U.S. Federal Reserve Board chairman Ben Bernanke is set to tell Congress that Lehman Brothers’ failure in September 2008 was unavoidable.

The Fed released testimony Monday that Bernanke is slated to give before the House Committee on Financial Services Tuesday. In that testimony, Bernanke says, “The Federal Reserve fully understood that the failure of Lehman would shake the financial system and the economy. However, the only tool available to the Federal Reserve to address the situation was its ability to provide short-term liquidity against adequate collateral; and… Lehman already had access to our emergency credit facilities.”

Bernanke says that it was clear, “that Lehman needed both substantial capital and an open-ended guarantee of its obligations to open for business… At that time, neither the Federal Reserve nor any other agency had the authority to provide capital or an unsecured guarantee, and thus no means of preventing Lehman’s failure existed.”

He goes on to explain that the Lehman failure provides at least two important lessons. “First, we must eliminate the gaps in our financial regulatory framework that allow large, complex, interconnected firms like Lehman to operate without robust consolidated supervision,” he says, noting that, “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.”

“Second, to avoid having to choose in the future between bailing out a failing, systemically critical firm or allowing its disorderly bankruptcy, we need a new resolution regime, analogous to that already established for failing banks. Such a regime would both protect our economy and improve market discipline by ensuring that the failing firm’s shareholders and creditors take losses and its management is replaced,” he concludes.

IE