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SEC, Fed Alerted By Merrill of Lehman Balance Sheet Games in March 2008

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So which theory is it: stunning bureaucratic incompetence, wishful thinking and denial (a better gloss on theory #1) or a cover up? Or a combination of the above?

No matter which theory or theories you subscribe to, the continuing revelations of how the SEC and perhaps more important, the New York Fed conducted themselves in the months before Lehman’s collapse paint an increasingly damning picture.

The Valukas report shows both regulators were monitoring Lehman on a day-to-day basis shortly after Bear’s failure. They recognized that it has a massive hole in its balance sheet, yet took an inertial course of action. They pressured a clearly in denial Fuld to raise capital (and Andrew Ross Sorkin’s accounts of those efforts make it clear they were likely to fail) and did not take steps towards any other remedy until the firm was on the brink of collapse (the effort to force a private sector bailout as part of a good bank/bad bank resolution).

One of the possible excuses for the failure to do more was that the officialdom did not recognize how badly impaired Lehman was until too late in the game to do much more than flail about. But that argument is undercut by a story in tonight’s Financial Times.

Merrill warned both the SEC and the Fed in March 2008 that Lehman was engaging in balance sheet window dressing of a serious enough nature for it to put pressure on Merrill (as in it was making Merrill look worse relative to the obviously impaired Lehman).

When a company under stress makes fraudulent statements about its financial condition, it is a sign of desperation, and possibly imminent collapse. The fact that Merrill, with a little digging, could see that Lehman’s assertions about its financial health were bogus says other firms were likely to figure it out sooner rather than later. That in turn meant that the Lehman was extremely vulnerable to a run. Bear was brought down in a mere ten days. Having just been through the Bear implosion, the warning should have put the authorities in emergency preparedness overdrive. Instead, they went into “Mission Accomplished” mode.

This Financial Times story provides yet more confirmation that Geithner is not fit to serve as a regulator and should resign as Treasury Secretary. But it may take Congress forcing a release of the Lehman-related e-mails and other correspondence by the New York Fed to bring about that outcome.

From the Financial Times:

Former Merrill Lynch officials said they contacted regulators about the way Lehman measured its liquidity position for competitive reasons. The Merrill officials said they were coming under pressure from their trading partners and investors, who feared that Merrill was less ­liquid then Lehman…

In the account given by the Merrill officials, the SEC, the lead regulator, and the New York Federal Reserve were given warnings about Lehman’s balance sheet calculations as far back as March 2008.

Former and current Fed officials say even in the competitive world of Wall Street, it is un­usual for rival bankers to relay such concerns to the Fed.

The former Merrill officials said they contacted the regulators after Lehman released an estimate of its liquidity position in the first quarter of 2008. Lehman touted its results to its counterparties and its investors as proof that it was sounder than some of its rivals, including Merrill, these people said…

“We started getting calls from our counterparties and investors in our debt. Since we didn’t believe the Lehman numbers and thought their calculations were aggressive, we called the regulators,” says one former Merrill banker, now at another big bank…

Merrill officials said their calculations led them to believe that Lehman included what is known as regulatory capital in its calculation of excess liquidity. Executives at other banks say that is improper…

Mr Valukas said in his report that the banks interacting with Lehman may have suspected Lehman was incorrectly calculating its liquidity. In September 2008, days before it collapsed, Lehman maintained that it had about $50bn in readily accessible funds, though at the end it had nothing like that amount.

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55 comments

  1. Robespierre

    Forget about what they knew then. How about doing something now? To me what will indicate cover up is the reaction of the SEC from this report. If they ignore it and do no criminal prosecutions then %100 cover up since any investigation would eventually point back at them.

  2. shinola

    So it wasn’t just David Einhorn and a bunch of cranky bloggers making noise about Lehman’s pending demise throughout the middle of 2008.

    Lehman followed by Madhoff – Willful ignorance is a prerequisite for plausible deniability.

  3. Sechel

    The Lehman story proves more regulation is not the answer, but smart regulation.

    1) Volcker rule
    2) Find a way to return wall street to partnership form
    because partners worry about risk
    3) swaps on exchanges
    4) make all offerings fully sec registered, not because
    the SEC does a great job but because we want lawyers
    who can sue for false statements

    Lehman proves that More regulators or moving regulation from
    the SEC to OCC to OTS does not solve much, although the FDIC seems to do the best job(maybe because their money is on the line)…

    1. NotTimothyGeithner

      As long as our tax code incentivizes “making” piles of money without actually producing anything, people will find ways around regulation and regulators.

