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Former Fed Official Sees Lehman Collapse As Sign That Fewer Interventions Are Likely

A former Federal Reserve official says government refusal to back the sale of Lehman Brothers should be seen as a warning to the rest of the market.

Robin Lumsdaine, who served as the Fed's representative on the Basel Committee on Bank Supervision's Risk Management and Modeling Group and is now a professor of international finance at American University, told RTTNews that the federal refusal to back some of Lehman's riskier investments to facilitate a sale shows that the government is working to reduce the market's reliance on potential bailouts.

"There's a need to walk a fine line in terms of assisting the financial market situation. … In a situation like this you want to be careful to provide assistance without creating an incentive for additional risk-taking behavior" she said in an interview. "It's a general signal to the market that they should be careful about an expectation of government assistance."

Treasury Secretary Henry Paulson, speaking at a White House press briefing Monday, didn't rule out the possibility of future bailouts, but he stressed that the situation with Lehman was very different from the role the government took in backing the sale of Bear Stearns in March and the recent intervention to take over Fannie Mae and Freddie Mac.

Although he said he is committed to maintaining the stability of financial markets, Paulson said that he "never once considered that it was appropriate to put taxpayer money in the line in resolving Lehman Brothers."

With respect to the takeover of Fannie Mae and Freddie Mac, Paulson also indicated that the market shouldn't read an interventionist mindset into federal actions.

"What we're doing is really living up to our responsibilities, which were rooted in congressional charters that go back decades and that have been perpetuated by Washington," he said.

Lumsdaine said that in addition to reworking the regulation of financial markets, which Paulson had called for as early as March, financial institutions should also take much closer looks at their investments.

"As the financial landscape has become more complex there needs to be additional focus on controls and governance surrounding the activities of firms. … The understanding of activity needs to be commensurate with that activity," she said. "The financial institutions need to understand the risks they are getting into."

by RTT Staff Writer

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