Geithner Image Burnishing? Disingenuous Story on Lehman Emerges Now

Perhaps I am unduly cynical, but I find it pretty odd that the general counsel at the New York Fed. Thomas Baxter, is making statements about the Lehman collapse now.

For those who are familiar with US jurisprudence, anything said to an attorney in confidence is privileged information (yes, there have been some attacks on that principle, but for the most part it still stands). That fact makes attorneys careful about how they handle information. Moreover, Fed officers are very circumspect. Fed presidents occasionally break ranks and offer personal views, but anything from the NY Fed general counsel had to be sanctioned

And this disclosure is a bit peculiar. Why did Lehman go under? Because the government wasn’t willing to offer a backstop. That has been the general view of the matter and no principal has stepped forth to dispute it. Indeed, former Lehman CEO Dick Fuld has repeatedly complained about what he perceived to be unfair treatment, that every other big player on the rocks got some sort of government support.

If you read the Bloomberg story, it does not disprove the broad outlines of that account, but nevertheless CLAIMS to do so:

“The facts are often that people conclude that we let Lehman fail, and that factual predicate is not accurate, that the government let Lehman fail,” Baxter said. “The problem we encountered on Sunday, Sept. 14, is Barclays wasn’t in a position to give a similar guarantee of the trading obligations of Lehman” as JPMorgan Chase & Co. gave to Bear.

Yves here, That little $29 billion backstop provided by the Fed to JP Morgan is somehow omitted in the comparison of the two situations (in addition, some have contended the support was a not permissible activity, and may have contributed to the Fed/Treasury refusal to pony up dough for Lehman). But let’s return to the legerdemain:

The group of bankers and officials was trying to repeat the Bear rescue on Lehman, except that this time officials told lenders that “unlike with Bear, you all are going to finance the assets that are taken to facilitate the acquisition. That was plan A,” Baxter said.

“The problem with plan A was not an absence of financing” because the bankers in the room did agree on a deal, Baxter said. “They had the money and they were willing to put it out.”

The hitch was “much more technical,” Baxter said.

“The problem for plan A relates to, what do you do in the period between the announcement of a merger and the actual closing of the merger?” Baxter said. He said plan A failed because Barclays couldn’t guarantee the trading obligations.

Barclays agreed to acquire Lehman after a syndicate of banks consented to backstop a new entity that would take over $55 billion to $60 billion of Lehman’s troubled assets, according to people familiar with the negotiations. The deal fell apart when the U.K.’s Financial Services Authority refused to sign off on the Barclays purchase that day and U.S. officials refused to take further steps to save the deal.

Yves again. Now this leaves opaque the question of whether the FSA simply needed more time, or whether there was concern that they would attach conditions that would require the deal to be renegotiated. And remember, this was a weekend special. Getting anything other than a simple waiver agreed by a consortium during the week would be well nigh impossible.

So why didn’t the officialdom find a way to bridge the deal till closing? Baxter diverts the listener from that question, and proceeds:

The New York Fed meeting then turned to discuss plan B, Baxter said.

“The best option was to put the parent of Lehman into bankruptcy, to continue an operation as broker-dealer at least in the U.S., and to continue a broker-dealer operation through Federal Reserve liquidity,” Baxter said. “That happened.”

In the week after the bankruptcy filing, the Fed loaned “big time” to keep the broker-dealer in business, with funds totaling as much as $50 billion, he said. Barclays then returned to the table and bought the division.

“If you go back and study the way we did Bear Stearns, you’ll see the importance of the guarantees,” Baxter said.

Following Lehman’s filing on Sept. 15, “there was a spiral of confidence disappearing,” Tony Lomas, a partner at PricewaterhouseCoopers who is administering Lehman’s U.K. bankruptcy, told the same conference today. He previously worked on the aftermath of Enron Corp.’s financial collapse.

