Former Lehman Brothers chairman Richard Fuld told U.S. lawmakers Wednesday that the collapsed investment bank took reasonable risks and did all it could to protect itself.

Richard Fuld, former chairman and chief executive officer of Lehman, listens while testifying at a Financial Crisis Inquiry Commission hearing Wednesday. (Jim Young/Reuters)

"Lehman’s demise was caused by uncontrollable market forces and the incorrect perception and accompanying rumours that Lehman did not have sufficient capital to support its investments," Fuld told the Financial Crisis Inquiry Commission in Washington, D.C.

Fuld was one of many banking executives and regulators to address the panel, which is examining potential system-wide risk from financial institutions and the institutions that were deemed "too big to fail."

Under the landmark financial overhaul law enacted in July, regulators are empowered to shut down financial institutions whose collapse could threaten the system.

Lehman's bankruptcy in late 2008 began a domino effect that sent financial markets into a tailspin and ensnared the global economy in a credit crunch from which it has only recently recovered.

Vilified by investors for his role in the crisis, Fuld said Lehman was "mandated" by regulators to file for bankruptcy on Sept. 15, 2008, but was more than capable of staying afloat had it been offered the same treatment as other financial firms.

"Lehman was forced into bankruptcy not because it neglected to act responsibly or seek solutions to the crisis, but because of a decision, based on flawed information, not to provide Lehman with the support given to each of its competitors and other nonfinancial firms in the ensuing day," he said.

"We also had finance-able collateral and solidly performing businesses. There is nothing about this profile that would indicate a bankrupt company."

Regulators defend actions

After the subprime mortgage bubble burst in 2007, complex investments called credit default swaps — which insured against default of securities tied to the mortgages — collapsed. That brought the downfall of Lehman Brothers, the biggest bankruptcy in U.S. history, and triggered a panic in financial markets.

U.S. government officials declined to rescue Lehman. Instead, they injected tens of billions of dollars into other financial firms, such as American International Group Inc.

"The Federal Reserve did not 'allow' Lehman Brothers to die," said Thomas Baxter, general counsel of the New York Fed, in prepared testimony.

'There is nothing about this profile that would indicate a bankrupt company'—Lehman chair Richard Fuld

Wachovia had a huge amount of business in adjustable-rate mortgages, enticing borrowers who later defaulted on their home loans. In late September 2008, the FDIC, the Federal Reserve and the Treasury Department found that Wachovia posed a "systemic risk to the financial industry and the economy," FDIC official John Corston says in his testimony.

Aided and prodded by the government, Wells Fargo acquired Wachovia. The $12.7-billion US deal, announced in early October 2008, created an institution with operations in 39 states and the District of Columbia.

With files from The Associated Press