      1. C

        That depends on how draconian the regulators and legislators want to be. They could, for example, simply ban any new products from being used without express prior permission and a year-long waiting period. They aren’t going to do this, and it may not be a good idea to do this, but there are plenty of ways to really crack down on Wall Street skirting regulations if there was a strong will to do so.

    2. Sid

      You can still sue for fraud in the offer of an unregistered security, just that the pffering documents don’t need to include the same details.

      At the same time, requiring all offers of securities to be fully registered would make starting or expanding a small business impossible, except as a one-person LLC or a partnership.

  4. Evelyn Sinclair

    Criminal Prosecution? But that would be “looking backward” like prosecuting people for warcrimes committed last year or something. If you plan to leave the same rules in place and continue to play the same game, you treat bygones as bygones. Just don’t notice that embarrassing smell and it will eventually go away.

    1. nowhereman

      Evelyb:
      Is that like when someone murders your father and is not caught immediately, it’s water under the bridge? No need to continue to persue the perpetrator, bygones are bygones?
      I don’t understand your logic, unless it’s tongue in cheek.
      The only way to prevent this from continuing is to prosecute these people, otherwise there is no dis-insentive to looting and lying and cover up.

  5. c

    Although the focus will likely be on Geithner, the SEC is looking increasingly incompetent with every new story that comes out.

    1. Yves Smith Post author

      True but…

      The practical issue is the SEC has had increasing gap regarding its regulatory responsibility for investment banks (overseeing capital adequacy) versus their product responsibility (SEC regulated markets, which these days is pretty much equities only). It is pretty hard to make an informed opinion about activities in markets/businesses you don’t regulate. That is why the SEC turned to the NY Fed for help.

  6. Jesse

    Great story and analysis. Thank you Yves.

    Let’s punish the Fed by giving them the Consumer Protection Agency.

  7. MichaelC

    Enough already!

    It’s time to cut through all the brilliant expanations of how we got here.(Although, I’m grateful there are thoughtful people who take the time to share their knowledge ,free of charge, (which leads to a separate consideration of the importance of the blogoshere to freedom. Thank God for the internet)

    We’ve spent the last two (although I’d argue , those in the business knew, 5)years trying to understand the arcana so we can prod the relevent officials to do the right thing. That’s important work for policy makers, but do the voters get it? I think they’re terrified at the brilliant venality of the IB’s/Policy makers and have no clue who to trust.

    So, its (past)time for the courts to get involved and cut through all the political BS.

    Go with SOX. Now that we have the players turning on each other this is the perfect time.

    Crimes have been committed, not just at Lehman. I’m happy to have Lehman be the wedge.

    Lehman’s defenses against SOX crimminal charges are so clever by half as to be laughable. The spirit of the law was clear, to protect investors from predatory CEO/CFOs at TBTF institutions.

    It’s clear to anyone with a pulse that the only thing the banks were concerned with was the letter of the law.

    SOX was also meant to protect us from the letter/spirit conflict by imposing standards on the accountants.That the Accts failed us is a separate issue we can persue but shouldn’t be confalated with the primary objective of protecting investors from corrupt CEOS.

    Its past time for those citizens who are employed outside the finacial world to demand their representaives uphold the spirit of the law.

    I simply can’t understand the SEC and DOJ’s timidity on this.

    Charge Fuld, Callen, et al. for those SOX violations that are crimminal acts (i.e knowingly communicating false info). That was what the people demanded and relied on post ENRON.

    If the SOX charges ultimately don’t stick (which I think is a low risk given the outrageous liberties these guys (Lehman, ML, BS,etc)took), who cares?

    The discovery process alone will expose the depth of the depravity (ok that mey be too hyperbolic. rot, if you prefer), that the proposed “reforms” are going to institutionalize.

    1. Ina Pickle

      I agree wholeheartedly that people need to be indicted. But there will have to be some civil suits if you want discovery. Criminal investigations do not involve the kind of wide-reaching discovery you want – the Feds come with a subpoena and they seize everything, catalog it, and then provide discovery of what they have and intend to use to the defendants. Use of the materials is only as good as the prosecutors who have them.