Now this is a tad slippery. Thanks to all of the shenanigans of the Roaring Twenties, the securities laws created in 1933 and 1934 were very comprehensive and far sighted. John Hempton comments:

I am hardly a lawyer – so take the bush lawyer caveat – but the way it works is that the broker dealer may not borrow against your securities to finance their own business, only client business….

Moreover when you deposit a million dollars at the broker dealer and give them the right to repledge those securities they can only rehypothecate 140 percent of your outstanding balances.

If you have 1 million deposited and you have 100 thousand borrowed then only 140 thousand can be rehypothecated and the rest must sit in a segregated client account. [If your broker wants to steal from the segregated client account there are precious few defences – but…] You can not contract out of this requirement.

So (provided the broker is not acting criminally) you should get the bulk of your money back if the broker dealer fails. And provided the capital requirements are adequate (and they mostly are) the broker dealer won’t fail. Even the Drexel Burnham Broker Dealer did not fail…..Whilst Lehman brothers went bust Lehman US broker dealer did not. This pretty well saved the US hedge fund industry.

I welcome reader comment here, but ex fraud (and I am not under the impression any was alleged here) the US broker/dealer operations should have been a sound piece in the larger Lehman mess. The fact that Barclays scooped it up so quickly would seem to confirm that belief. Thus while the Fed lending may have been sizable, it should not have entailed much risk.

In fact, Hempton claims that the piece that all the regulators got wrong were the much more lightly regulated UK broker dealer ops (note the Fed did NOT lend to them). They were the black hole that lead to greater losses than most analysts anticipated:

Europe however was a different story. Lehman Europe failed – and the clients of the European broker dealer (read a good proportion of the London hedge fund community) are now queuing as unsecured creditors of Lehman. Many funds have folded. Far more have been nicked. Whilst the US hedge fund business is currently looking dazed, confused and a little problematic the UK business is on life support….

This puts in a different light the 8 billion dollars that Lehman London transferred to the US when it was failing. I stand open to correction – but I would guess that the money was obtained from client accounts from the European/London broker dealer. It is certainly being investigated by Lehman clients. This is a scandal of the first order allowed by an insane lassis faire approach to financial regulation.

Now let’s go back to the main event. Here the wisdom of letting Lehman go has been pilloried in the press for months. The Fed and Treasury remain largely silent on the matter (yes, we get a few circling the wagons type statements, but no substantive detail).

Now we have a defense of sorts offered by a party clearly authorized to do so, while the Geithner confirmation is in play (but truth be told, still seems like a done deal). Is this a bit of image burnishing? The peculiar timing would certainly say so.

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  1. Anonymous

    So Yves, I don’t recall reading any blog post about what you think of Geithner.

    Do you endorse him?

  2. Yves Smith

    I have had to refrain myself from discussing the Obama economics team, which (save Volcker, who I am told was offered the Treasury Sec. position, so they did try to make the right first choice, and Romer, who was not a player) helped create our current mess. Geithner in particular is subject to what Willem Buiter calls “cognitive regulatory capture”. He has bought into the Wall Street world view.

    And it may seem petty, but I am not happy with the tax shenanigans. Geithner was discovered not to have paid his 2003-4 payroll taxes in a 2006 audit. He is subject to no penalty (would you or I ever get that treatment?). He was working for the IMF in 2001 and 2002, but did not own up to the problem then (which he clearly knew due to the audit). It was Team Obama that figured it out.

    Now if Geither wasn’t in a major public service role, this might be forgivable. Some accountants advise NOT to clean up past errors because you can open yourself up for audits. But there is NO evidence Geithner received any such advice, and this is an ambitious man who has reason to expect he might be up for even more senior government jobs down the road. Not cleaning up 2001-2 says he has really bad judgment.

  3. Anonymous

    I _think_ Baxter is alluding to the fact that under the UK system there is no way Barclays could take over Lehmann without shareholder approval.

  4. Steve

    Barclays would have needed shareholder approval–leaving an uncertainty that US regulators found intolerable–but it was rumored that FSA had concerns about Barclays’ cap ratios and thought the loss-sharing consortium for Lehman’ CRE portfolio was insufficient.

