When Lehman Brothers Holdings Inc's embattled former chief executive Richard Fuld faces U.S. lawmakers again on Tuesday, he will blame a perfect storm for the firm's collapse and defend Lehman's use of a controversial accounting technique.
Over a year and a half after the firm's collapse, the House of Representatives' Financial Services Committee will grill Fuld, Federal Reserve Chairman Ben Bernanke, Treasury Secretary Timothy Geithner and Securities and Exchange Commission Chairman Mary Schapiro about how common the practice was and what new oversight might be needed.
The focus of the hearing will be the March report by Lehman's court-appointed examiner alleging the firm used a gimmick, known as Repo 105 to temporarily remove some assets from Lehman's books, obscuring its full financial picture and contributing to its demise.
Lehman filed for bankruptcy in September 2008. At a congressional hearing the following month, Fuld wondered why the government did not rescue the firm.
In written testimony posted on the committee's website on Monday, Fuld said he had not heard of the accounting technique until the examiner had asked him about Repo 105 a year after the firm filed for bankruptcy.
I have absolutely no recollection whatsoever of hearing anything about Repo 105 transactions while I was CEO of Lehman, Fuld's said in the prepared remarks.
He said that Lehman followed accounting rules and that Repo 105 was not used to remove toxic assets or hide assets, rather it was mandated by accounting rules.
Fuld, who left Lehman at the end of 2008, will say that the U.S. Federal Reserve and the U.S. Securities and Exchange Commission knew what was happening to Lehman in real time, and Lehman did not have a huge capital hole. He also will press Congress about the need for a super regulator that would monitor the markets in real time.
Lehman's court-appointed examiner, Anton Valukas, who will also testify on Tuesday, concluded that the use of Repo 105, which dated back to 2001 and was used without telling investors or regulators, gave the appearance that Lehman was reducing its overall leverage levels in 2008 when in reality it was not. Lehman used Rep 105 to temporarily remove $50 billion of assets from its balance sheet in 2008, according to his report.
We need to understand what was going on inside of Lehman and how they were doing this, Steve Adamske, spokesman for House Financial Services Committee Chairman Barney Frank said.
Was this a company policy? Was this to escape regulatory scrutiny, was this a common business practice on Wall Street.
SEC Chairman Mary Schapiro will say that government watchdogs were unaware of the tricks Lehman was using to mask its risk-taking, and pledged to root out similar activity at other firms on Wall Street, according to her prepared testimony.
Last month the SEC sent letters to several large financial firms, demanding detailed reports on their accounting and disclosure for repo transactions.
Federal Reserve Chairman Ben Bernanke, will also defend the Fed's role, as the former fourth-largest U.S. investment bank spiraled downward in September 2008.
According to his prepared testimony posted on the Federal Reserve's website, Bernanke will testify that the Fed and other regulators lacked the means to rescue the firm and that the Fed had no direct supervisory authority over Lehman.
Valukas, however, who spent over a year investigating Lehman's collapse, will be critical of regulators.
In his prepared remarks, Valukas said U.S. regulators did not ask hard questions of Lehman, but simply acquiesced to the information they were given, allowing the firm to take on excessive risk.
Valukas also said there were serious lapses in how the Federal Reserve Bank of New York and the SEC teams monitoring Lehman worked together, and while a more engaged regulator may not have saved Lehman from collapse, earlier action could have enabled a softer landing for the firm.
The committee is scheduled to begin the hearing in Washington D.C. on Tuesday at 11 a.m. EDT (1500 GMT).
(Reporting by Emily Chasan and Clare Baldwin, additional reporting by Kim Dixon, Pedro Nicolaci da Costa, Karey Wutkowski and Paritosh Bansal; Editing by Tim Dobbyn)