NY Fed Under Geithner Implicated in Lehman Accounting Fraud Allegation

Quite a few observers, including this blogger, have been stunned and frustrated at the refusal to investigate what was almost certain accounting fraud at Lehman. Despite the bankruptcy administrator’s effort to blame the gaping hole in Lehman’s balance sheet on its disorderly collapse, the idea that the firm, which was by its own accounts solvent, would suddenly spring a roughly $130+ billion hole in its $660 balance sheet, is simply implausible on its face. Indeed, it was such common knowledge in the Lehman flailing about period that Lehman’s accounts were sus that Hank Paulson’s recent book mentions repeatedly that Lehman’s valuations were phony as if it were no big deal.

Well, it is folks, as a newly-released examiner’s report by Anton Valukas in connection with the Lehman bankruptcy makes clear. The unraveling isn’t merely implicating Fuld and his recent succession of CFOs, or its accounting firm, Ernst & Young, as might be expected. It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations.

We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed’s review of Lehman’s solvency. If, as things appear now, Lehman was allowed by the Fed’s inaction to remain in business, when the Fed should have insisted on a wind-down (and the failed Barclay’s said this was not infeasible: even an orderly bankruptcy would have been preferrable, as Harvey Miller, who handled the Lehman BK filing has made clear; a good bank/bad bank structure, with a Fed backstop of the bad bank, would have been an option if the Fed’s justification for inaction was systemic risk), the NY Fed at a minimum helped perpetuate a fraud on investors and counterparties.

This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.

And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets. If so, he is not fit to be Treasury secretary or hold any office related to financial supervision and should resign immediately.

I am reading the report, and will provide an update later, but here are the key bits (hat tip reader John M). As much as Karl Denninger has done some terrific initial reporting, he does not go far enough as far as the wider implications are concerned.

The key revelation is that Lehman as of late 2007 was routinely using repo transactions at the end of the quarter to mask how levered it truly was:

Lehman regularly increased its use of Repo 105 transactions in the days prior to reporting periods to reduce its publicly reported net leverage and balance sheet.2850 Lehman’s periodic reports did not disclose the cash borrowing from the Repo 105 transaction – i.e., although Lehman had in effect borrowed tens of billions of dollars in these transactions, Lehman did not disclose the known obligation to repay the debt.2851 Lehman used the cash from the Repo 105 transaction to pay down other liabilities, thereby reducing both the total liabilities and the total assets reported on its balance sheet and lowering its leverage ratios.

Yves here. The stunning bit is these “repos” were actually a conventional type of repo, despite the name, but Lehman was engaging in blatant misreporting, treating these “repos” (in which a bank still shows them on its balance sheet as sold with the obligation to repurchase) as sales. Note that at the time (as the report notes) analysts and others kept probing at the seeming miracle of Lehman’s deleveraging in a difficult market. This ruse may also square the circle on a Lehman leak we broke in 2007. A former Lehman MD had reported that most of the deleveraging that had occurred at the end of 2Q 2008 had resulted from the placement of $55 billion of assets with newly-formed entities in which Lehman retained a 45% ownership interest and were operated by former Lehman employees. To put it mildly, these were off balance sheet entities that strained the idea of independence. Bloomberg got hold of the story, and Lehman asserted that only $5 billion of assets had actually been transferred. I am now wondering whether the $55 billion were indeed transferred precisely as the source had said originally (he in turn had been told this by several people at Lehman) but that most of it was via this type of repo, and then re-materialized on Lehman’s balance sheet once the quarter end had passed (the Examiner’s report notes that the amount that Lehman moves off its balance sheet at the end of 2Q 2008 was $50.38 billion, which tallies with the difference between what the Lehman MD said had been moved off balance sheet versus what they fessed up to when asked by Bloomberg) .

Denninger raises one question: were other banks engaging in this type of accounting chicanery? But there is another question: did some of Lehman’s counterparties must have suspected what was going on, given that this took place on a large scale basis at the end of every quarter? How many had an idea that Lehman was engaging in massive window dressing and chose to play along?

But here is the part of the report that discussed how the Fed aided and abetted Lehman misconduct:

the Examiner questioned Lehman executives and other witnesses about Lehman’s financial health and reporting, a recurrent theme in their responses was that Lehman gave full and complete financial information to Government agencies, and that the Government never raised significant objections or directed that Lehman take any corrective action.

Yves here. So get this: even though Lehman dressed up its accounts for the great unwashed public, it did not try to fool the authorities. Its games playing was in full view to those charted with protecting investors and the financial system.

