Richard Fuld: Why Lehman Brothers Went Under

CEO of the bankrupt company says a number of factors contributed to its downfall.

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In his opening statement before the House Committee on Oversight and Government Reform, Richard Fuld, the CEO of the now bankrupt Lehman Brothers, told lawmakers, "I want to be very clear: I take full responsibility for the decisions that I made and for the actions that I took."

But in his written testimony, Fuld made it just as clear that he believed there were a number of factors outside of his control that contributed to—or failed to prevent—the largest bankruptcy filing in history.

Those factors include:

From Fuld's prepared testimony, via ABC News:

The Fed: "Over the summer, we discussed with the Federal Reserve the possibility of converting Lehman Brothers to a bank holding company, and applied for a regulatory exemption that would permit our Utah bank to receive assets from its affiliates, all for the purpose of creating additional liquidity. On the same day Lehman Brothers prepared to file for bankruptcy, the Federal Reserve significantly broadened the types of collateral all banks were able to pledge to the Federal Reserve to create additional liquidity, the lifeblood of our system, and the Federal Reserve also adopted, on a temporary basis, the type of exemption that Lehman Brothers had applied for earlier. Had these changes been made sooner, they would have been extraordinarily helpful to Lehman Brothers."

The Media and Rumors: "After the second quarter, Lehman Brothers developed a series of options to strengthen the firm, including working with regulators to develop a plan to separate the vast majority of our commercial real estate assets from our core business by spinning off those assets to our shareholders in an independent, publicly traded entity. We believed this plan would have improved our balance sheet while preserving shareholder value. The spinoff entity would have been able to manage the assets for economic value maximization over a longer time horizon. However, a sharp drop in our share price following leaks to the press about confidential negotiations with Korea Development Bank about a possible investment in Lehman Brothers, and rumors regarding our liquidity and capital, compelled us to pre-announce earnings before we had a chance to complete those plans or any of the alternatives we were pursuing. We then faced the threat of credit downgrades. Counterparties to the numerous transactions we conducted every day started to withdraw business and to demand increased collateral for trades. We had pursued buyers and merger partners to no avail."

Mark-to-Market Accounting: "Investment banks, unlike commercial banks, are subject to mark-to-market accounting. The result was we all had to mark our positions to the weakest competitors' fire-sale prices of assets. The commercial banks did not. This put investment banks at a disadvantage. Chairman Bernanke himself recognized there is 'good value' over the long-term for these assets being sold at fire-sale prices. These write-downs have been a large contributor to shaking general confidence in investment banks and the banking system."

Short Selling: "Naked short selling, followed by false rumors, dealt a critical, if not fatal blow to Bear Stearns. Many knowledgeable participants in our financial markets are convinced that naked short sellers spread rumors and false information regarding the liquidity of Bear Stearns, and simultaneously pulled business or encouraged others to pull business from Bear Stearns, creating an atmosphere of fear which then led to a self-fulfilling prophecy of a run on the bank. The naked shorts and rumormongers succeeded in bringing down Bear Stearns. And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers. In our case, false rumors were so rampant for so long that major institutions issued public statements denying the rumors."