BEN BERNANKE, the Federal Reserve chairman, told the Financial Crisis Inquiry Commission (FCIC) yesterday that he should have been “more straightforward” with Congress when he avoided saying the central bank had no means to save Lehman Brothers.
Shortly after Lehman’s collapse in 2008, Mr Bernanke told Congress that the government had “declined” to rescue the bank. He said yesterday that this had “supported this myth that we did have a way of saving Lehman”.
“I regret not being more straightforward there because clearly it has supported the mistaken impression that in fact we could have done something,” he told the commission, speaking a day after Dick Fuld, former chairman of Lehman Brothers, said the Fed could and should have rescued his group.
However Mr Bernanke said the omission was made only out of concern that revealing the Fed’s lack of tools could have ratcheted up market pressure on other financial institutions.
Asked what was different at AIG, which has received billions of dollars of government assistance, Mr Bernanke said the group’s insurance business was valuable enough to secure loans to bail out its troubled financial products division.
“It was our assessment that they had plenty of collateral to repay our loan. The rest of the company as far as we could tell was an effective, sound company with a lot of value,” he said.
The FCIC is considering the phenomenon of “too-big-to-fail” institutions such as AIG and Lehman.
Mr Bernanke predicted that the consolidation seen in recent years, which has worried many in the US, could be reversed over time.
“My projection is that even without direct intervention by the government, over time we’re going to see some break up and some reduction in size and complexity of some of these firms as they respond to the incentives created by market pressures and by regulatory pressures as well,” he said.
Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation, told the panel that the Dodd- Frank financial reforms passed by Congress in July should help to end the problem. – Copyright The Financial Times Limited 2010
