JEFFREY BROWN: Now: a two-part look at the fallout from the financial crisis, as it plays out in Washington and in the housing market.
First, “NewsHour” congressional correspondent Kwame Holman revisits a key moment in the meltdown, the collapse of Lehman Brothers.
KWAME HOLMAN: The Lehman Brothers bankruptcy 19 months ago sent shockwaves through markets around the world, and it helped fuel the push to overhaul the U.S. financial regulatory system.
Those two things, Lehman’s past and the future of financial reform, collided today before the House Financial Services Committee. Treasury Secretary Tim Geithner said reform would let regulators break up ailing firms like Lehman in a way that protects the broader economy.
TIMOTHY GEITHNER, U.S. treasury secretary: With financial reform, if a firm like Lehman is able to manage itself to the edge of failure, the government will have the ability to wind it down with no exposure to the taxpayer. This is bankruptcy for banks.
It is essential to deal with moral hazard, the risk that investors and executives will take risks in the future, in the expectation that government will step in to bail them out.
KWAME HOLMAN: But Republicans, such as Alabama’s Spencer Bachus, said, in fact, the Lehman debacle shows there’s no reason to have any confidence in the overhaul plan.
REP. SPENCER BACHUS, R-Ala.: The regulatory proposals that have been offered by this administration and are now being considered by Congress double-down on these same failed policies.
The same regulators, in some cases the same individuals, that failed us two years ago and made Lehman’s collapse far more damaging than it should have been are still with us. Lehman is gone, but the failures of the Fed and the SEC are still with us, and shouldn’t be rewarded with new regulatory powers.
KWAME HOLMAN: Mixed in with the debate over Wall Street reform were questions about who was in fact responsible for Lehman’s demise. Last month, an examiner for the federal bankruptcy court found that Lehman hid $50 billion in bad debts through an accounting maneuver known as “Repo 105.”
It allowed the company to sell toxic assets at the end of a quarter, wipe them off the balance sheet, and then quickly buy them back. But the chairman of the Federal Reserve, Ben Bernanke, said the central bank never knew.
BEN BERNANKE, Federal Reserve chairman: However, knowledge of the Lehman’s accounting for these transactions wouldn’t have materially altered the Federal Reserve’s view of the condition of the firm. The information we did obtain suggested that the capital and liquidity of the firm were seriously deficient, a view that we conveyed to the company and that I believe was shared by the SEC and the Treasury Department.
KWAME HOLMAN: The chair of the Securities and Exchange Commission in 2008, Christopher Cox, also said, in written testimony, his agency had been unaware of Lehman’s tactics.
The current chair, Mary Schapiro, said the SEC now is investigating whether other large banks are using a similar accounting move.
MARY SCHAPIRO, chair, Securities and Exchange Commission: We have sent a letter and demanded information from the largest financial institutions to explain to us exactly how they’re using repos, how they’re accounting for them and disclosing repos and the impact on their balance sheet, whether they have changed their accounting models over the last three years, and, importantly, what has been their average debt balances over the period, so that we don’t just have them dress up the balance sheet for quarter-end, and then — then have dramatic increases during the course of the quarter.
KWAME HOLMAN: As the day went on, the committee dug into details of the federal bankruptcy examiner’s report. And, ultimately, the former head of Lehman Brothers was called to answer the accusations of accounting gimmicks and hidden debt.
The court-appointed examiner, Anton Valukas, discussed the findings from a report that ran 2,200 pages. He said warning signs were there, but no one acted on them.
ANTON VALUKAS, court-appointed examiner: By at least 2007, various agencies of the United States government were concerned at the highest levels with the prospects for Lehman’s survival. But concern did not translate into action. Government agencies gathered information. They monitored. But no agency effectively regulated or compelled Lehman to alter its conduct.
KWAME HOLMAN: Valukas charged, the SEC, Lehman’s main regulator, did little to prevent the investment bank from spiraling into bankruptcy.
ANTON VALUKAS: The SEC did not know that Lehman was manipulating its balance sheets to take it — to make its leverage appear better than it was by using Repo 105 transactions that I describe in detail in my report.
The SEC didn’t know this because it didn’t ask the right questions. Its failure to ask about off-balance-sheet transactions in this post-Enron era is hard to understand.
KWAME HOLMAN: Later, former Lehman Brothers executives had their first public comment on the examiner’s report.
Former chairman and CEO Richard Fuld denied knowing about the accounting maneuver.
RICHARD FULD, former CEO, Lehman Brothers: I have absolutely no recollection whatsoever of hearing anything about or seeing documents related to Repo 105 transactions while I was the CEO of Lehman.
KWAME HOLMAN: Fuld said representatives of the SEC and Federal Reserve monitored Lehman’s activities daily, and could have stepped in if they thought there were problems.
The former CEO voiced regret for the bank’s downfall.
RICHARD FULD: I’m very much aware that, one day, we had a firm; the next day, we did not. And a lot of people got hurt by that. And I have to live with that.
KWAME HOLMAN: But, under questioning, Fuld confused to concede that he had made major mistakes of judgment.
RICHARD FULD: I take full responsibility for the…
MAN: Then let me ask you…
RICHARD FULD: … for the decisions that I made. And all I can say to you is that I made those decisions. I had the information at the time that I thought was accurate, and, with that, made a prudent decision.
KWAME HOLMAN: The House hearing came as the Senate is preparing to take up financial reform legislation in the coming days.