Bernanke, Gerthner on Lehman collapse

U.S. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke have given testimony to Congress on the 2008 collapse of Lehman Brothers, at the peak of the financial crisis. They said an overhaul of financial regulations is needed to help limit the damage to the country's financial system.

The collapse of financial giant Lehman Brothers nearly two years ago sent shockwaves through the global financial system. U.S. regulators now testify that there was nothing they could have done about it.

Bernanke said, "Despite the best efforts of all involved, a solution could not be crafted, nor could an acquisition by another company be arranged,"

One way Lehman hid its true financial condition was by employing a technique which allowed it to overstate its capital levels -- or, conversely, to underplay its reliance on debt. The firm's collapse in 2008 rattled capital markets worldwide.

Geithner said "Failure is inevitable in financial systems. The challenge for governments is to devise a system where failures of private firms cannot cause catastrophic damage to the economy. The sweeping financial reforms that this committee has passed, that the House has passed, and that the full Senate is about to consider are designed to deal with the vulnerabilities exposed by the crisis and illustrated by the Lehman example."

Geithner said the rules of financial engagement need to be changed. "Any strategy that relies on market discipline to compensate for weak regulation and then leaves it to the government to clean up the mess is a strategy for disaster." he said.

Congress is in the midst of considering the most sweeping changes to the US financial system since the Great Depression. The White House is expected to press the case for financial reform when the president heads to new York later this week.