S. Fuld Jr. told the Financial Crisis Inquiry Commission at a hearing that Lehman did everything it could to limit its risks and save itself in the fall of 2008.

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,” Mr. Fuld testified.

The collapse of Lehman in September 2008, the biggest bankruptcy in U.S. history, is widely seen as a key catalyst for the financial crisis that nearly froze global credit and financing lines in the waning days of the George W. Bush administration, sparking the approval of the $700 billion Wall Street bailout package.

Mr. Fuld accepted responsibility for mistakes that saddled Lehman with some $60 billion in bad investments. But he said Lehman proposed measures to federal regulators that could have saved the firm, and “each of those requests was denied.”

Other financial firms later received the government assistance that Lehman was denied, Mr. Fuld said.

Lehman was “mandated” by regulators to file for bankruptcy on Sept. 15, 2008, and was the only firm ordered to do so, he said.

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,” Mr. Fuld said.

Thomas Baxter, general counsel of the Federal Reserve Bank of New York, insisted that government regulators lacked the legal authority to provide the temporary financing or other aid that Lehman sought. Hundreds of billions worth of collateral assets would have been needed to secure aid of that magnitude.

Lehman didn’t have it,” Mr. Baxter told the panel.

Commission Chairman Phil Angelides said the Fed appeared to have made “a conscious policy decision” not to rescue Lehman.

Through hours of testimony Wednesday, Mr. Fuld repeated that Lehman had reduced its risks and held adequate capital, but fell victim to a classic run on the bank.

After the subprime mortgage bubble burst in 2007, complex investments called “credit default swaps” — which insured against default of securities tied to the mortgages — collapsed. That brought the downfall of Lehman.

Treasury Secretary Henry M. Paulson Jr. and other U.S. officials declined to rescue Lehman. Instead, they injected tens of billions of dollars into other financial firms.

Under the landmark financial overhaul legislation signed by President Obama in July, regulators are now empowered to shut down financial institutions whose collapses could threaten the health of the entire financial system.

At the hearing, regulators defended allowing Lehman Brothers to collapse and justified supporting the forced sale of other troubled financial firms such as North Carolina banking giant Wachovia. The regulators said both decisions made sense under the circumstances.

But Mr. Angelides said regulators failed to look at the potential damage to the financial system until 2007, even as the crisis was building. When the markets began to unravel, regulators declined to rescue Lehman but pumped billions of dollars into other teetering financial institutions, such as insurance giant American International Group Inc., he said.

“One was in and one was out,” Mr. Angelides said.

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