Actions on Lehman, Wachovia defended

WASHINGTON (AP) - Federal bank regulators are defending their actions leading up to the collapse of Lehman Brothers and the purchase of Wachovia at the height of the financial crisis.

They are telling the Financial Crisis Inquiry Commission on Wednesday that government officials' decisions in 2008 not to rescue Lehman and to encourage Wells Fargo & Co.'s takeover of Wachovia made sense under the circumstances.

"The Federal Reserve did not 'allow' Lehman Brothers to die," said Thomas Baxter, general counsel of the New York Fed, in prepared testimony.

Robert Steel, the former Wachovia CEO, said in prepared testimony that Federal Deposit Insurance Corp. Chairman Sheila Bair directed Wachovia to enter talks with potential buyers.

The panel is examining potential systemwide risk from financial institutions and the institutions that were deemed "too big to fail."

Former Lehman Chairman and CEO Richard S. Fuld Jr. said in prepared testimony that Lehman did everything it could to limit its risks and save itself.

"Lehman's demise was caused by uncontrollable market forces, and the incorrect perception and accompanying rumors that Lehman did not have sufficient capital to support its investments," Fuld says in his testimony prepared for the hearing.

Lehman was "mandated" by regulators to file for bankruptcy on Sept. 15, 2008, Fuld says.

Under the landmark financial overhaul law enacted in July, regulators are empowered to shut down financial institutions whose collapse could threaten the system.

After the subprime mortgage bubble burst in 2007, complex investments called credit default swaps -- which insured against default of securities tied to the mortgages -- collapsed. That brought the downfall of Lehman Brothers, the biggest bankruptcy in U.S. history, and triggered a panic in financial markets.

U.S. government officials declined to rescue Lehman. Instead, they injected tens of billions of dollars into other financial firms, such as American International Group Inc.

Wachovia had a huge amount of business in adjustable-rate mortgages, enticing borrowers who later defaulted on their home loans. In late September 2008, the FDIC, the Federal Reserve and the Treasury Department found that Wachovia posed a "systemic risk to the financial industry and the economy," FDIC official John Corston says in his testimony.

Aided and prodded by the government, Wells Fargo acquired Wachovia. The $12.7 billion deal, announced in early October 2008, created an institution with operations in 39 states and the District of Columbia.