Questions for Bernanke, Geithner, and Fuld at the Lehman Hearing


Treasury Secretary Tim Geithner and Fed Chair Ben Bernanke appear Tuesday morning before the House Financial Services Committee to answer questions about the policy implications of the recent Lehman Brothers autopsy report. The report concluded that “accounting gimmicks” and “balance sheet manipulation” by some Lehman executives helped turn the 158-year-old financial firm into the biggest bankruptcy in American history.

Also testifying will be SEC Chair Mary Schapiro, recently in the news after the SEC filed fraud charges against Goldman Sachs, and former Lehman CEO Richard Fuld, who according to early reports, plans to tell lawmakers that regulators knew what was going on inside Lehman prior to its collapse and did nothing. He also plans to say that he knew nothing of Repo 105 trades, which the report alleged Lehman used to make its balance sheet look healthier than it was.

We asked a handful of economists and market watchers what questions they’d most like to hear asked to the assembled panelists today.

Dean Bakerco-director of the Center for Economic and Policy Research.

For Geithner: Did you know that the Lehman was using its “Repo 105s” to hide its insolvency? If you did not know this, did anyone at the New York Fed know? If someone other than you at the Fed knew, and did not bring this fact to your attention, shouldn’t this person be immediately fired and prevented from ever holding a government position again?

If no one at the Fed knew that Lehman was using Repo 105s to hide its insolvency, then doesn’t this suggest an incredible failure in regulation? Is there any reason to believe that the regulators who are at the NY Fed today are smarter than the regulators who failed to recognize that Lehman was using Repo 105s to hide its insolvency? If an investment bank like Lehman can cook its books to hide its true financial state from the NY Fed and other regulators, is there any reason that the public should have confidence that government regulators will be able to prevent similar acts of manipulation in the future?

Lynn Stoutprofessor of corporate and securities law at UCLA

Just one question: Would Lehman Brothers have collapsed if Congress had not passed the Commodities Futures Modernization Act of 2000, which legalized off-exchange trading in financial derivatives?

Russ RobertsJ. Fish and Lillian F. Smith Professor of Economics Chair, Mercatus Center, George Mason University

I would ask Ben Bernanke: What would have happened had you let Bear Stearns go bankrupt? How would that have changed Lehman’s behavior between March and September of 2008? What evidence is there that the bankruptcy of Bear Stearns would have had systemic effects?

I would ask Tim Geithner: Who were the counterparties of Lehman Brothers? Who were the counterparties of Bear Stearns? Did the differences between these two groups play a role in the decision to rescue the creditors of Bear but not those of Lehman?

I would ask Richard Fuld: Did the rescue of Bear Stearns play a role in your decision to seek additional capital between March and September of 2008? Why do you think Reserve Primary, a money market fund, was buying your commercial paper which turned out to be quite risky? Do you think that the prospect of creditor rescue reduced the urgency of you and other Lehman executives in seeking a suitor for Lehman?

Mark Calabriadirector of financial regulation studies at the Cato Institute

Chairman Bernanke: If Lehman had been rescued what would be different today? Would employment be any higher or credit more widely available?

Bernanke: How many other companies failed as a direct result of the Lehman failure?

Mr. Fuld: You had several opportunities to have Lehman acquired by other, stronger firms, yet you and the board rejected those offers. Why?

Sec. Geithner: What was the responsibility of the Federal Reserve Bank of New York in relation to Lehman?

Mr. Fuld: The Federal Reserve has repeatedly stated that Lehman had no quality assets against which it could have lent. Is that an accurate description of Lehman’s holdings?