Bernanke: Fed could do nothing to save Lehman

The Federal Reserve was powerless to stop the collapse of Lehman Brothers in 2008, the central bank's chairman said yesterday, but he was too scared to say so in public at the time.

Ben Bernanke admitted that he had been less than straightforward in his testimony to Congress in the days after the investment bank went bankrupt as he thought that admitting the limits of the Fed's power would only make the market panic worse.

His confession was made at the latest hearing of the Financial Crisis Inquiry Commission, which is investigating the causes of the crisis and has now zoned in on whether the government should have bailed Lehman out.

The Fed chairman created a "myth" that the government had decided to let Lehman fail, he said, referring to Congressional testimony in which he said federal authorities had "declined to commit public funds to support the institution".

In fact, there was never the option, he told the FCIC. "It was a judgement at that moment, with the system in tremendous stress and with other financial institutions under threat of a run or panic, that making that statement might have even reduced confidence further and led to further pressure," he said.

The collapse of Lehman was such a shock to the financial system that it caused a run on even super-conservative money market funds, something that could within days have left businesses unable to pay their workers. The panic was halted only when the US Treasury said it would seek permission to use taxpayer money to support the system.

On Wednesday, Dick Fuld, the former chief executive of Lehman, lashed out at the Fed and the Treasury for failing to rescue of his firm, which he said was financially sound and needed only emergency loans to tide it over until the panic subsided.

That version of events was roundly rejected by Mr Bernanke yesterday. Lehman did not have enough collateral to put up against any loans, and customers would have kept deserting the firm anyway. "If I could have done anything to save it, I would have saved it," he said. "If we had lent to Lehman, not only would we have been unsuccessful but [we] would have saddled the taxpayer with tens of bilions of dollars of losses."

The FCIC must report on the relative importance of almost two dozen factors in the credit crisis by mid-December, and has this week been examining whether banks became too big to fail, and what might have been done either to prevent them becoming too big, or to enable them to fail without wrecking confidence in the wider financial system.

Mr Bernanke and Sheila Bair, the chairman of the Federal Deposit Insurance Corp, another banking regulator, both expressed confidence that the creation of a new "resolution authority" to wind down failed firms in an orderly manner makes a repeat of the 2008 panic much less likely.

Ms Bair said: "The new resolution powers, the enhanced regulatory and supervisory cooperation mandated in the law, and the resolution planning authority provide an infrastructure to end 'too big to fail'. Applying high standards for transparency and simplification of overly complex financial firms must be pursued aggressively to make this a reality."

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