      I agree that it is high time that the bastards had a day in court. But I don’t agree that the courts is the best way to get this stuff into the public domain – it is unwieldy and slow. How long did we wait before the Valukas report? And bankruptcy is pretty fast (relatively speaking).

      We need to think outside the box here. They will not release the material from the Fed and SEC side through FOIA, I’ll bet you dollars to donuts (increasingly a fair trade, unfortunately).

      Getting all of the information is a different matter than punishing the crooks: that needs to proceed, regardless. The fact that it doesn’t, and in all likelihood won’t, speaks volumes. And basically tells us why FOIA will be pointless. I share your anger that this whole fiasco has brought out into the open that the rules will not be enforced against some. I don’t think that they understand quite the damage that they are doing to society in failing to treat this as a crime.

      1. Justicia

        Spot on Ina.

        The power of discovery in a civil case (especially if brought before a Street smart judge like Jed Rakoff) could get at the facts necessary for criminal indictments as no Congressional hearing (let alone FOIA – ha!) ever could.

  8. Doug Terpstra

    I second Michael on this.

    The financial elite have been systematically dismantling or detouring all sturdy barricades since the Great Depression, erected purposefully to prevent just such bank runs and leveraged insovencies. Right? And everyone involved, not limited to accredited ‘financial wizards’ like Gramm, Greenspan, Bernanke, Rubin, Paulson, Summers, etc., did so willfully, with forethought and no reasonable claim of ignorance. At the very least, this is malfeasance, negligence or dereliction worthy of asset stripping and/or imprisonment. But the actual and circumstance evidence you present is now compelling that, as toothless as they are, laws have been, and are being, broken, crimes are ongoing. Is anyone calling for a wider investigation or a special prosecutor?

    In the conspicuous absence of action, this administration appears to be aiding and abetting crime, a co-conspirator and a lawless government. IMO, you are documenting a significant scandal that may well prove more damaging than Watergate as it continues to unfold and as defaults multiply. If your facts are correct, it seems we have very serious trouble ahead. I supsect it is fear or terror that is driving them, hence the rationalization of emergency powers for national security, a “you can’t handle the truth” mentality.

  9. bob

    But LEH wasn’t a BHC, the fed was there simply in an advisory role. Capitalism worked. The people paid to regulate, most notably steven friedman chairman of the NY fed, were paying very close attention to the workings of all of this.

    If MER knew, how did GS not know? From BB

    http://online.wsj.com/article/SB124139546243981801.html

    The Federal Reserve Bank of New York shaped Washington’s response to the financial crisis late last year,…..

    During that time, the New York Fed’s chairman, Stephen Friedman, sat on Goldman’s board and had a large holding in Goldman stock, which because of Goldman’s new status as a bank holding company was a violation of Federal Reserve policy.
    _______

    What are the chances his email or schedule get subpoenaed? Mr. Cuomo? Are you there? Mr. Holder said he was too busy.

  10. Alexandra Hamilton

    I don’t subscribe to the inept and understaffed theory anymore. This has method.

    The stability of the financial markets is a primary concern, that is why you have no interest at all bringing such events as happened at Lehman’s to light.

    The SEC does the financial industries bidding, as those two articles from the WSJ make clear:
    http://online.wsj.com/article/SB10001424052748704743404575128122174622274.html
    http://online.wsj.com/article/SB10001424052748703523204575130142329796632.html

    1. NotTimothyGeithner

      Agreed .The maximum income a Federal employee can make for that job is less than a Senator’s Senate income. If I’m making 100k as regulator and uncover billions of malfeasance from something, how hard would it be for me to keep my own records, leave my government job, and get a job in the private sector for substantially more than 100K?

      Its incredible people think its incompetence or under-staffing at play.

      1. Robespierre

        Easy to fix. Give the SEC employees a % of the fines and a higher % if criminal convictions…

    1. Skippy

      Run away!!! Faux News special report with flags and pins smashed all over the place…Hail Faux!!!

      Skippy…I still remeber bill and the kids show…your dad would be so ashamed of you for not wanting to kill Iraqs.

      1. PJM

        My dear Skippy,

        I dont care about politics. I only care about economics, maybe a part of sociology.

