US Federal Reserve chairman Ben Bernanke said today he was partly to blame for leaving the wrong impression that the central bank could have saved Lehman Brothers from failure in 2008.
Bernanke was testifying before a congressional commission examining the causes of the worst financial crisis in 80 years.
He said he thought it 'very likely' that the investment bank was insolvent and lacked sufficient collateral to borrow enough from the Fed to avert collapse.
But he said he kept that view to himself in congressional testimony given just days after Lehman's September 2008 bankruptcy because he was worried that such comments might have spooked already panicky financial markets.
'I regret not being more straightforward there because clearly it has supported the mistaken impression that in fact we could have done something we could not have done,' he said.
The Financial Crisis Inquiry Commission wraps up a two-day session today focusing on 'too big to fail' firms whose disorderly collapse could destabilise the global economy.
Yesterday, commission chairman Phil Angelides questioned whether politics had played a role in the decision not to bail out Lehman Brothers. Its bankruptcy triggered widespread panic, hastening the worst global recession since World War Two.
'It was with great reluctance and sadness I conceded that there was no other option' but to let Lehman fail, Bernanke said. 'The only way we could have saved Lehman would have been by breaking the law and I'm not sure I'm willing to accept those consequences for the Federal Reserve and for our system of laws.'
The Fed serves as the lender of last resort for banks in financial difficulty, but it is required to lend against good collateral. Bernanke said it was the 'unanimous opinion' of New York Fed lawyers and leadership that Lehman did not meet that requirement.
The 10-member, congressionally-appointed commission is due to issue its report on the causes of financial crisis by December 15.
Bernanke said a new financial reform law would help reduce the risk of future problems, provided regulators follow through on its implementation.
He listed stricter capital and liquidity rules, a regime to wind down a failing firm in an orderly fashion, and requirements that most derivatives are to be settled in clearinghouses, as among the measures that will strengthen the financial system and help address the too-big-to-fail problem.