    Compare and contrast the immediate regulatory blessing of BoA’s acquisition of Merrill…

  5. Yves Smith

    Whoops, “refrain myself” above is really inept, but I am not about to repost the comment. Should have been either “refrain” or “restrain myself”. Sorry ’bout that.

    Anon of 11:49, let me beg to differ with you on that one. The CEO of Barclays was present at the NY negotiations, he surely knew what was required to consummate a deal (shareholder approval is such a basic issue that most CEOs are aware of the general parameters). So I can’t imagine they would have crafted a deal that was INHERENTLY undoable and then blamed it on the FSA. US acquisitions that pass certain thresholds require shareholder approval. In fact, this was an issue in the Bear deal too, it was an explicit reason for needing a government backstop. Per our post then (quoting CNBC):

    Here’s what makes this a tricky situation: without shareholder approval, there is no real deal, so other banks and clients may be reluctant to deal with Bear on Monday unless it’s part of a well capitalized JP Morgan.

    Because of this, most executives inside Bear believe the Federal Reserve and Treasury will play some role in making sure there is a backstop if the shareholder approval isnt reached.

    So how could the Fed and Treasury have EVER thought there could be a deal without at least an interim backstop? It was necessary for Bear (aside from the toxic assets bit). It would be necessary for ANY corporate buyer. Paulson spent the better part of his life involved in M&A. This aspect should have registered with him, and if not, everyone at the table would have reminded him.

    In fact, the sense I had that weekend was that the banks went along with the negotiations assuming the Fed/Treasury would blink when the banks had gone as far as they could, and were genuinely surprised that the powers that be did not come forward with some sort of assistance.

  6. Anonymous

    I think the powers that be did come forward with some sort of assistance, for everyone else.

    I have a feeling that the appointment of Geithner, who was in the middle of these negotiations, will tell us what the price of that assistance is when he is approved.

    He has much more baggage than just the tax issues. I had that feeling when the “assistance” for BoA was annonced.

  7. Anonymous

    For some reason, nobody asked for his state and local tax returns yet.

    It goes to reason that he owes those taxes too and they have not been paid.

    The core reason why he is not qualified is that he is making precisely the kind of “optimization” decision that economists are trained to do, with little or no regards for risks, and even when he got caught, no effort was made to mitigate the risk until it blew up.

    The mental thought process behind that says everything about his “character”.

    It is like the old saying, you see a person’s personality come out when you watch them drive alone…

  8. FairEconomist

    I don’t think the tax business is petty at all. Until now, that would have been instant disqualification. it really disturbs me that the Obama administration is going to bat for him.

    Admittedly the tax issues are small beer compared to colluding to defraud the US taxpayer of hundreds of billions and then hiding the details from Congress and the public. But it’s still pretty substantial.

    My interpretation is that Obama plans to address the problems with regulatory reform, based on the Volcker trial balloon. Geithner is reputedly a proponent of better regulation, and the banks literally owe their lives to him, so he’s the ideal guy to get Obama’s regulatory changes through.

  9. sk

    The thing about the taxation issue is not only did the IMF send him memos telling him of his tax liability but they also compensated him for it – in the form of gross-ups over and above his salary.

    Now, I’ve received gross-ups, relo(cation) payments in my case and it was clear to me that this is money the corporation is giving me since I’m gonna have to give it to the IRS. so I did.

    He not only cheated the IRS out of the money, he took money from the IMF that he should have hand over to the IRS and kept it.

    He’s a thief. He’s a goner.

    Now I don’t hold a candle for the IRS and I fully uphold the right of citizens to minimize their taxes but this doesn’t fit that category – not by a mile.


  10. The Recovering Banker

    Yves, I was at this conference. The BB report on Baxter's comments was accurate, although these remarks were after his main speech, which was on the use of the Fed's Section 13.3 powers. Section 13.3 hasn't been used since the Depression until March 2007, and since has been the basis of most of their new programmes. It permits the Fed to engage in collateralized lending with any counterparty in unusual and exigent circumstances, provided the borrower is unable to secure adequate credit accomodations from other banking institutions The main "innovation" in interpretation of this section seems to be the application of the clause in circumstances where lending to asset classes has dried up (as compared to lending to a counterparty drying up).

