Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, April 19, 2010

Fuld Says Examiner and Press Distorted Facts about Repo 105

Richard Fuld, former Lehman CEO, will testify tomorrow before the House Financial Services Committee.  Here is an excerpt from his written testimony about the much-criticized Repo 105:

The Examiner did take issue, though, with Lehman’s “Repo 105” sale transactions.

As to that, I believe that the Examiner’s report distorted the relevant facts, and the press, in turn, distorted the Examiner’s report. The result is that Lehman and its people have been unfairly vilified.

* * *

The Examiner himself acknowledged that the Repo 105 transactions were not inherently improper and that Lehman vetted those transactions with its outside auditor. He also does not dispute that Lehman appropriately accounted for those transactions as required by Generally Accepted Accounting Principles.

Bankruptcy Examiner Anton Valukas' written statement has unflattering words about the SEC:

We believe it clear, then, that the SEC was in fact Lehman’s primary regulator.  The SEC told us that were constantly monitoring Lehman’s risk and liquidity.  But there was little if any actual regulation; we observed no instance in which the SEC did anything, in Chairman Cox’s words, to “act quickly in response to
financial or operational weaknesses” at Lehman.

The SEC made a few recommendations or directions here and there, but in general it simply collected data; it did not direct action, it did not regulate.

It is one thing for Lehman to have exercised the business judgment, although in retrospect clearly bad judgment, to forge ahead and take on excessive risk. But it was quite another for the supposed regulator – a regulator who had been told by Lehman that its risk controls were binding and not meant to be exceeded under any circumstances – to stand by idly and simply acquiesce to management’s decision. The SEC’s mission – clearly stated on its own website – is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” The SEC’s role was not to simply absorb and acquiesce to Lehman’s decisions; the SEC’s role was to supervise and regulate to protect investors and
the markets.

Written statements  from other scheduled witnesses are available at the Financial Services Committee website.

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