        In my cowntry the same happened but were learning to avoid some mistakes.

        I dont pretend to teach you about nothing so I wish you or others dont pretend do give lessons to me or others. Eespecially foreigners. I see a lot of noising in politics but I also see a trend. The same trend that took my cowntry to a dictorship and later the nazism in Germany.

        I see the same things. Blame others for your own mistakes. Japanese, chinese, german or even PIGS are the best scapegoats to deny own mistakes.

        I am a lover for History. I read a lot about nazism, communism, sionism, socialism and so on. And Iam seeing the same things today as I read the things published in those times.

        It is easy to find a scape goat. Jews, muslin, europeans, asians and so on are the best to be guilty. But I dont believe in that. We must to be honest and try to find inside us the monsters. Not in others and blaming them for own mistakes.

        I hope you enjoy studying History, especially the Twenties and Thirties. And I dind some analogies with these interesting times. Watch the video and try to learn something without partisam politics. I think is best for us.

        Kind regards.

        PS I Wish the best for you father. Mine is dead but I believe he is happy whatever he is. I hope in paradise. He deserved because he died shortly he could be free and Im free today because he fougth for my freedom. He admired the USA and teachs us: USA is the best example for us. Learn with them. Those days we believed in USA. Today were seeing the same mistakes made in thirties by english and german by americans. It is sad. Because USA folk were a good example to us. Not today.

        1. PJM

          Why I see the same trends today that took the fall of liberal democracy in Europe, in Thirties? Because I see a lot of misuderstanding about the world and economics problems that we are facing. And I am seeing american and british blaming others by they own mistakes. As Hitler did in Germany and Salazar did in my cowntry.

          What show that dangerous movement is similar to thirties was the opinion who blames Germany for the problems in Europe.

          Lets talk abou Germany and Portugal, my cowntry.

          In 1977 (more or less) Mario Soares, a democratic leader in Portugal, who fougth against the the past dicatorship, made an agreement with other political leaders to join the former European Economic Community. That agreement, between portuguese democratic leaders, especially Mario Soares and Sá Carneiro, was made because we believed then that only joining others democracys we could warrant the Freedom and Democracy in Portugal.

          In that time, members of EEC agreed to have Portugal in that community and help us with political help and financial help. We waited some years to join EEC because the EEC members believed that Spain could join us and it was good for both to asure democracy in Iberian Peninsula. Greece was acepeted before in 1981. It worked with Greece and it worked with Spain and Portugal. Until today we never had any discussion about the democracy. We are free.

          One cowntry was especially interested helping Portugal. It was Germany who was split in two in that time. RFA, the democratic and western part of germany knew how is hard living in dictorship. The communist part of Germany show them everuday what is living in a dictorship.

          Germany help us, portuguese with political support and money, even before we were memeber of EEC in 1986.

          Later Portugal received bilions of €uros to help us, similar to the Plan Marshal. It was Germany, France and Jacques Chirac, leader of EEC in that time, who prive us, portuguese with a lot of money.

          Some years later, with the colapse of URSS, Germany took a great decision: acept east germany and provide them with bilions of €uros. The french demanded one common currency to agree to acept the reunification of Germany. The french wanted to have a strong currency and they knew that only one with Germany could provide France a strong currency.

          Germany wanted to help us, portuguese and others, wanted to be one, together with former communist germany and wanted to have a common currency. Tthat german effort was paid by german people with high taxes and open borders with the new neighbours, with low level of wages. The formers easterns communist countries, like Hungary or Latvia.

          In less of twenty years, the german taxes rose about 60% to german people. The unemployment rose a lot, to acommodate the new members of European Union and the oldest like Portugal, Spain, Greece, etc. Germany suffered a lot to help us all. All. Portuguese, greeks, lavians, etc. But never, never, german leaders critized others cowntries. Never blamed others countries because they suffered a lot. Never said to portugueses: look, youre taking our money so be smart and dont spent like new riches.

          Germany made that like USA made in 1945 with Marshal Plan. They tried help us and to asure the peace in Europe. Las 65 years were the most peaceful time in Europe even with the problems in former Jugoslav. Thanks to USA and… Germany.