So what transpired? The SEC (which in all fairness, has never had much expertise in credit markets, this is a major regulatory problem) handed assessing Lehman over to the Fed, which bent over backwards to give it a clean bill of health:

After March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress‐testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank.5753 The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.”5754 Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed.5756 However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757 It does not appear that any agency required any action of Lehman in response to the results of the stress testing.

Yves here. So get this: the stress tests were a sham. Only one outcome was permissible: that Lehman pass. So after the Fed was unable to come up with an objective-looking stress test that Lehman could satisfy, they permitted Lehman to devise a test with low enough standards to give itself a clean bill of health.

So why should we trust ANY government designed stress test, particularly when the same permissive grader, Timothy Geithner, was the moving force behind the ones dreamed up last year, which have been widely decried by banking experts, including Bill Black, Chris Whalen, and Josh Rosner? We linked to a simple analysis by Mike Konczal that demonstrates that for the biggest four banks alone, merely on their second mortgage portfolios, the stress tests of 2009 were too permissive to the tune of at least $150 billion.

Lehman type accounting, in other words, is being institutionalized, with the active support from senior government officials.

It is time for Geithner to go. He is not fit to serve as Treasury secretary.

And the time is overdue for a full audit of the Fed, and in particular the New York Fed, from the start of the Bear crisis through and including all the retrades of the AIG bailout.

Update 12:00 AM, 3/12/10. Oh, boy, the spin is in in the US. Bloomberg focuses on an interesting revelation in the report, but which strikes me as secondary, that JP Morgan and Citi delivered the fatal blow to Lehman by withholding collateral. That JP Morgan seized $17 billion of collateral has been reported elsewhere; the only new elements are Citi’s role and that its and JPM’s actions could serve as grounds for legal action:

“There are a limited number of colorable claims for avoidance actions against JPMorgan and Citibank,” Valukas said in the report. He defined a colorable claim as sufficient credible evidence to persuade a jury to award damages at trial.

The Times pointed ignores the Fed’s lapses, as does the Journal and the major report at the Huffington Post.

Update 3:00 AM. Have now read the germane section a bit (over 300 pages, please do not bust my chops). Every page is stunning (the law firm did a great job, this is one case where big fees are associated with big time value). The nonsense is mile high. Lehman had been doing this sort of thing since 2001. No US law firm would give them cover via an opinion letter for their phony repo accounting, they managed to get the opinion they sought in the UK and accordingly shuffled assets through the UK for the repo 105 transactions. Frankly, if you don’t need colorful characters or glam settings, this is as attention-capturing as Too Big To Fail

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  1. Jeff

    Bankers created the FED & bankers own the FED, therefore “Crooked Timmy” will do whatever it takes to protect their interests.

    The true means of putting an end to this abuse is to end the FED so our currency is no longer backed by debt!

    The root cause is the exponential math of debt backed money. Anyone who thinks that exponential growth is okay simply doesn’t understand math. Our money system does not have to be backed by debt, nor should the quantity be controlled by a private “FED.” True market stability will not be found until the debt saturated condition is CURED, not just swept under a mark-to-fantasy carpet.

    Please help bring about a permanent cure and return the markets to that which they were intended instead of an artificial casino.


  2. Marshall Auerback

    You are too easy on Timmy. Not only is he unfit to be a Treasury Secretary, he’s unfit to be anywhere but in a jail cell, with Jeffrey Skilling. This is aiding and abetting fraud. Fraud – do not pass GO, go directly to jail -FRAUD.

    Now we know the REAL reason why the NY Fed has tried to cover up everything. Timmy’s tax returns were child’s play compared to this.

    The stress tests were a joke. John Cassidy, Joshua Green, you ought to be embarrassed being patently “played” by the Treasury. As Bill Black has illustrated, financial control frauds’ “weapon of choice” is accounting. Fraudulent lenders produce guaranteed, exceptional short-term “profits” through a four-part strategy: extreme growth (Ponzi-like), lending to uncreditworthy borrowers, extreme leverage, and minimal loss reserves. These exceptional “profits” act in classic “Gresham’s Law” fashion – bad money drives out good (bad accounting drives out good accounting), subverting private market principles. Regulatory restrictions are subverted, thereby allowing the CEO to convert firm assets to his personal benefit through seemingly normal compensation mechanisms. That is what is happening and now we know that Geithner himself was a handmaiden in this fraud, by virtue of his role at the NY Fed.
    It also seems reasonable to ask: how much did Obama know of this and when did he know it?

    1. clawback

      I bet nickels to donuts Obama has no idea what you’re talking about. I really don’t. Finance is to Obama what geography was for Bush.

      Eric Holder? AWOL. Completely AWOL. Can he read a balance sheet, either? Doubtful.