    He didn't explain why the Fed couldn't backstop all of a bank's trading, it had to be a JPM or a Barclay's. Perhaps the problem is with derivative transactions & the like. In the main speech, he noted the SPVs set up for BSC and AIG, and that this was the way it handled derivative transactions. But it takes more than a day to set up such a SPV.

    Tony Lomas' speech was quite interesting as well, but not very related to the BB quote. One problem with the Lehman's bankruptcy was that neither countparties nor regulators had contingency planning for such a bankruptcy. It wasn't that it was too big to fail, it was that no one was prepared for its failure. He stated that a well-run major international bank still is unable to calculate its collateral & net exposure to LBIE (the UK entity), after 4 months. It sounds like at least some bank booking systems did not discriminate between the various Lehman entities, but when Lehman went under the different entities were subject to different insolvency rules (banks are global in life and national in death). In the UK, at the moment the administrator (PwC) is liable for any errors in returns of collateral, so it needs to confirm with the counterparty and the relevant sub-custodian (of which there are 97) that the claim is valid & that there are no counter-claims. Given the major bank above doesn't know its own claims at the moment, it sounds like this process will take a while.

  11. Expat

    Geithner is a crook. He is going to be in charge of the very agency he ripped off. Of course, he suffered few, if any, penalties for his transgressions, but that is the trademark of the Bush Administration.

    So, now we get Barak “Change” Obama who is giving us more of the same.

    Geithner will be approved since he is being vetted by a jury of his peers. Plus ça change…

  12. Anonymous

    and from the conspiracy realm it is interesting that the precise turning point in Obama’s campaign was the Lehman failure — the following link is an NPR interview with an Obama full time campaign worker (Elizabeth Wilkins) who last week said precisely that.

    click on ‘complete interview’ and once loaded scroll to minute 35:20-38:30

  13. Anonymous

    “For those who are familiar with US jurisprudence…”

    I am somewhat “familiar with US jurisprudence” and it is self-regulating through Bar Associations and other institutions controlled by Lawyers. Why do people believe a self-regulating jurisprudence works any better than the now imploding self-regulating Financial System? Why do people give lawyers a respect and a pass that they do not deserve and have not earned?

    So, I certainly would not bet the ranch that “anything said to an attorney in confidence is privileged information”. The attorney can use that information to their benefit without the client ever knowing about it.

    As a true test of Lawyer Privilege, try to get one disciplined by a Bar Association.

    If Plumbers, Electricians and other Trades were self-regulating like Lawyers, I can only imagine the fees that would be charged and the fires and floods we would suffer without any means of compensation.

    This is not just opinion but verified by the legal operators themselves:

    “When asked about lawyers in the aggregate, the public views them less favorably. Lawyers’ ethical standards and practices are thought to be middling by most people, with a much larger contingent regarding them as poor (21%) than as excellent (3%).20 Those who thought


    lawyers less honest than most people rose from 17% in 1986, to 31% in 1993.21 The ABA poll reports that ” [h]alf the public thinks that about one-third or more of lawyers are dishonest, including one in four Americans who believe that a majority of lawyers are dishonest.”22 Over the past decades, general estimations of lawyers have fallen.23 In the 1993 NLJ survey, 36% of the respondents said their image of lawyers had “gotten worse” and only 8% said it had “improved.”24
    When, in 1991, a national sample was asked to volunteer “what profession or type of worker do you trust the least,” lawyers were far and away the most frequent response. Almost as many (23%) spontaneously volunteered lawyers as the next two categories (car salesman, 13%; politicians, 11%) combined.25″

    So, in the free market place, lawyers and thus, their “jurisprudence”, get a distinct thumbs down. In confidence, many of them are dishonest.

