By Steven K. Beckner

(MNI) – Federal Reserve Chairman Ben Bernanke will defend the Fed’s
role in the collapse of Lehman Brothers in Congressional testimony
Tuesday.

Bernanke will make no apology for Lehman’s September 2008 failure,
which precipitated an intensification of the financial crisis, when he
appears jointly with Treasury Secretary Timothy Geithner and SEC Chair
May Schapiro before the House Financial Services Committee.

A recent report from a court-appointed examiner found that, prior
to its collapse, Lehman used an aggressive accounting device, known as
Repo 105, to disguise its insolvency by temporarily moving $50 billion
in bad assets off its balance sheet.

But in an advance text of his testimony released by the Fed,
Bernanke says the Fed did not know of the practice. He said the Fed was
not Lehman’s primary supervisor and said the central bank did everything
it could to prevent the investment bank’s failure by providing emergency
liquidity through its discount window.

“The Federal Reserve fully understood that the failure of Lehman
would shake the financial system and the economy,” Bernanke says,
“However, the only tool available to the Federal Reserve to address the
situation was its ability to provide short-term liquidity against
adequate collateral; and, as I noted, Lehman already had access to our
emergency credit facilities.”

Bernanke will tell lawmakers while it was clear Lehman needed both
substantial capital and an open-ended guarantee of its obligations to
open for business on Monday, September 15 — at that time — neither the
Fed nor any other agency had the authority to provide capital or an
unsecured guarantee, and thus no means of preventing Lehman’s failure
existed.

The Lehman failure, he argues, underlines the importance of
eliminating the gaps in the U.S. financial regulatory framework “that
allow large, complex, interconnected firms like Lehman to operate
without robust consolidated supervision.”

Second, he continues, a new resolution regime — similar to that
already established for failing banks — is necessary to avoid having to
choose in the future between bailing out a failing, systemically
important firm or allowing its disorderly bankruptcy,

“Such a regime would both protect our economy and improve market
discipline by ensuring that the failing firm’s shareholders and
creditors take losses and its management is replaced,” Bernanke
concludes.

** Market News International Washington Bureau: 202-371-2121 **

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