      1. anon

        There’s a reason that no US law firm would issue an opinion letter blessing Lehman’s Repo 105/Repo 108 accounting. It’s clearly a sham. You don’t have to be a securities lawyer, a banking lawyer, or a secured transactions lawyer to see that.

        Obama could not have passed the first semester of law school if he didn’t understand that.

    2. jake chase

      Does anyone notice that Lehman was not regulated by the Fed during the years in question? It reported to the SEC. Are you saying Geithner was obligated to blow the whistle on Lehman nevertheless? As someone who lost big money shorting Lehman in 2005-2006, I am relieved to discover I was not crazy but simply cheated. However, I am not certain you can charge Geithner with any regulatory obligation here.

      1. rootless_e

        Gotta blame Tim, no matter what the facts are. If you don’t blame Tim, you have to deal with the Republican fail and the disaster of neoliberal economics on their own terms and that would be inconvenient.

  3. Doug Terpstra

    The takewaways: “…likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets. If so, he is not fit to be Treasury secretary or hold any office related to financial supervision and should resign immediately.”…and…”It is time for Geithner to go. He is not fit to serve as Treasury secretary.”

    The fact that he did not pay his taxes was a bad omen from the beginning. It’s past time for prosecutions and prison terms for these perps.

  4. gigi

    At the very minimum I expect Obama to come out and state that he has full confidence in Geithner. I think Geithner stays and so does Bernanke; such are the times.

    The facts are pretty damning. I knew there was foul play at Lehman but except in my most paranoid moments I didn’t think that this was being played in such a chummy fashion. I thought the government was in a “don’t ask, don’t tell” where they refused to ask tough questions knowing fully well that all major banks were insolvent. But having done investigations and being aware of balance sheet cooking before earnings?

    Things are worse than I thought, much worse.

    And Karl is right. How many of the major banks are solvent despite massive taxpayer looting to prop them up?

  5. JoE

    I was just denied a job a E&Y. Looks like this was a good thing. If this country is at all sane, E&Y is dead and it’s now the Big 876543.

    Ah, who am I kidding. Nothing will come of anything.

  6. Francois T

    Obama told us “To look forward, not backward”.

    And the media is complying with the usual servility and slothfulness that has become their flagship trademarks.

    Here what’s going to happen:

    No coverage, no questions
    No questions, no controversy
    No controversy, no problems!

    Timmy will be at his post for a long time.

  7. Robert N

    I believe I read an article about this practice during the crisis and I believe I saw articles about others doing essentially the same thing. It was such an obvious ruse that I have to believe all of those entitled firms did and are doing the same, believing no one will ever catch on.

  8. Brian P

    Interesting to note that in the NY Times coverage of the report currently on its web site there is no mention of Geithner or the role of the Fed.

  9. Carrick

    Hey — curious outsider here…

    What would be the effect/consequences of auditing the Fed/NY Fed? (genuine guesses no snark please)

    1. Carrick

      Interestingly, HuffPo is running this as their first story (with a secondary story linking to Zero Hedge’s concentration on Geithner)

      Drudge Report on the other hand, had no mention ‘whatsoever’, yet.

      Obama wont let Geithner fall b/c the political cost would be too high, but I will be very surprised if the GOP or its Fox/Tea Party mob doesn’t monopolize on it to scream for Obama/Geithner’s heads.

      1. Yves Smith Post author

        You may be right, but I actually think it depends if the “audit the Fed” types jump on this and force the release of the relevant e-mails (note that litigants might also be able to obtain them).

        Geithner will not survive that level of scrutiny.

        Obama’s inclination is to believe he can paper everything over with PR. But as Auerback’s comment above suggests, Cassidy ought to feel like he was played for a fool. If journos start to feel running Team Obama PR has costs, they may also find their ability to control image impaired.

        1. bob goodwin


          First of all thanks for your always hard and detailed work. This one is particularly important.

          I think the question for Obama is whether he truly believes that a captured regulatory framework is actually in the interest of the country. No politician minds lying. He might believe that the truth would lead to a collapse of the economy. Hank did say we would have martial law, so they might truly believe that.

          Obama will pull his support if either of two things happen: 1) he feels that he was ‘had’ by Geithner et al, or 2) The popular media jumps on this in the way they did on health care.

          Geithner can still survive. So keep on pushing!!!

          1. clawback

            Maybe we could send up one of those Ron Paul blimps, plaster it with Wall St. logos, and have it read “Obama is a Chump”. I dunno. I kind of like pushing the Obama-as-chump meme — it fits your #1. above, so maybe it would work.