          So when today the anglosaxon mainstream media blame Germany for Europe problems I just can say: bullshit. Germany did help us, with money and political support. Never complained against others when they suffered a deeply crisis. They heard a lot of jokes when a fhew arrogants americans and british said that german were lazy, socialis and fat german. But they never complained. And now, when British and american economies are managed by students of Zimbabww School of Economics, they blame chinese and germans for they problems? Like Hitler did in thirties and salazar in Twenties?

          Isnt fair. Germany help us, portuguese. If we have problems is because we arent good to deserve a better standard of life. We must work more, we must to be better at doing things, control the inflation, improve the productivity and not use the credit as drug adicted. Germany did a great job to improve their economy, opening their borders to us. We can export to Germany as they can to Portugal. If they export more is because they work better and have better products and sercices. So we cant complain against others or against Germany. Germany is helping Portugal since the Seventies. They never say no to Portugal when we needed help. So, why they blame Germany now? Why british and american blame Germany for their own problmes? They do because they deny the problem is inside their countries. They deny the corruption inside the governements, the corruption in academic instituitons and scientifical instituions, they deny that banksters control capitoll Hill and Westmnister. They deny thar their elentar schools dont teach to do a work, only buy and shopping. They deny that they dont have a industrial policy. They deny that they spend more in guns that in helth care. And so on.

          Yes, is painful to liestning the truth. We portuguese know how is painful to hear the truth. Is painful to hear that we arent good enouph to have a better standar of living. But its true. We must work better, better and better. And not complaint against others. Against the germans, chinese or even americans. No. We have problems as they have. So we must to work to fix own problems and stop complaining against others. Hitler and salazar did that in the past, in Germany and Portugal. Now we dont do that anymore. We now that isnt true. The problems are ours. So stop complain and starta work to fix them.

          Thats why I see today USA as Germany in Twenties. They start complain against chinese and german. Before they joked with PIGS. They whant trade wars and, one these days, they will start a war, like Hitler did. Its sad and it isnt the USA that we knew before. The land of optimism who believed in self and wanted to fix their problems without compalining against others. That USA is dead and, today, american society is decadent.

          Im so sorry wright that. I know that a lot of americans arent decadent as we see in the news. But is true. American society is decadent with a lot of academics who are only panfletists and politicians who use their position to do politics. To me, as a foreigner, the best example of that american decadent society is mr. Al Gore, who uses his position as ambientalist to be bilionaire, using a scientific fraud to make money. Mr. Gore is the symbol of that decadent american society.

          And as former strong believer in USA, the land of Freedom and Democracy, I am disappointed with USA and their society.

          1. Skippy

            Don’t get me wrong, your education and experience aside, when you see one of Rupert’s Muppet’s (Hannity) you know the fix is in. Every thing he touches is tainted and skewed to the very fears you describe.

            Skippy…Him becoming PM or President of some county, would be a reduction of status.

          2. PJM

            My dear friend, I dont care who they are. I only care with the facts they show us.

            You must to understand that I dont discuss politics. This isnt my issue. I discuss economics about Portugal. Because is my cowntry. I dont pretend to teach oter to tule their ouwn house as I dont give others the excuse to rule my house.

            But Im seeing the the evil coming using politics as we had in Europe in the firt half of twentie century.

            A lot americans are very arrrogant. They have a lot of nobel prize in economics and are managed by students of Zimbabwe School of economics. A lotof americans are used to give others lessons but they dont like to see whats is happening inside their own house. Its sad. Its sad to see a corrupt gouvernment like chinese giving moral lessons to americans. Isnt normal. something is wrong in USA.

            Something wrong in USA when a school girl with twelve years old is arrested in the school and treated as a drug dealer because she screpped the table. For us isnt normrl to see that. These incidents show us that something is wrong in USA. That society who arrests a school girl in front of their mates is sick. maybe is time to americans liestening the others and dont pretend to be the masters of universe.

            USA won the cold war but lost his soul. Thats the problem.

            USA is used to think thar are the best of the world. They are discovering that isnt the truth. Without a powerful enemy like Russia communist the american society lost their hability to look inside their home. Their politics.

            To me, Skippy, the authors of that video are americans. Not black or white; democrats or republicans; catolicis or ptotestants. Do you see, for me The President of USA is the man who was choosed by the american people. Not a democrat or republican. This is your problem. Is the american people who got the choice. For me Mr. Obama is the Leader of USA. As it was mr. Bush, Mr. Clinton and others. Im a foreigner who dont have colours in politics. That is my view.

