Colin Barr

Following the money in banking, economics, and Washington

Fuld fingers feds in Lehman failure

September 1, 2010: 10:14 AM ET

Lehman Brothers ex-chief Dick Fuld blamed the government for his firm's failure.

Fuld, in written testimony Wednesday before the congressionally appointed Financial Crisis Inquiry Commission, insisted Lehman was healthy enough to survive its September 2008 brush with bankruptcy if only federal officials led by Henry Paulson, Ben Bernanke and Tim Geithner had extended a hand.

Fuld blames these guys

Many on Wall Street were mentally sticking a fork in Lehman the moment its smaller rival Bear Stearns collapsed in March 2008, on the reasoning that the firm simply had been too aggressive in chasing bubbly real estate assets in the boom.

But Fuld contended Lehman had adequate capital, sufficient liquidity and enough well functioning businesses that it could have made it through the crisis had the government backstopped the firm.

He claimed it was policymakers' decision not to assist Lehman, rather than the firm's overreach during the credit bubble or his own failure to find an equity partner, that resulted in the biggest-ever U.S. bankruptcy the morning of Sept. 15, 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. All of this resulted in a loss of confidence, which then undermined the firm's strength and soundness. 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 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 a rare concession to reality and a bit of an understatement, Fuld said that "there is no question we made some poorly timed business decisions and investments."

But he contended Lehman had raised enough capital and had recognized enough losses that it could have survived had it simply received the same level of support extended to other faltering financial firms.

Fuld takes pains to show Lehman didn't suffer from capital shortfall that has been bandied about on Wall Street since before the firm filed for bankruptcy. He says the reports of a capital hole are mistaken.

Fuld also talks extensively about liquidity, mentioning the word nine times. He does not, however, directly address the contention that Lehman vastly overstated the size of its liquidity pool, and that the firm ran out of cash after its trading partners withdrew.

The massive report by the court-appointed bankruptcy examiner supports this conclusion, but as it happens that view doesn't jibe with Fuld's preference for pointing the finger at others.

In the end, however, 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 nonfinancial firms in the ensuing days.

Fuld will never admit it, but the information wasn't the only thing that was flawed in the Lehman crisis.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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