      2. Kevin de Bruxelles


        I doubt that the right wing media will jump on this at all as it doesn’t fit well into story they are trying to tell. They have certain memes they push, for example that Obama is a socialist who supports the bottom quintile (lowest 20%) and that he is soft on defence. The target audience for Fox is the second and third quintiles (20-40% working class and 40-60% middle class) and Fox certainly wants to continue to direct these two classes’ anger downward towards the bottom quintile. It does them no good to emphasize the fact that in truth Obama is the paid hack of the top 1% since this knowledge would just tend to unite the lower three quintiles in a dangerous way for our wealthy elite.

        In the past I’ve brought up Geithner before on a right wing / tea party blog and was met by a wall of silence. But who knows, maybe this time will be different. I was recently stunned to see Drudge linked to the story below:


        1. clawback

          Real right-wingers (some of them) are really pissed about Geithner and the bailouts, but the so-called leaders don’t give a rat’s patooty about the welfare queens at 85 Broad or down in Charlotte, e.g.

          Rand Paul, whatever you think about his campaign, has mentioned the bank bailouts at almost every public appearance. He also tells the story that he has yet to meet a single Republican voter (as opposed to Republican hack) who has supported the bank bailouts.

          Signs are mixed on this, but some good could happen. Maybe the “right wing” could get excited about the Obama-as-chump meme. Maybe.

          1. Kevin de Bruxelles

            I agree that real conservatives are pissed about this and these are the type of people I could see myself making common cause with, especially Ron Paul. Many, but not all, of these same people were also angry about the Iraq War. The right wing media machine, on the other hand, is doing everything they can to co-opt these people and to turn their anger downwards towards the ghettos instead of upwards towards Wall Street.

        2. Carrick

          I don’t know — Fox & cohorts were happy enough to basically make the Tea Party, because it fit their narrative of “Obama wants to take you money, Obama wants to nationalize the economy, etc… by the way, Republicans hate taxes and socialism! (fingers crossed).” They did this to the disservice of GOP members who voted in favor of the bailout & stimulus.

          They fomented and profited from that dumb populism (case in point, Glenn Beck took off.) They can just shout “Obama is in with the bankers!” and it fits their narrative just fine — and the viewers can get more dizzy and entranced from their cognitive dissonance.

          The question is whether Fox and this neocon infection are more committed to their wealth or their lust for power (being “right”). I think it mirrors Wall St. — they were all too happy sinking the ship if they didn’t have to recognize that they’d been scuttling it all along. Both are desperately operating under the premise that they are inherently superior. therefore, their methods and ends are nearly irrelevant. When reality doesn’t suit their narrative, they just manipulate the story as best (and however) they can, to restore it. The GOP/Fox just MUST defeat the Democrats, and Wall St. MUST maintain a level of personal compensation and company profit (whatever fraudulent accounting it requires.)

  10. charles

    An interesting tidbit of this report is that the most egregious anomalies came from relatively simple transactions (like repo).
    By contrast, the derivatives “weapons of financial mass destruction” book was deemed to be correctly valued (with net difference with external parties summing at 60 million USD, small beer in the grand scheme of things), thanks to transparent use of market valuations, supported by the monitoring of Credit Support Agreements.
    The main problem is fraud and opacity. When derivatives are dealt transparently and fairly, they are not part of the problem, they are part of the solution, as they accelerate the price discovery mechanism.

      1. rootless_e

        Can you explain the legal obligations of the NY Fed to regulate an investment bank? I was under the impression that the SEC was the regulator.

        Or are we just convicting Geithner on principle?

  11. NYT

    Jeff Skilling must be furious. Dick Fuld did the very same things and retires a multi-millionaire.

    And by the way, all of Wall Street knew all this at the time. They were all refusing to trade with each other because they didn’t believe that each others balance sheets were legitimate. Thats what the whole credit crunch was about.

    1. Marshall Auerback

      “Jeff Skilling must be furious. Dick Fuld did the very same things and retires a multi-millionaire.”

      I’m not sure for how much longer that state of affairs will pertain to Mr Fuld.

  12. NYT

    One consequence of auditing the Fed would be related to repos. Banks are now allowed to offer much lower quality assets as collateral for Fed repos. In effect, it is possible that the Fed is now the counterparty for “Repo 105” transactions.
    Auditing the Fed would allow outsiders to see what is being accepted as collateral and whether the prices used were reasonable.

    1. Carrick

      Thanks for replying.

      What would be the consequence of it becoming clear that the Fed has been accepting flimsy collateral at unreasonable prices?

      I guess my question is — what will the outcome look like, and who (society wide) will feel it? If it was evident that all the ‘megabanks’ are running this same ‘scam’, will they just have to give up the illusion that they’re not diseased zombies (and suffer the consequences of being broken up, regulated, etc.) or are we talking about a meltdown?