            Bur as foreigner and when I see dangereus minds and thougths in american opinion makers I star thinking: are they real? Are they meaning that they think that theirs problems are caused by others? Are they thinking the same as Hitler in 1920s and 30s? Something is wrong.

            USA is the most power in world. USA has guns to fight everyone in that planet. When that power start having some beahviours that looks an amenace to the world, we foreigners must to tel to americans that the world inst blind. Theu are seeing whats is happening in USA. And we learned with USA that some kind of amenaces are very dangerous and to be preventive. And when the leader of USA is having proteccionist discurses and politics… We must take in account that is an amenace to the world. We are seeing what USA is doing to Brasil and isnt good for the world. USA signed and agreement and a treaty. We hope that USA follow the rules that free signed.

            Sometimes is time to say to powerfuls: look, we cant support all yours policys because you are failing inside your home. Fix your problem dont blame others. Dont amenace others.

            Do you see, Russia is a country that lost a lot when they thougth that could do what they wanted in the planet. We dont want to see mr. Obama and seeing mr. Puttin of USA.

            Its time to americans fix theirs problems without blaming others for your own mistakes. We need an USA who wants to colaborate with others to fix the economic problems. Not blaming others and doing threatas to protect banksters, as are doing the Obama Administration, because europe wants better regulation about some financial derivatives.

            Its time to american people listetning others and think in a world who dont start in NY and finishes in LA. Its time to american people thinking in a world that hasnt rulers and Caesers. We europeans learned in the hard way. We had a lot of blood in ours lands. Its time the american people grow up and thinking that is happening in the world needs open minds and not “blame the other”.

            In my opinion, we foreigners dont have to give lessons to american people. In the past it was the american people who teached us the way to live together in a free world. So I expect to see american people to have more understanding of thw world and dont pretend use others to deny theirs problems.

            As the some old age saids: the better friend is the friend that tell us the truth. Not kisses.

          3. PJM

            Its hard to listening the truth? Yes it is. Especially when some cowntry feels that can do what he wants without critics. Please, it is time to weak up and dont feel that the nuclear nukes is enouph to force others doing what the poerfull wants to do.

            Maybe in USA that words dont mean nothing. Maybe. But the USA must to understand that behaviour is anormal in a cowntry who wants leading the world:

            “When asked what the US government should do to increase its export, the trade expert advised, “the single best policy to promote exports would be for the US government to set a good example by resisting protectionism in our own market.”

            He further explained, “US companies are currently facing sanctions from Mexico, Brazil and other countries because we have failed to live up to our commitments in the WTO and the North American Free Trade Agreement. We are losing export opportunities abroad because Congress has failed to enact trade agreements with South Korea and Colombia, and the administration has failed to exercise leadership in WTO negotiations.”"

            In http://www.chinadaily.com.cn/bizchina/2010-03/18/content_9608256.htm

            The USA has behaving like a rogue state. Looks to the world that USA is like Norteh Korea. Something is wrong in USA.

            Its sad to see USA betraying the international treaties in that manner. of course dont expect to be respetced in the future. Guns are powerfull but enouph to defeat the world as hitler learned.

            In the last 20 years we got some strange international foreign policy in USA but nothing as today. It is true that outside USA, mr. Obama was popular but its loosing that simpathy because nobody understands what is happening in USA. Is USA the ruler of the world? No. But looks that USA is trying to impose their wish without thinking in others.

            Its sad to see USA having that beahviour and beeing a menace to others. Thats why Israel is having problems with USA. Japan is very relutanct concerning the USA. Europe is threated and by USA.

            Whats is happening in USA? USA thinks that is the master of the universe and can impose their view of world without liestening others? That can sign international treaties and break that rules without sanction?

            USA is looking a roqgue state withou respect with international partners. is a menace to others when uses some words with some strange policies. USA is powerfull but even Hitler was and lost.

            It is time to USA open the book and seat with others and discuss that problems with the rest of the world. At this velocity, one day USA is alone like North Korea. It is time to weak up. It is time for american society to discuss openly their problems without scapegoats and blaming the others or the foreigners.