    WIth so many positions of power in our society (Bankruptcy Courts, Treasury TARP alone), how much of our financial malaise is due to Lawyers? How much of their advice is used not to respect the law but to avoid its enforcement and consequences?

  14. Bob_in_MA

    Yves, I wish you, and other prominent, bloggers would post about it.

    And the tax matter is not petty! He made multiple requests to be reimbursed for paying this tax, then didn’t pay the tax and kept the reimbursement!

    And this is one of the SIMPLEST tax forms. There has to be at least 10 million people who pay the self-employment tax, probably many more.

    I am a Democrat who has never voted for a Republican in 15 elections, and this really pi$$es me off!

  15. fresno dan

    Really, really good post and comments. Thanks to “annonymous” for the link to the senate files on Geithner!

    I have to agree with the majority (um, actually I guess its unanamous) that Geithner not paying taxes is no small matter.

    It begs the question – does he read tax instructions or not, or does he not understand what he is signing (I am referring to the IMF’s instructions to all employees that they are independent contractors and must pay their own SS taxes).

  16. S

    WSJ article on the Bank of America gaurantees and representations that bernanke and Paulson made to Lewis in Dece,mber are a nice dovetail to this story.

    From WSJ…

    :”The action reached a climax in mid-December, when Bank of America Chief Executive Kenneth Lewis scrambled to handle billions in unexpected losses from the Merrill deal. He rushed to see Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. In a Dec. 17 meeting, Messrs. Paulson and Bernanke suggested it was in BofA’s own interest, and also the nation’s, to stay the course. They ultimately offered Mr. Lewis a $138 billion package of taxpayer-funded incentives not to scrap the deal.

    To adsd insult to injury FBR is out with a call today the WFC is likley to cut its dividend (payout of $6B a year approx) in the first half of 2009. Recall that it was the orchestrated dividend raise by Wells Fargo (it is patently obvious that this was an orchestrated event now) that kicked off the short squeeze in bank stocks assited by the Fed. (

    Then comes word by Chris Cox at the SEC that PAulson and Bernanke demanded action on the short squeeze and he (Chris Cox) views complying as his buiggest mistake (which is saying something).

    When the narrative is written and the mosica ios weabved together Bernanke will be viewed in the light he deserves. he is an utter failure as is Paulson and Geithner. I would add that Kohn has escaped the spotlight but he proves a bridge between thge oderous Greenspan legacy and the Bernanke failings. That Kohn should be even talked about for the NY Fed is a disgrace, but then again we are about to get another Goldman banker. A sad tale on America. Roubini gets it about right today. The entire system is Insolvant.

  17. Anonymous

    the link posted by S above is a must read and suggests that Geithner is doomed:

    posted by

    "January 18, 2009 David Kotok, Chairman & Chief Investment Officer

    We will start with two quotes.

    “It is indispensable to the proper functioning of, and the maintenance of public confidence in, the Federal Reserve Bank of New York ("Bank") and the Federal Reserve System ("System") that every employee perform his or her duties with honesty, integrity and impartiality, and without improper preferential treatment of any person. Each employee has a responsibility to the Bank and to the System to avoid conduct which places private gain above his or her duties to the Bank, which gives rise to an actual or apparent conflict of interest, or which might result in a question being raised regarding the independence of the employee's judgment or the employee's ability to perform the duties of his or her position satisfactorily. Each employee should conduct his or her financial affairs with integrity and honesty. To ensure the foregoing, each employee, including all Bank officers, shall respect and comply with the principles and standards of conduct contained in this Code. An employee who needs assistance in interpreting the provisions of the Code or who desires additional information should contact the Bank's Ethics Officer.”

    Source: Code of Conduct, Federal Reserve Bank of New York.

    “There will be false starts and setbacks, frustrations and disappointments. I will make some mistakes, and we will be called to show patience even as we act with fierce urgency.”

    President-elect Obama, in Philadelphia, before he commenced his historic rail trip to Washington.

