Lehman Brothers' former chief executive said he only learned of Lehman's use of a controversial accounting technique a year after the investment bank filed for bankruptcy in September 2008.
Richard Fuld, whose October 2008 appearance before lawmakers was marked by protesters with signs reading shame and cap greed, returns to Washington D.C. on Tuesday to answer questions about the accounting gimmicks alleged by a court-appointed examiner.
The examiner's report, released in March, said the firm used a technique known as Repo 105 to temporarily remove some assets from Lehman's books, obscuring its full financial picture.
I have absolutely no recollection whatsoever of hearing anything about Repo 105 transactions while I was CEO of Lehman, Fuld said in the prepared remarks for the House of Representatives' Financial Services Committee.
Fuld, who left Lehman at the end of 2008 and blames a perfect storm of events for the firm's failure, said he had not heard of the accounting device until the examiner asked him about Repo 105.
But from what he had since learned, he argued that Lehman had followed mandated accounting rules and that Repo 105 was not used to remove toxic assets or hide assets.
The committee is also expected to grill Federal Reserve Chairman Ben Bernanke, Treasury Secretary Timothy Geithner, and Securities and Exchange Commission Chairman Mary Schapiro about how common the accounting practice was and what new oversight might be needed.
Most witnesses' written testimony was posted Monday on the panel's website. The hearing is scheduled to begin at 11 a.m. EDT (1500 GMT).
Congress is getting closer to package of measures to overhaul financial regulation in response to the crisis that peaked in 2008 with Lehman's collapse and a massive rescue of American International Group Inc .
U.S. Treasury Secretary Timothy Geithner, said in his prepared testimony that Lehman showed the stability of the U.S. financial system cannot be left vulnerable to reckless choices of individual firms.
If these reforms become law, we will be far better situated to avoid the abuses that led to the crisis, he said.
Under the 2002 Sarbanes-Oxley financial reforms, chief executives are required to certify their companies' financial statements. Fuld said he held certification meetings each quarter with Lehman's unit heads and top financial and legal staff where he asked anyone to bring up concerns.
To my knowledge, no one ever, at any of those meetings, raised any issue about Repo 105 transactions, Fuld said.
Lehman's court-appointed examiner, Anton Valukas, will also testify on Tuesday. He has said 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 it was not.
Lehman used Rep 105 to temporarily remove $50 billion of assets from its balance sheet in 2008, according to his report released in March.
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.
REGULATORS IN THE DARK
SEC chief Schapiro said in her written testimony 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.
Last month the SEC sent letters to several large financial firms, demanding detailed reports on their accounting and disclosure for repo transactions.
The SEC underscored a tougher enforcement stance by charging Goldman Sachs Group Inc with fraud on Friday, alleging the firm failed to tell investors that a prominent hedge fund manager was betting against a subprime mortgage product he helped create.
Federal Reserve Chairman Ben Bernanke defended the Fed's role, as the former fourth-largest U.S. investment bank spiraled downward in September 2008.
According to his prepared testimony, Bernanke said 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, was critical of the regulators in his testimony for Tuesday's hearing.
He said they 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 Fed and SEC teams monitoring Lehman worked together, and while a more engaged regulator may not have saved Lehman, earlier action could have enabled a softer landing for the firm.
I am sure there are things Lehman could have done differently, former Lehman Director Thomas Cruikshank said in his testimony.
Cruikshank said Lehman ultimately failed due to its real estate exposure, short sellers, tight short term credit, and a broad loss of confidence -- not Repo 105.
(Reporting by Emily Chasan and Clare Baldwin, additional reporting by Kim Dixon, Pedro Nicolaci da Costa, Corbett B. Daly, Karey Wutkowski and Paritosh Bansal; Editing by Tim Dobbyn)