Federal Reserve Chairman Ben S. Bernanke on Thursday said he regretted not saying in congressional testimony shortly after the failure of Lehman Brothers Holdings in 2008 that the central bank had no authority to save the firm.
The testimony at the time “has supported this myth that we did have a way of saving Lehman,” Mr. Bernanke responded to a question during a Financial Crisis Inquiry Commission hearing in Washington. “I regret not being more straightforward there because clearly it has supported the mistaken impression that in fact we could have done something.”
Mr. Bernanke made the remarks to explain the disparity between his September 2008 testimony that the Fed and Treasury Department “declined to commit public funds to support the institution” and later statements that the government had no option to save Lehman because of inadequate collateral. The Fed decided at the time against saying Lehman was unsalvageable because it may have risked further panic in financial markets, Mr. Bernanke said Thursday.
“It was a judgment at that moment, with the system in tremendous stress and with other financial institutions under threat of a run or panic, that making that statement might have even reduced confidence further and led to further pressure,” Mr. Bernanke said.
In September 2008, Mr. Bernanke told the Senate Banking Committee that the Fed and Treasury “declined to commit public funds to support the institution” and that investors and counterparties had enough time to prepare for the firm’s failure.
Lehman’s Chapter 11 bankruptcy filing intensified the worst financial crisis and recession since the Great Depression. Mr. Bernanke said he believed that a Lehman failure would have been “catastrophic” and that the government, which was trying to arrange a private merger, should do all it could to avert that outcome.
“This is my bread and butter,” said Mr. Bernanke, a former Princeton University economist who studied the Great Depression before joining the Fed as a governor in 2002.
The Fed chief said he was prepared to ask the Board of Governors to approve aid to Lehman, then backed off when he was informed that the central bank wouldn’t get sufficient collateral to back any loan. Lehman probably would have failed even with Fed assistance, Mr. Bernanke said.
“It was the judgment made by the leadership of the New York Fed and the people who were charged with reviewing the books of Lehman that they were far short of what was needed to get cash to meet the run,” Mr. Bernanke said. “That was the judgment that was given to me.”