Bernanke: Lehman could not be saved

September 3, 2010 at 12:00a.m.

McClatchy Newspapers

WASHINGTON

Federal Reserve Chairman Ben Bernanke on Thursday strongly rejected as “myth” suggestions that he could have saved investment bank Lehman Brothers and prevented the near-collapse of the global financial system.

Former Lehman CEO Richard Fuld suggested Wednesday that the Fed could have given him a lifeline in September 2008 and spared the world the subsequent chaos. That view is wrong, Bernanke, a former Princeton economist, told the Financial Crisis Inquiry Commission.

“Before I came to the Fed chairmanship, I was an academic, and I studied for many years the Great Depression, financial crises, and this is my bread and butter. And I believed deeply that if Lehman was allowed to fail or did fail that the consequences for the U.S. financial system and the U.S. economy would be catastrophic,” Bernanke said. “And I never at any time wavered in my view that we should do absolutely everything possible to prevent the failure of Lehman.”

The problem, he said, was that Lehman lacked sufficient collateral to provide to the Fed for any loans it would have received. Lehman was under the modern equivalent of a bank run, where investment firms on the other end of deals with it simply refused to lend it any more money, pulled out of existing deals and demanded immediate repayment from it.

Bernanke’s testimony provided the most detailed public accounting yet of how the Fed reached the decisions it made in a pivotal point in American financial history. Almost two years later, another Great Depression has been averted, but the damage to the structure of the nation’s financial sector led to a deep and seemingly intractable downturn.

On the fateful weekend of Sept. 13-14, 2008, regulators concluded that Lehman was dead. It would either be purchased at the last minute by the British bank Barclays or shuttered. Any government rescue effort amounted to a “Hail Mary” pass.

“The view was that failure was essentially certain in either case,” the Fed chief testified.