            For some americans, as I read here, its easy to impose sanctions to others. Like to chinese. Ok. Do that and you will see the world against the USA as if USA is a rogue state like North Korea. Something is wrong when a person like mr. Krugman believes that can force others following their ideology and beliefs. First, put the USA in the same position as North Korea, second is the economy of USA who will suffer more because China has decoupled of USA and just few notice. Perhaps is nothing for some americans but China agree a free trade pact with Southasia and is a bigger market that USA. Something is wrong in economics analisys in USA and something is wrong when a prize Nobel, who won in the trade theme make this mistakes. Do you see, academics dont know how the reality is when they are a lot of time doing politics insted good economic and political analysis. I never saw a good investment manager who is great academic, right? Or a good politican who is academic with nobel prize. They dont fit together. Thas why the least nobel laureates in economics better economic policies.

            Do you see, its time to USA weak up. Dont expect to be treated well when something is wrong in the core american society. If mr. Bush made mistakes, the current american leader is deeply destroying the rest of international respect for USA. For us, mr. Obama and mr. Bush are the leaders of USA, not democrats or republicans, liberals or conservatives, black or whites. Its time to american society grow up and listening the others. We cant pay for your own mistakes.

          4. Skippy

            I have no issues with your diatribe, just simplistically pointing out that, it does matter where the info comes from.

            And from all that you have portrayed in previous statements Rupert M. is part of your problem, hence any collaboration with him via his intermediaries is counter productive to your goals.

            Skippy…15 years ago I moved to Australia out of love, in meeting my new countrymen I was frequently asked…well it’s good that America is mow the worlds police ( post Berlin wall days )…to whit my reply was…be careful of what you wish for…you should have seen the puzzled looks I got…lol. unfounded belief is a beat ch…eh

  11. Gordon

    For the deep background to all these abuses – how traditional understandings were reframed and laws subverted read barry C Lynn’s very excellent new book “Cornered: the New Monopoly Capitalism and the Economics of Destruction”.

    It’s definitely in the must-read category.

  12. Siggy

    It’s time for the Congress to act and to convene a court of inquiry. Subpoena the emails and all other communications, put them into the public record and invite the avalanche of litigation.

    New laws and regulations will tend to paper over this fraud. Better to begin by prosecuting the existing laws that have been violated. If you must have new laws, reconstitute Glass-Steagell for starters. Follow that with the regulation of CDS contracts. And upon that limit the securitization chain of any aglomeration of loans to one issuance only. No CDO’s, no CDS^2 and the rule is no concentration of default probability.

    With that we need to consider the societal disinterest that has bought into this money grubbing mentality. Upon that thought can any one demostrate how it is that we shall borrow our way to a recovery and prosperity?

    Arrogations of economic control or influence to manipulate the economy are incredibly unwise. They are fundamenatly expressions of a socialist agenda. If you want to discard the Federal Republic, fine, do it and when you do please don’t complain when you find that you have ceded your liberty.

    As disclosures mount, read the tenor of the public response. That will tell whether there is hope for the Republic or whether we need to consider banana trees as our new crop.

    1. nowhereman

      I don’t understand why CDS are so special. In my view these types of hedges are the reason that risk was so misinterpreted. They are poison, and should be forbidden, then risks would have to be taken into consideration and not just wished away with sleight of hand.

  13. Siggy

    As to Mr. Geithner, never should have been appointed and confirmed, needs to be removed.

    Mr. Benanke, dear Helicopter Ben, please resign and go back to teaching.

    1. Gavshire Hathaway

      Best stick to first graders — I don’t think he’s qualified for much more than finger painting.

  14. dd

    The end game is to gut the independent investor/depositor protection agencies ie SEC (Cox was doing a fine job of that), the FDIC and the CFTC and consolidate power to the Fed and Treasury. Once power is consolidated and the primary mandate is “systemic risk” then investors, depositors and consumers will be held hostage to the needs of the major financial institutions. Since those institutions are really hedge funds, come the next meltdown effective confiscation via “lock up” periods will be a utilized option.

  15. Wayne Martin

    > They recognized that it has a massive hole in its
    > balance sheet, yet took an inertial course of action.

    There is so much wrong here that it is difficult to comment on anything with any sense of clarity. The check-and-balance that the “regulators” should have exercised seems to be an issues with all of these failures. Companies don’t go bad overnight. The “regulators” must have known there were problems long before this. Sadly, no one is likely to probe the actions of the “regulators”. Even if there is no criminality on the part of the “regulators” .. what good are they if this is all that they can do? Why even pay their salaries unless they can produce something of value?

