Two top lawyers for the Federal Reserve system are headed to Capitol Hill today to defend its handling of the financial crisis, including the 2008 failures of Lehman Brothers and Wachovia.
Scott Alvarez, general counsel of the Federal Reserve’s Board of Governors, and Thomas Baxter Jr., general counsel of the Federal Reserve Bank of New York, are scheduled to testify before the Financial Crisis Inquiry Commission. The commission has been charged by Congress with investigating the causes of the havoc on Wall Street.
Both lawyers had prominent roles during the crisis — Alvarez as an adviser to Fed Chairman Ben Bernanke and Baxter as an adviser to Timothy Geithner, who was president of the New York Fed before becoming U.S. treasury secretary.
In testimony as written for delivery, Alvarez describes how the Federal Reserve refereed a dispute between Citigroup Inc. and Wells Fargo & Co.
Both institutions considered merging with Wachovia Corp. after it faced a loss of investor confidence in September 2008. At one point, Citigroup and Wachovia entered into an agreement to deal with each other exclusively, but Wells Fargo then proposed a late bid that Wachovia’s board of directors accepted. Citigroup, in turn, protested and threatened litigation.
Alvarez says there was concern that the competing claims “could themselves become a destabilizing influence” on the banking system. “To allow these discussions time to proceed, Federal Reserve officials became involved in facilitating negotiations for a cease-fire or standstill to the litigation among the three firms,” he says in the prepared testimony (PDF).
Citigroup eventually agreed not to block the Wells Fargo bid, and Alvarez adds that the Federal Reserve “did not provide any emergency financial assistance” for the deal “nor was any financial assistance sought” for either bid.
Baxter, in his prepared testimony (PDF), pushes back against the idea that the Federal Reserve allowed Lehman Brothers to fail. The bank and federal agencies “tried hard to save it…. We did not succeed, but the effort made was serious and determined. We came very close.” The biggest obstacle, he says, was the lack of a serious merger partner for Lehman Brothers after British banking rules complicated a proposed merger with Barclays PLC.