Dick Fuld: Former Lehman CEO To Claim 'No Recollection' Of Accounting Fraud
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WASHINGTON — The former chief executive of Lehman Brothers said he has "absolutely no recollection whatsoever" about an accounting maneuver that a bankruptcy examiner says the company used to mask its perilous financial condition.
Richard Fuld, Lehman's former CEO, said he does not recall seeing any documents related to the so-called Repo 105 accounting gimmick, according to testimony prepared for a House hearing Tuesday.
The report "distorted the relevant facts" and that the accounting complied with standard practices, Fuld said in the prepared remarks.
"The result is that Lehman and its people have been unfairly vilified," Fuld said.
Last month, an examiner appointed by the bankruptcy court to investigate the Lehman debacle issued a 2,200-page report. It found that the firm masked $50 billion in debt by using the so-called Repo 105 accounting maneuver
The examiner, Anton Valukas, discovered 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."
Since the report came out, interest has grown on Capitol Hill among lawmakers seeking to find out if the accounting gimmick was widely used by Wall Street firms to hide their debt. Tuesday's hearing is the latest attempt to probe the matter and comes as the Obama administration is urging passage of a sweeping financial regulatory overhaul.
Treasury Secretary Timothy Geithner will testify at the hearing that Lehman's collapse highlights why the Obama administration's proposal to reform the financial system is needed.
"Lehman's disorderly bankruptcy was profoundly disruptive," Geithner said, according to excerpts of his prepared remarks. "It magnified the dimensions of the financial crisis, requiring a greater commitment of government resources than might otherwise have been required."
The chairman of the Securities and Exchange Commission, Mary Schapiro, also is scheduled to testify. She will say that after Lehman's rival, Bear Stearns, nearly collapsed two years ago in a government-managed sale, the SEC had little ability to prevent Lehman from going under.
She did, however, concede that the SEC "did not do enough" to oversee the five largest investment banks, even though it had authority over them since 2004. That oversight program, she said, was "insufficiently resourced, staffed, and managed from its inception."
Lawmakers are also likely to question Schapiro about the SEC's case against Goldman Sachs. The agency filed civil charges Friday against the venerable Wall Street firm, claiming the bank misled investors about mortgage-linked securities.
Federal Reserve Chairman Ben Bernanke, also scheduled to testify, said the central bank wasn't aware that Lehman used the accounting move. And even if the Fed did know it was doing so, it wouldn't have changed the Fed's view that the company was in bad financial shape, according to Bernanke's prepared remarks.
Although the Securities and Exchange Commission was Lehman's chief regulator, the Fed began to monitor the firm after trouble surfaced in the financial industry.
Two Fed employees were placed at Lehman to keep tabs of the company's cash position and its general financial condition, Bernanke explained. Beyond information gathering, the employees had no authority to regulate Lehman's disclosures, capital standards, risk-management practices or other business activity, Bernanke pointed out.
The Fed and other government agencies were unable to engineer a private-sector rescue of the failing firm or come up with some other solution. Lehman was forced to declare bankruptcy – the biggest in U.S. history – in the fall of 2008. That threw financial markets in the United States and around the globe into crisis.
Bernanke said the case underscores the need for Congress to pass a sweeping financial overhaul. 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.
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ALAN ZIBEL and JEANNINE AVERSA 04/19/10 07:09 PM ET Associated Press