Bernanke says Fed had to let Lehman fail


Federal Reserve Chairman Ben S. Bernanke said Thursday that there was no way for the government to rescue Lehman Bros. from failure in 2008 without a huge loss of taxpayer money, and that he should have been “more straightforward” when explaining the decision to Congress shortly afterward.

Appearing before the federal panel investigating the financial crisis, Bernanke said his vague congressional testimony less than two weeks after Lehman’s collapse had helped feed what he called a myth that the investment bank could have been saved.

But Bernanke said at that time he did not want to add to the growing crisis by admitting that the Fed lacked power to bail out some major firms. He also said Lehman didn’t have the collateral needed to back any Fed aid.

“It was a judgment at that moment … that making that statement might have even reduced confidence further and led to further pressure,” Bernanke said Thursday. “I regret not being more straightforward there because clearly that has supported the mistaken impression that, in fact, we could have done something. We could not have done anything.”

Bernanke told the Financial Crisis Inquiry Commission that any loan the Fed could have provided Lehman would not have stopped a run on the bank by customers.

“If we lent the money to Lehman,” Bernanke said, “we would have saddled the taxpayers with tens of billions of dollars in losses.”

The failure of Lehman was a pivotal event in the financial crisis. It led to upheaval in world financial markets and triggered events that led to the decision by the Fed and Treasury Department officials to rescue insurance giant American International Group Inc. and successfully push Congress for the $700-billion bank bailout fund.

The Fed determined that it could rescue AIG because it did have adequate collateral with its diverse insurance assets, Bernanke said.

Bernanke’s comments came a day after former Lehman Bros. Chief Executive Richard S. Fuld blamed federal officials for his firm’s September 2008 collapse.

Fuld told the commission there was a double standard in the government’s decision to deny Lehman the extraordinary assistance given to other investment banks. Fed money could have helped Lehman find a buyer or given it time for a more orderly bankruptcy, he said.

Some members of the commission also have appeared skeptical of the defense by Fed officials that they had no legal way to lend money to Lehman Bros. The Fed can lend money only if it believes that there is sufficient collateral to guarantee it will be paid back.

“It seems to me the decision to allow Lehman to fail was a conscious policy decision,” commission Chairman Phil Angelides said.

He said he was not accusing government officials of wanting Lehman to fail, but pointed out there were other factors, such as concerns about the public’s reaction to another bailout.

Angelides noted that Bernanke didn’t say in his congressional testimony nearly two years ago that the Fed was legally barred from lending to the firm. Bernanke only said that the Fed and Treasury “declined to commit public funds to support” Lehman.

Angelides also said that the commission’s investigation had not found any documents showing a legal analysis of a Lehman loan or an analysis of the firm’s collateral during the hectic days before its failure when Bernanke and Treasury officials were trying to arrange a sale of the firm to prevent a collapse.

In March 2008, six months before Lehman’s failure, the Fed used its emergency power to help save investment bank Bear Stearns by lending JPMorgan Chase & Co. $30 billion to acquire it at a fire-sale price.

But the decision not to help Lehman was based on the Fed’s concern that the money would never be repaid, Bernanke said. As a scholar of the Great Depression, Bernanke said he wanted to avoid Lehman’s failure to avoid the damaging consequences of its bankruptcy.

“This is my bread and butter, and I believed deeply that if Lehman was allowed to fail, or did fail, the consequences to the U.S. financial system and the U.S. economy would be catastrophic,” Bernanke said.

“It was with great reluctance and sadness that I conceded that there was no other option” than to let Lehman fail, he told the commission. “If I could have done anything to save it, I would have saved it.”