Lehman failure 'unavoidable'

Lehman failure 'unavoidable'

When the giant investment bank Lehman Brothers fell, it created the largest bankruptcy filing in US history and helped accelerate the worst global recession in 70 years.
 
Now 19 months later Washington's asking how the firm failed and why it couldn't be saved.
 
Recent revelations have suggested that the true state of Lehman's balance sheet at the time of its collapse was much worse than thought - and that the firm used an accounting "trick" to hide the reality of its books.

Federal Reserve Chairman Ben Bernanke, who was testifying in Washington DC on Tuesday before a House committee investigating the collapse of the investment bank in 2008, said the failure of Lehman Brothers was "unavoidable".  

In September 2008 no government agency had sufficient authority to compel Lehman to operate in a safe and sound manner and in a way that did not pose dangers to the broader financial system.

Lehman's former CEO Richard Fuld denied his firm was looking for a bailout as it teetered on the edge. "We financed ourselves on the Friday night," he said, but the firm failed when a window offering cheap government borrowing to all struggling banks was suddenly closed off to Lehman Brothers.  He went on:

When the Fed opened the window to all the investment banks for additional collateral we all turned to each other and said we are fine, we will get through this. We then learnt that that window was denied to us.

At times the hearing was testy, with Treasury Secretary Tim Geithner getting a rough ride over whether the Obama administration's financial reform bill - now working its way through congress - will be strong enough stop future large scale bank failures and protect creditors who lost so much money when Lehman went under.
 
Goldman Sachs

The hearing came on the same day rival investment bank Goldman Sachs doubled its profits to more than $3bn by successfully trading in bonds, corporate debt, currencies and mortgages.

Goldman Sachs is a lightening rod for Americans for paying millions in salaries and bonuses since the turn of the year. Ex-Goldman staff hold key jobs in the federal government and the firm made billions during the financial crisis with the help of government bailout cash and very favourable interest rates.
 
Four days ago, however, regulators charged Goldman Sachs with civil fraud over a complicated financial product known as a Collateralised Debt Obligation.
 
A CDO is basically a bet between a bank and a hedge fund. The bank bets the CDO will be profitable. The hedge fund bets against - taking the view that the CDO will fail. Goldman Sachs is accused of failing to reveal to all its investors that a hedge fund betting against the CDO – Paulson & Co - was also helping to choose its content.
 
Paulson made a billion in profits while other customers lost about the same amount.
 
In Britain, the leading regulator the FSA, is also investigating Goldman Sachs after the mainly state-owned Royal Bank of Scotland lost $800m on CDOs.
 
Goldman is vowing to fight all allegations made against it but its reputation as the one firm that came out on top during the great recession of 2008/2009 may be harder to restore.