A top Federal Reserve official said the federal aid Dick Fuld sought wouldn’t have saved Lehman Brothers.
The official, longtime Fed general counsel Scott Alvarez, also cast doubt on Fuld’s finger-pointing account of Lehman’s dealings with the government.
Fuld said in his written testimony before the Financial Crisis Inquiry Commission Wednesday that Lehman, contrary to its public perception as a rogue firm that failed as a result of risky bets gone bad, deserved to be saved and would have lived had the government only provided a modest level of assistance.
He even outlined three ways the government could have helped the wounded securities firm, which filed the biggest-ever U.S. bankruptcy case two years ago.
Lehman fully welcomed and cooperated with SEC and Fed officials, who were physically present in our offices monitoring our liquidity, funding, capital, risk management and mark-to-market process. Lehman also proposed to government regulators certain measures that could have helped Lehman and bolstered confidence in the financial markets.
Those measures included (i) permitting Lehman to convert to a bank holding company, (ii) granting Lehman’s Utah bank an exemption under Section 23A of the Federal Reserve Act to raise deposits, which would have given the firm additional liquidity and (iii) imposing a ban on naked short selling.
Each of those requests was denied at the time. Tellingly, though, each measure was later implemented in some form for other investment banks during the days and weeks following Lehman’s bankruptcy filing.
But Alvarez told the FCIC that converting to a bank holding company or transferring assets to Lehman’s banking affiliate wouldn’t have prevented the firm from failing.
He rejected the notion that a relaxation of the Section 23A rules limiting asset transfers between banks and their non-bank affiliates could have prevented Lehman’s failure. A transfer of assets to Lehman’s banking arm “could have delayed” a bankruptcy but not for long, Alvarez said.
He said that contrary to popular belief, becoming a bank holding company doesn’t give a firm additional access to the Fed’s discount window. The true value of holding company status lies in giving investors the Fed’s stamp of financial good housekeeping, Alvarez said.
Lehman considered applying for bank holding company status but “wasn’t certain of the benefits,” Alvarez said.
What’s more, Alvarez took issue with Fuld’s claim that Lehman’s request for bank holding company status was “denied at the time.” In fact, Alvarez said, Lehman held preliminary talks with Fed officials but never filed an application and never received any comments from the Fed to the effect that it couldn’t get BHC status.
Finally, Alvarez also told the commission, which has been charged by Congress with writing the definitive account of the financial crisis by mid-December, that the Fed didn’t believe it could save Lehman on account of the firm’s lack of collateral it could present for loans. Fed chief Ben Bernanke has been making this case for most of the past two years.
“If the Fed had lent to Lehman without adequate collateral, this hearing would have only been about how we wasted the taxpayer’s money,” Alvarez said in response to a question about the Fed’s differing responses to funding problems at Lehman and Bear Stearns, which was sold in a federally financed fire sale six months before Lehman collapsed.
He said the Fed “didn’t expect we would have been repaid” on emergency loans to Lehman, and “couldn’t have been in that position legally.”
