2  Donald L. Kohn, Vice Chairman, Board of Governors of the Federal Reserve System, Risk Management and Its Implications for Systemic Risk, before the Subcommittee on Securities, Insurance, and Investment, Committee on Banking, Housing, and Urban Affairs, United States Senate, June 19, 2008. 2  BIS Review 112/2010  supervising Lehman. The SEC continued to be the supervisor of the broker-dealers and their parents, including Lehman’s broker-dealer and its parent, Lehman Holdings. Lehman showed some signs of recovery during this period. It raised capital in June of 2008. But liquidity continued to be a significant disability. As part of its monitoring, the New York Fed, in conjunction with the SEC, conducted liquidity stress analyses of the investment banks, in part to evaluate their creditworthiness. Those analyses suggested that Lehman needed to improve its liquidity should the credit crisis intensify. Again, to Lehman’s credit, and in response to our analyses, Lehman took steps to, and did, improve its liquidity. At no time, however, did anyone at the New York Fed believe that Lehman had sufficient liquidity to withstand what was to come in September, events that Richard Fuld, Lehman’s former chief executive officer, has described as the “perfect storm.” 3 Accordingly, as has been well-documented in the press and in the comprehensive report by Anton Valukas, the Lehman Brothers’ bankruptcy examiner (the Valukas Report), senior Federal officials, including President Geithner, continually pressed Lehman to find workable solutions for its capital and liquidity problems from March to September 2008. Lehman executives pursued potential merger partners.
Counterparties’ reluctance to deal with Lehman intensified starting on Monday, September 8, 2008, such that by Thursday, September 11, 2008, it was apparent to us that Lehman faced a liquidity crisis – i.e., it would not be able to pay its debts as they came due. The issue was no longer whether this public company could fashion its own rescue. We had come to the point of no return, where Lehman faced two alternatives: bankruptcy, or some kind of third-party rescue. The United States Treasury Department, working in conjunction with the Federal Reserve and the SEC, convened a meeting of the chief executive officers of major financial institutions at the New York Fed after the close of markets on Friday, September 12, 2008. Secretary Paulson opened the meeting with a short and plain declaration that there would be no public money to support Lehman. The Government then gave the CEOs two tasks. First, it was suggested they form a consortium to finance certain of Lehman’s illiquid assets in  3  Richard S. Fuld, Jr., Statement before the United States House of Representatives Committee on Financial Services, April 20, 2010. 4  Transcript, Hearing on Lehman Brothers Bankruptcy Examiner Report, United States House of Representatives Committee on Financial Services, April 20, 2008, pp. 136, 153. BIS Review 112/2010  3  order to facilitate an acquisition.