      Will Wall St. be thrust into the light (and dismantled & regulated), or is it going to be the kind of revelation makes the world stop?

      This goes back to a question that was frequently voiced on NC (and in the comments) when I was a more frequent reader in the past — is Obama & Co just totally captured, or is the reality so dire, that propping up the current system the best that we can hope for?

      1. Yves Smith Post author

        I think it is a given they took flimsy collateral at inflated prices. But the question is “how much”?

        As Willem Buiter has pointed out, the Fed can “print” its way out of losses….in theory. That is probably what the Fed assumes, no one ever needs to care, therefore they never need to know. But Buiter points out that big enough losses means the Fed’s printing to recoup will produce inflation, and the Fed has a price stability mandate. So big enough losses means the Fed would then need to go to the Treasury for an equity injection, um bailout, meaning taxpayer dough. But again, the Fed is probably assuming, “apres moi, le deluge”, even if this happens, it’s not on their watch, someone else faces the consequences.

        So that is the economic/monetary angle. But the political angle is a wild card, and the Fed and Team Obama did not think this one through. If the Fed is discovered to have bought a lot of bad paper, lied about that, then on top of that mismarked it as a cover up… who knows where the fallout goes if that is uncovered and pursued with vigor. That is a wild card.

        1. carol

          “the Fed and Team Obama did not think this one through. If the Fed is discovered to have bought a lot of bad paper, lied about that, then on top of that mismarked it as a cover up…”

          Somehow, this reminds me of the 2002/early 2003 run-up of the Iraq war.
          How to deal with what would happen after the Iraqi’s would welcome US soldiers with flowers … not thought through!

          CIA, Niger uranium, Powell’s presentation in the UN, no WMD (well, at least not in Iraq; the WMD were at Wall Street), ….. lies and cover-ups.

          Unfortunately, this analogy does not bode well.
          Lots of lives lost, trillions of taxpayers dollars wasted, no prosecutions, …

          1. i on the ball patriot

            Carol, good comment, and I am inclined to agree with you, however, there is an aggregate threshold of just how much deception people are willing to tolerate, and, that, coupled with the real financial hurt that many scamericans are now feeling and more people on the internet to learn about the causes of that hurt, can be a catalyst for positive change. We are living in vastly different times than even a few years back when the neo-con gang, headed by Bush, invaded Iraq. Obama is just another ruling elite puppet and is complicit up to his neck and over his head. They did think it through. A main thrust is to create divisiveness and a sense of futility. Avoid the division, find the common ground, and keep fighting where ever possible. Don’t let the bastards get you down.

            God job Yves!

            Deception is the strongest political force on the planet.

  13. Hugh

    We know that everyone has been cooking their books after the meltdown. With all the fraud involved in the housing bubble, it was a safe bet that fraud was being hidden in various ways in the accounting. But this information about Lehman is interesting for two reasons. First, it shows that Lehman post-bubble, pre-meltdown had now real, not potential, losses which it was hiding and which Geithner and the NYFRB knew it was hiding. In other words, it engaged in one kind of fraud on the upside of the bubble and another kind on the downside. So it not only was engaged in fraudulent activities. It persisted in them to the bitter end. Second, what does this say about the decision to allow Lehman to go bust? If Paulson, Geithner, and Bernanke, all knew for months that Lehman was a rotten carcass, how could they not know that it would blow up not only the investors but the bondholders, with the obvious results to credit markets? I have always wondered how they could not have done due diligence on Lehman, and instead just let the firm go splat. Now it looks like they didn’t ask the questions because they already knew the answers but they let it happen anyway. This leaves me wondering still whether it all was just amazing incompetence or whether it was criminal. What they did was like pulling a pin on a grenade they knew to be live and protesting that no one could have foreseen…

    1. MarcoPolo

      “We know that everybody was cooking their books after the meltdown”.  People like Paulson & Fuld are hard-nosed ear-to-the-ground sell side sharks. No way they didn’t know where the holes were before the meltdown. And they were all playing the same (accounting) game so we should assume they all had holes and they all knew about them.  With a complicit Fed & Treas easy to hide the holes.  See stress test.  Fuld knowing all that too thought nobody would dare bring him down. But he overplayed his hand.  Survivor Wall Street – off the island.  Just my take.     

      1. MarcoPolo

        Just saw a passage in Yves’ book in which she claims that if anybody knew the size of the hole in LEH they wouldn’t have allowed it to fail and shine a light on everybody. Could be. Point is that it must be kept in the dark and Timmy is involved.

