Few Heroes in Lehman Bankruptcy

Much of the blame for Lehman Brothers' collapse has fallen on the Securities and Exchange Commission, but at least one former regulator thinks the New York Fed is just as much to blame. William K. Black, an associate professor of economics and law at the University of Missouri-Kansas City and a former official of the Federal Home Loan Bank Board and Federal Savings and Loan Insurance Corp., told a House panel last week that the SEC had no way to effectively regulate Lehman.

"The SEC did not have the mind-set, rules or appropriate personnel" to succeed in the consolidated supervised entity program that gave it authority over Lehman, he said.

Black said the SEC's only hope of effectively regulating Lehman was in partnership with the Fed, which had "unprecedented practical leverage during the crisis because of its ability to lend and convert investment banks to commercial bank holding companies." This did not happen. "It was painful, as a former regulator, to read the [court-appointed examiner] report's discussion of the FRBNY staff's open disdain for working cooperatively with the SEC to protect the public," he said.

Republicans at the hearing seized on his remarks to argue against financial reform. They contended that regulators already had plenty of power they had failed to use before Lehman's failure.

In an online survey, 78% of respondents said the reform bill would not have prevented Lehman's collapse — not because regulators were not using the tools they possessed, but because the bill leaves the banking system dominated by a few large institutions overseen by multiple regulators. Another 12% said the bill would have curbed the risky behavior that preceded the Lehman's collapse, and 10% said it would have given regulators tools to wind down the firm without destabilizing financial markets.

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