    1. MyLessThanPrimeBeef

      Quis custodiet ipsos custodes?

      Who will guard the guards?

      I will also add, ‘reformers, reform thyselves!’ – reform Congress, the Supreme Court and the White House before you reform health care.

  16. Contrarian Pundit

    This is rich:

    “The SEC declined to comment beyond saying that the senior people at the unit that oversaw Lehman had left the regulator.

    “The New York Fed said it were unable to verify that the conversation with Merrill Lynch bankers took place.”

    This makes it seem as if the Merrill charges are the only basis for thinking the Fed was alerted to the problem, when the Valukas report makes clear that the Fed had direct, intimate knowledge of what was going on. Hell, the Fed on-site examiner called it “three card monte”!!!

    http://www.contrarianpundit.com/?p=495

  17. BenF

    People need to be put in jail for this stuff. Even the regulators for some sort of negligence. This is absurd.

  18. globalnomad

    Timmy should do us all a favor and quit so he can better use his cooking skills in a real kitchen.
    He is a far better crook..oops…I meant cook, than treasury sec.

  19. Justicia

    Could it be that there was a culture of corruption at the highest levels of the Fed? Just asking.

    WSJ
    http://online.wsj.com/article/SB10001424052748704534904575132014207535690.html?mod=WSJ_hps_LEFTWhatsNews

    MARCH 20, 2010
    Fed Told to Hand Over Friedman Documents

    By JON HILSENRATH

    Lawmakers demanded documents from the Federal Reserve relating to the purchases of Goldman Sachs Group Inc. stock by Stephen Friedman, the former Goldman executive who stepped down as chairman of the Federal Reserve Bank of New York last year because of a controversy over those purchases.
    [...]
    “What was the basis for the decision by the Federal Reserve to grant Mr. Friedman this waiver in light of the obvious conflict presented by his role at the New York Fed and his simultaneous role as a Goldman director and shareholder?” Mr. Towns asked.

  20. Bob Morris

    Which was it?

    I vote for open corruption. The financial records of all regulators involved need to be examined by forensics. Then we’ll really get somewhere.

    Folks, if all this happened in a third world country we’d be chortling about how corrupt their government is, right?

  21. Pat

    Past failures in Enron, Madoff, etc., show that a different kind of approach is necessary to deter fraud crimes. Contacting the SEC is inadequate if the SEC sits on the information for fear of stepping on the wrong toes.

    Bullying in America is rampant, and that bullying goes hand in hand with silence as the method most likely to prevail in addressing white collar crime.

    Obviously, it is insufficient as white collar crimes thrive on the presence of the utility of the innocent instrumentality that is characteristic of their commission.

    As if a part of the landscape created, such pyramid schemes can go on far too long to prevent any significant curbing of white collar crime. That knowledge implies that predictive failure approaches only serve to encourage and fuel the fires of criminal fraud as well as gross negligence in torts.

    Sophisticated hierarchies rooted in knowledge and performance need sophisticated controls that can prevent both the inoportune implications of bullying and the opportunistic fraud that accompanies it. Mandatory report systems and legitimate scrutiny work well to combat these types of crimes from becoming the norm and rewarding private deviance to create public nusiance of fraud as the crime law enforcement is most likely to confront. Not only is it the most costly of crimes to investigate and pursue, it detracts from the more violence-based crimes that were meant to be the major focus of law enforcement.

    White collar crime is a scourge upon government in the sense that it siphons tax dollars from violent crimes and shifts those tax dollars to personal property crimes that must be addressed because they are wholesale thefts, committed by educated persons who know better than to do so.

    When white collar crime becomes the province of law enforcement by necessity, the entire society pays for such a break down of morality that defies the ethics and values that the society relied upon to exist, thereby destroying the sense of trust that is supposed to exist from having a government and laws to begin with.

    White collar crime is important in that it is a breakdown of the very nature of civilized society, and shows that basic morality is subject to confusion and individual interpretation in order to permit the crimes to take place. This is not a normal option for most societies, and in the blue collar arena is equivalent to lawlessness and the invitation of wholesale personal physical violence. Men may as well don guns and return to cowboy justice and darwinian dominance.

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