  14. psychohistorian

    What will this say about the whole state of jurisprudence in America if this does not bring forward some criminal indictments?

    I suspect the quarterly gaming was done by many. Las Vegas could regulate these criminals better than the Fed has done. The term complicit comes to mind.

    Maybe rule of law is becoming just another piece of paper like the Constitution…

    Jaded anyone?

  15. Jackrabbit

    Lets not forget the interesting (some might say troubling) personal relationships that underpin these events.

    * Geithner was a Rubin and Summers protege. He worked with them in the Clinton White House.

    * Rubin co-led Goldman Sachs with Stephen Friedman before joining the Clinton White House.

    * Stephen Friedman was Chairman of the NYFed while Geithner was President of the NYFed.

    * Stephen Friedman was also a Goldman Director while he was Chair of the NYFed.

    And of course we now know that:
    1) The NYFed tried to hide the beneficiaries (the largest was Goldman Sachs) of the AIG bailout, and
    2) Stephen Friedman made millions buying Goldman stock soon after the AIG bailout and soon after Goldman became a bank holding company (thereby subject to NYFed regulation). Apparently this was OK for technical reasons, but it still seems unseemly.
    3) The NYFed had a look into Lehman’s books?!?!?! This raises A LOT of questions. Why wasn’t there more of an effort to address Lehman’s problems before they ended in failure? What did Goldman and Citi know? When? Why?

    1. Jackrabbit

      Oh, and of course Paulson was a former head of Goldman.

      And the current President of the NYFed is a former senior exec at Goldman.

      *NOTE: I’m not suggesting that Goldman is any better or worse than other banks, just that the personal relationships forged from years of working and socializing together may be important to how events unfolded and ARE unfolding.

  16. esb

    We all learned from the 2008 election (and what followed in governance in 2009 and 2010) that the electoral process in the USA is useless in producing change as relates to the power and positioning of the oligarchs.

    The rapacious hands of the very few remain firmly affixed to the wallets (and accounts and other assets) of the many, through the intermediation of the Federal Government which they do not simply influence but control.

    So what does that leave us?


    So who here is willing to fire the first shot, since revolutions are never bloodless?


    Just as I thought

    Well then, please stop complaining and assume your designated roles as reasonably well fed (or very well fed) slaves.

    1. Wild Bill

      Guy flew a plane into the IRS office in Texas, guy tried to shoot it out at the Pentagon. What are you wating for?

  17. Independent Accountant

    I have always called the stress tests a Fed public relations device to convince the public the TBTF banks were financially sound. That major Wall Street houses cook their books should surprise no one. Who will blow the whistle on them? The SEC? The SDNY US attorney’s office? The Treasury? The gutless Big 87654 firms? The Big 87654 are not that incompetent. I once worked for one. The Big 87654 are gutless. They do as told. Can you imagine a Big 87654 partner telling Timmy Boy or Zimbabwe Ben, “Go to hell. Tomorrow at 9:00 AM, we will call a press conference to announce, ‘Goldman Sachs is unauditable’.” I can sooner imagine icebergs floating off the Panama coast. Where is the PCAOB, which purportedly “inspects” the Big 87654’s audit work? Why ask?

  18. Anon

    “were other banks engaging in this type of accounting chicanery?” I thought it was pretty common.

  19. Contrarian Pundit

    From Vogue’s March profile of Treasury Secretary Tim Geithner:

    For Geithner, an especially irksome aspect of the attacks is the many inaccuracies, starting with the notion that the secretary, who was head of the New York Federal Reserve when the crisis began, is somehow responsible for its origins. “Think of all the stuff that burned first,” he says. “Fannie and Freddie, the investment banks, AIG, the monoline insurance companies—it was their collapse that brought the system to the point of panic, but those things were outside the scope of the Fed’s jurisdiction. They all got dumped on us when they went bad, but we had no authority up front.”

    Perhaps all the Geithner puff profiles were meant to preempt this report.

    1. rootless_e

      tiresome of Tim to refer to facts, but I believe the charter of the NYFRB does not give it authority to regulate investment bankers that are not depository banks.

  20. Aaron Burr

    Isn’t Teflon Timmie a Republican? I suspect the Republicratic/Demican party will close ranks to protect him no matter what. How else can one explain the fact that he is still around?

  21. Swedish Lex

    Is this the same Geithner who is telling Europeans how to regulate their financial sector?

  22. Hubert

    So – really no derivative losses? 50 bn of bad collateral in repos cannot be the whole story. Can somebody do some simple adding and substracting and help us find out where the BIG HOLE came from?
    Does the big lawyer report help in this regard?

