Lawmakers: Lehman Collapse Hurt Schools, Towns

Two lawmakers say Lehman Brothers' historic collapse cost school districts and local governments millions, forcing many to make major cutbacks.

Lehman's meltdown in September 2008 was the biggest corporate bankruptcy in U.S. history. It threw global financial markets into crisis.

On Tuesday, lawmakers probed what led to the investment bank's collapse and the impact of the ensuing losses. They also traded barbs about whether the Obama administration's proposed changes to financial regulations would lead to more bailouts.

Rep. Anna Eshoo, D-Calif., said 40 municipalities nationwide lost around $1.7 billion after the firm went under. She is introducing legislation that would require the federal government to compensate those governments.

At a hearing Tuesday probing what led to Lehman's collapse, Eshoo said San Mateo County, which is in her district, lost $155 million.

Another lawmaker said numerous governments and hospitals in his state suffered huge losses.

"These were school districts and local governments that made investments that they believed were conservative," said Rep. Ed Perlmutter, D-Colo. "They trusted that federal regulators were keeping a watchful eye on companies like Lehman Brothers."

The former chief executive for Lehman is scheduled to testify at the hearing, which will probe a bankruptcy examiner's report that the firm masked $50 billion in debt.

The examiner, Anton Valukas criticized the company and the Securities and Exchange Commission. Lehman, he said, "was significantly and persistently in excess of its own risk limits," he said in prepared remarks. The SEC, meanwhile, "was aware of these excesses and simply acquiesced."

In his report last month, Valukas disclosed that Lehman put together complex transactions that allowed the firm to sell "toxic" securities - mainly those made up of mortgages - at the end of a quarter. That wiped them off its balance sheet, avoiding the scrutiny of regulators and shareholders. Then the bank quickly repurchased them - hence the term "repo."

Richard Fuld, Lehman's former CEO, said he has "absolutely no recollection whatsoever" of any documents related to the so-called Repo 105 accounting maneuver, according to prepared testimony.

Treasury Secretary Timothy Geithner said at the hearing that Lehman's collapse highlights why the Obama administration's proposal to reform the financial system is needed. That legislation includes a mechanism to allow the government to safely wind down ailing financial companies whose collapse could take down the entire financial system and the broader economy.

Lawmakers used the hearing to spar over the Obama administration's push for financial regulatory reform.

Republicans asserted that regulators' failure to prevent Lehman's collapse is proof that the proposed financial reforms won't work either.

"Given their track record, giving these regulators more power will provide the markets with a false sense of security, while hampering the free market," said Rep. Scott Garrett, R.-N.J.

Republicans accused Democrats of trying to continue federal bailouts by injecting more money into Wall Street companies.

But the committee's chairman, Rep. Barney Frank, D-Mass., called that a "blatant mischaracterization," arguing that "no money can be spent in these cases until the institution is out of business."

The chairman of the SEC, Mary Schapiro, acknowledged her agency didn't do enough to oversee the five largest investment banks, even though it had authority over them since 2004. That oversight program, she said, did not have enough resources.

Going forward, "the SEC is determined to become a more effective regulator," she told lawmakers. "We are determined to use the lessons of that experience to be more effective"

Her comments come days after the SEC filed civil fraud charges against Goldman Sachs, alleging it withheld information in a complex transaction involving risky mortgage securities.

Federal Reserve Chairman Ben Bernanke testified at the hearing that the central bank wasn't aware that Lehman used the accounting move. And even if the Fed did know, it wouldn't have changed the Fed's view that the company was in bad financial shape, he said.

Although the SEC was Lehman's chief regulator, the Fed began to monitor the firm after trouble surfaced in the financial industry.

[Ataxpayer]

Fuld is a crook, and a liar. They make these high salaries and lie to people, they defraud them. They knew what they were doing when those bad loans were bundled into investments and given names that were hard to understand. They're crooks, with suits and ties ! Liars and thieves. They knew those investments of bundled bad loans would eventually go sour.
Just like in 2000/2001 when the Wall Street gang sold all these dotcom securities. They knew most of them were losing vast amounts of money and were going to fail. They are all crooks, stealing investment money 'by design'.
The only way to fix this mess, is to start handing out stiff jail terms, and keep doing it. The ones that are left, might just change their ways.
I'm sick of how corrupt Wall Street is, our big banks, the credit rating agencies, and even AIG.
Then those corrupt *#@*!@# use their ill gotten gains to buy politicians ! They get their buddies into the SEC, so there is not really honest oversight either.
Talk about widespread corruption !

[bmirarck2]

RE: Fuld, Hang 'em, hang 'em high!

[HGOODGUY]

RIGHT!!!!

IT MUST HAVE BEEN THE TOOTH FAIRY!!!

[msimamaji]

Oh yeah. And South Carolina Governor Mark Sanford couldn't remember that he was married. Not everyone is as gullible as the folks in the Tea Party Movement. This is just another example of lies and cover ups that over paid Wall Street CEO's (Crooks, exorbitantly Over Paid.) try to put over on the public. But not everyone in the public is easily fooled.

[brianbwb2011]

Whether he remembers or not, approval for the cooking of books had to come from somewhere, and ultimately the CEO is responsible.

A look at the paperwork will show whose signature is on the "approval" line, and if it is the CEO's, then he and his faulty memory should be held personally liable.

It is common for these thieves to lie using the Reagan "I don't recall" BS tactic, and after all is said and done, the result is that the sompany screwed up, nut no one is responsible.

This is why the neocons' "small government" agenda is a crock of cat poo, government must be powerful enough to deal with the largest business entities operating on American soil, pro-actively as well as post fact.

Anything less is fascism.

[inketolstoy]

Actually the government strong enough to deal with or out right control the largest businesses is one of the key components of fascism.

[brianbwb2011]

Who said anything about outright control?

From whence comes the neocon tactic of "extrapolation ad absurdium'?

When I say "deal with", I mean possessing the resources, legal authority, and requirements to bring anyone (and I do mean anyone) afoul of law to justice, regardless of how much money they control.

When companies can defraud with impunity, the country is in a fascist state, with business, in unelected, authoritarian control of the population, as opposed to the elected representatives of the people exerting such control.

I realize the neos love that idea, but I'd rather vote for our own leaders, and vote them out if they fail in their duties, rather than have them chosen permanently by a "good ol' boys" network of privileged shareholders.