Two lawmakers say Lehman Brothers' historic collapse cost school districts and local governments millions, forcing many to make major cutbacks.
Rep. Anna Eshoo, D-Calif., said 40 municipalities nationwide lost around $1.7 billion after the firm went under. She is introducing legislation that would require the federal government to compensate those governments.
At a hearing Tuesday probing what led to Lehman's collapse, Eshoo said San Mateo County, which is in her district, lost $155 million.
Lehman's meltdown in September 2008 was the biggest corporate bankruptcy in U.S. history. It threw global financial markets into crisis.
Another lawmaker said numerous governments suffered huge losses.
"These were school districts and local governments that made investments that they believed were conservative," said Rep. Ed Perlmutter, D-Colo. "They trusted that federal regulators were keeping a watchful eye on companies like Lehman Brothers."
The former chief executive for Lehman is scheduled to testify at the hearing, which will probe a bankruptcy examiner's report that the firm masked $50 billion in debt.
The examiner, Anton Valukas criticized the company and the Securities and Exchange Commission. Lehman, he said, "was significantly and persistently in excess of its own risk limits," he said in prepared remarks. The SEC, meanwhile, "was aware of these excesses and simply acquiesced."
In his report last month, Valukas disclosed 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."
Richard Fuld, Lehman's former CEO, said he has "absolutely no recollection whatsoever" of any documents related to the so-called Repo 105 accounting maneuver, according to prepared testimony.
Treasury Secretary Timothy Geithner said at the hearing that Lehman's collapse highlights why the Obama administration's proposal to reform the financial system is needed. 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.
Lawmakers used the hearing as an opportunity to spar over the Obama administration's push for financial regulatory reform.
Republicans asserted that regulators' failure to prevent Lehman's collapse is proof that the proposed financial reforms won't work either.
"Given their track record, giving these regulators more power will provide the markets with a false sense of security, while hampering the free market," said Rep. Scott Garrett, R.-N.J.
Republicans accused Democrats of trying to continue federal bailouts by injecting more money into Wall Street companies.
But the committee's chairman, Rep. Barney Frank, D-Mass., called that a "blatant mischaracterization," arguing that "no money can be spent in these cases until the institution is out of business."
The chairman of the SEC, Mary Schapiro, said in written remarks that agency didn't do enough to oversee the five largest investment banks, even though it had authority over them since 2004. That oversight program, she said, was did not have enough resources.
"The SEC is determined to become a more effective regulator," she told lawmakers. "We are determined to use the lessons of that experience to be more effective"
Federal Reserve Chairman Ben Bernanke said the central bank wasn't aware that Lehman used the accounting move. And even if the Fed did know, it wouldn't have changed the Fed's view that the company was in bad financial shape, he said.
Although the SEC was Lehman's chief regulator, the Fed began to monitor the firm after trouble surfaced in the financial industry.
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