  23. fresno dan

    Yves here. The stunning bit is these “repos” were actually a conventional type of repo, despite the name, but Lehman was engaging in blatant misreporting…

    The correct word is “Lying”
    and remember, we are all equal under the law…uh, but some are more equal than others

  24. johnba

    I have always wondered why Geithner wasn’t held more accountable as Rome burned? He was head of the NY Fed, wasn’t he?

    1. clawback

      Tim Geithner saved the world. Didn’t you hear? Didn’t you hear it from the horse’s mouth?

      Most human beings would slink away in shame after such a performance, but not these ones. And that’s the problem.

  25. craazyman

    No doubt this will come down to another case where the letter of the law was somehow adhered to and “nothing illegal” was done by folks who were “saavy businessmen” until they weren’t.

    But when you line up the letters of the law they spell one word: LOOT — which stands for “Lay Off Onto Taxpayers”.

  26. Storm

    You guys are being too rough on poor Timmy. Remember during congressional testimony when Ron Paul asked him about regulatory issues, Geithner replied that he “had no regulatory experience”. The poor buffon didn’t know what his job duties entailed. Can’t you cut the guy some slack for being STUPID?

  27. Siggy

    The report is stunning in that it is clear that there was willful intent on the part of senior management to cook the books. The implied reach of missrepresentation gets to the Fed and the Treasury.

    It will be very instructive to see if and when the Justice Department acts.

  28. cd

    One of the interesting things about this is that, because of Enron and subsequent legislation, there should be a ton of documentation as to why Leh and EY thought this was an acceptable practice. It appears to me that, because of Sarbanes-Oxley, this would all be documented and have to be approved by Fuld.
    The basis of this transaction is fraud. I will say, as a repo trader, this is not a typical transaction, and violates the most basic accounting conventions that govern Repos. First and foremost a repo is a loan transaction where cash and securities are exchanged on the settlement date and returned +- interest on a foward date. This differs from a collaterilized loan in that actual legal title of the securities passes to the holder of the securities. They can rehypothicate said securities. Despite this legal transfer of ownership, a repo IS NOT a sale, and it is balance sheet intensive. As a borrowed asset will have its cash liability on the other side, and borrowed cash will be a liability vs an asset. According to FASB, the one condition for a REPO to be considered a sale is if its a netted obligation. That means that the counterparty, the maturity match, and there is a netting agreement in place. Or if a bond is owned and repo’d to maturity, cash flows net out.
    You can’t take a repo, and consider it a sale, regardless of the severity of the haircut, the haircut involved is not pertinent to the nature of the repo being a sale or not. Because of sarbanes oxley, EY must of had a good if not great reason to sanction lehmans repo 105 schemen, and it’s going to be interesting to find out what that was. Moreover, it is curious that the Fed, after examining Leh’s solvency, did not raise alarms. They are either criminal or criminally negligent, and that goes straight to the head of the NY fed, Tim G.
    I will speculate that the rather than approve of lehmans “scheme”, EY approved of lehman’s FRAUD. They felt that at 5-8pct h/c was aggressive enough that lehman could default on the second leg (cash return and interest payment) of the repo transaction, and that the counterparty would just be happy with their 5-8pct markup, because the counterparty was a lehman SIV(off-balance sheet vehicle). Essentially they allowed lehman to enter these contracts in bad faith.
    I was curious if anyone has a notion as to how EY could’ve justified Leh doing this. I will restate that in my years trading repo at various firms, I’ve never seen anything like this, nor would I believe that this could’ve of been approved by peole in good faith. Morever it does make you wonder what is on the balance sheet of JP, GS, and BOFA

  29. Steve W

    now that this huge report is out… how much of it do you suppose was known to any of the people involved (Geithner, Fuld, Paulson, etc)? Might that Geithner Vanity Fair article been a response to the known conclusion of this report?

  30. cd

    I hope justice does pound on this, along with the SEC. But i am curious as to what EY and Fuld’s justification will be for going through with these transactions. While they appear to be fraud, there is likely tons of documentation to explain why they thought they couldn’t be culpable. Anyone have any clue as to how they would’ve justified these transactions.

  31. Chris M.

    Geithner is done. There’s no way he can survive all the recent press. What an albatross. This time I’m sure Obama will show him the door. I’m not sure what he’s waiting for.

  32. David

    The question: How to get the public’s attention away from American Idol, Dancing with the Stars, and Tiger Woods long enough to clue them in on how badly they’re being scammed and fleeced?

  33. Bob Falfa

    Good thing there’s been sweeping financial reform to ensure this will never happen again.