    We thank our readers for the many emails regarding the nomination of Tim Geithner for Treasury Secretary…he Geithner affair is now in the hands of the US Senate. They have heard from the press (lots of critical editorials and letters to editors). They are aware of the facts. And they know that the world is seeking a new and trustworthy level of integrity and transparency in the post-Lehman, post-Madoff environment. Senators know that the qualities of good character and sound judgment are needed by the Treasury Secretary. Senators also know from the behaviors within their own ranks that the tests of character and judgment are most profound when they are determined by behavior that occurs when no one is watching.

    The only open item is whether the Senate has heard from you. Email is nice and easy but a phone call with a message to a Senator’s office carries a lot more weight. …"

  18. joebhed

    This from DownSouth on the homebuilder thread:

    “while a tax cheat has been nominated to be chief tax collector of the land.”

    My guess is we’re 48 hours from Geithner pulling his name.
    And we will unfortunately be left with Larry Summers.
    Prefer Volcker myself.

    REALLY I would prefer ANYBODY that was never connected to the Council, but, you know…….

  19. jmd

    Not sure I am reading btwn the lines correctly but was the nomination for Secy of Treasury implied here to be a quid pro quo for letting Lehman fail? This was a risky proposition if so…kudos to the mastermind who thought of it…and more to the clearly left-leaning speech [soundbite]-writer who told McCain to say that the economy was fundamentally sound right around then!

  20. Anonymous


    "NEW YORK, Jan 20 (Reuters) – The U.S. Trustee's office appointed Anton Valukas, chairman of law firm Jenner & Block, as an examiner to probe the collapse of investment bank Lehman Brothers Holdings Inc (LEHMQ.PK), according to court documents.

    If approved by bankruptcy court, Valukas will be expected to report on the issues surrounding Lehman's collapse; how it pursued the sale of key assets such as its core U.S. brokerage business to Barclays Plc (BARC.L); and look for any evidence of fraud, dishonesty, or misconduct.

    Under U.S. bankruptcy laws, an examiner can be appointed in any bankruptcy case if someone requests it and the court finds the company's debts exceed $5 million.

    When Lehman filed for bankruptcy in September, it listed $613 billion in debts and $639 billion in assets, making it the largest U.S. bankruptcy in history.

    Valukas is a former U.S. Attorney who specializes in civil and white collar criminal litigation, according to the Jenner & Block's website."

    The case is In re: Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555. (Reporting by Chelsea Emery; Editing by Derek Caney)

  21. dd

    JANUARY 21, 2009
    Tax Issue Won’t Derail Geithner
    WASHINGTON — Timothy Geithner will call for a comprehensive and aggressive approach to tackling the U.S. financial crisis when he appears Wednesday at hearings on his confirmation as Treasury secretary, while also trying to assure lawmakers that he simply erred by failing to pay some payroll taxes earlier this decade.

  22. Michael Hamersley



    The January 20, 2009, 12:40 pm comment in your blog by “whistlewhat” about me is patently false, malicious, and highly defamatory. I request AN IMMEDIATE REMOVAL/RETRACTION OF THIS COMMENT, and THAT YOU PREVENT ANY SIMILAR SUCH LIBELOUS POSTINGS IN THE FUTURE.

    I am a staunch advocate of constitutional free speech rights, but there are clearly constraints on speech that is so clearly libelous. Please review your obligations to remove such libelous commentary from your blog under existing cyber caselaw interpreting New York Times Co. v. Sullivan, 376 U.S. 254 (1964) See, e.g., Stratton Oakmont, Inc. v. Prodigy Services Co.


    This blogger has sent a substantially similar comment to my employer and has posted substantially similar comments on numerous other blogs. My attorney, who will be commencing a libel case against this blogger, will be contacting you and likely issuing a subpoena for all electronic data and information relevant to the identity of the blogger. PLEASE PRESERVE ALL SUCH INFORMATION.
    Thank you for your prompt attention to this matter.

    Mike Hamersley

Comments are closed.