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Tuesday, April 20, 2010

Lehman Examiner to Testify That S.E.C. Sat on Its Hands

NY Times

From left, Securities and Exchange Commission Chair Mary L. Schapiro, Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Timothy F. Geithner testified before the House Financial Services Committee on Tuesday. 
The court-appointed examiner who dissected the Lehman Brothers bankruptcy is expected to criticize the Securities and Exchange Commission on Tuesday for its decision to “stand by idly” as the investment bank veered toward collapse.

The S.E.C. knew that Lehman did not have adequate liquidity and had exceeded its own limits on risk-taking but in essence did nothing, the examiner, Anton R. Valukas, will say in testimony released in advance by the House Financial Services Committee.

One of the most damning findings in Mr. Valukas’s 2,209-page report last month — that Lehman used accounting gimmicks to hide the extent of its indebtedness — was not known to the S.E.C. He wrote: “I saw nothing in my investigation to suggest that the S.E.C. asked even the most fundamental questions that might have uncovered this practice early on, before Lehman escalated it to a $50 billion issue.”

Prepared testimony of Richard S. Fuld Jr., Lehman’s chief executive, says that he had no knowledge of the accounting maneuvers, known at the firm as Repo 105 transactions. “I have absolutely no recollection whatsoever of hearing anything about Repo 105 transactions while I was C.E.O. of Lehman,” his statement says. “Nor do I have any recollection of seeing documents that related to Repo 105 transactions.”

The committee, which is examining the implications of Mr. Valukas’s report, has also summoned Treasury Secretary Timothy F. Geithner to testify, and Ben S. Bernanke, the Federal Reserve chairman. Mary L. Schapiro, who took over the S.E.C. in January 2009, has also been called.

But the testimony of Mr. Valukas is likely to be the high point of the hearing. His statement says there was no way of knowing whether the S.E.C. could have saved Lehman from a failure in September 2008 that caused the credit markets to seize up and threatened a wider catastrophe.

“But what is clear is that had the government acted sooner on what it did or should have known, there would have been more opportunities for a soft landing,” it says. “The markets might have been spared the turmoil of Lehman’s abrupt failure.”

Mr. Valukas wrote, “The S.E.C.’s role was not to simply absorb and acquiesce to Lehman’s decisions; the S.E.C.’s role was to supervise and regulate to protect investors and the markets.”

Both the Federal Reserve and the Treasury Department grew increasingly concerned about Lehman’s survival after the near collapse of Bear Stearns in March 2008, but both entities deferred to the S.E.C. as Lehman’s presumed regulator.

The S.E.C. chairman at the time, Christopher Cox, told Mr. Valukas that he believed that the agency’s jurisdiction “was limited to Lehman’s broker-dealer subsidiary and that it was not the regulator of Lehman itself.”

All five big investment banks — Lehman, Bear, Goldman Sachs, Morgan Stanley and Merrill Lynch — had voluntarily submitted to an S.E.C. regulatory program from 2004 to 2008. But Mr. Valukas said it was pretty much toothless.

“The S.E.C. made a few recommendations or directions here and there, but in general it simply collected data; it did not direct action, it did not regulate,” he wrote in his testimony.

Mr. Bernanke’s testimony states that “the Federal Reserve was not aware that Lehman was using so-called Repo 105 transactions to manage its balance sheet,” but adds that knowledge of the gimmicks would not have changed its view that “the capital and liquidity of the firm were seriously deficient.”

The statement notes that the Fed placed two examiners on site to monitor Lehman’s financial condition after it began taking part in an emergency lending program the Fed created in March 2008. “Beyond gathering information, however, these employees had no authority to regulate Lehman’s disclosures, capital, risk management, or other business activities,” it says.