  34. Blurtman

    This is all being done for the benefit of the average American citizen. Show some gratitude. Who else do you think that this type of fraud benefits anyway? Sheeeez… Ingrates!!!

  35. bobh

    I was just listening to Marketplace, the NPR markets show, and they had a nice young lady talking about this story on a profoundly superficial level. Then they moved on to a story they found just as important: a Brit talking about London’s decline as a financial center (a bad thing)to a first place tie with NYC because the punitive tax and regulatory policies of the Brits are making City bankers unhappy and they are moving elsewhere. The good news for the Brits, we were told, is that the U.S. may do similar bad things, alienate Wall Street, and make London #1 again. Hopefully cooler heads will prevail and we can stay on top.

  36. emm

    Paging… Eric Holder???

    Eric? Attorney General Holder!!!???!!!

    !!! ??? !!!

    I know it’s Friday. Nothing gets done.

    Great blog, Yves. My GoTo for e-CON-ewwww’s ‘n stuff.

  37. Rich

    I very much agree that Geithner must go – and it certainly may be that he is a crook, but before we jump to conclusions, we should investigate both his actions and his motives. First, let us note that Geithner is a protege of Bernanke, Greenspan, and Milton Friedman. He is a very well polished neo-liberal economist. He knows his shit.

    Neo-liberals believe that there is no better, no truer, discipline for economic behavior than the market. Not just the market – but the UNFETTERED Market is the great arbiter. If you screwed up, you would fail – the market ensures it. I doubt it had ever entered their minds that if you fail big enough, you could fail the market itself. Unimaginable. So when their libertine ways resulted in the LIBOR lockup in Sept 08, they simply freaked. The market GOD was in danger of being dethroned. This was an event outside of their realm of possibilites. Rather than viewing all the bailout actions as efforts to “save the banks” in fact, I believe their efforts were aimed at saving their GOD – the Market. Viewed from this perspective, their actions become more rational, perhaps even virtuous, for if the Market failed (a concept not merely unthinkable to them, but heretical) then their entire construct of the world would be destroyed. The Market must be saved! With a mindset like this, of course rules and regulations, limits on authority and the like, were the enemy, to be destroyed, or ignored. Hence the view by many, including Time magazine, that their lunatic actions were instead heroic. They “saved the system.”

    Those of us less devoted to the Market have simply run out of time to stop this insanity. Perhaps after the Great Fall we can convince those in power that the real reason for governance is to protect the People, not an abstraction like “the Market.” Like a pit bull, the market can be employed in a manner that protects the People. And as we have seen, allowed to run rampant, the Market can and has eaten our children.

  38. scraping_by

    On the other hand, the Lehman collapse was useful in herding the people and the Congress with minimal bribes changing hands. The refrain of the Bush/Obama administration (singular intended) during the fountain of taxpayer gifts was “Noun, verb, Lehman. Noun, verb, Lehman.” Panic is good politics, if you’re a Bush.

    Listening to the President gloat “Mission Accomplished” to a hand picked audience in Las Vegas a few weeks ago, I figured out he’s the one expecting the kickback. His only danger is Congress getting restive about getting crumbs, and taking it out in real financial reform.

    We currently have a president who governs by lying, a Congress that’s corrupt and proud of it, and a judiciary that claims property has right and people don’t. Our avenues of self-defense are growing few.

  39. MichaelC

    In addition to the SOX line of attack, sham transactions are of signifcant importance to the IRS, which last I looked was a Treasury function.

    If you’re the head of Treasury and someone tips you off to a sham transaction, especially of this size, bells are ringing too loudly to ignore.

    To me this isn’t merely dereliction of duty, its contempt.

    I think overall, Paulsen was a short timer, so he didn’t care too much about being held accountable. Geithner’s actions are harder to rationalize.

  40. Al Reasin

    And what about that $2 billion given in bonuses to the management that caused this company to fail. Everyone went crazy over AIG but not Lehman. And my “secured” bonds that were over 10% of my retirement; where is the dang info on when I will receive a payout on what I owned. Will they go the route of the GM bond holders?

    Hey, I pay my taxes, unlike others!

  41. Scot Stirling

    This analysis is incompetent, because it just blows by and gives a pass to the SEC, which was the agency actually charged with regulating Lehman Brothers. Bear Stearns, Lehman, Merrill Lynch, Goldman Sachs, and Morgan Stanely were all regulated under the SEC’s Consolidated Supervised Entity Program. It isn’t called the Securities and Exchange Commission for nothing – this was the SEC’s job, and the author for some unfathomable reason just gives a pass to the SEC for simply failing to do its job, with the goofy statement that the SEC has just never been very good with the credit markets. What kind of nonsense is that? All of those bonds being traded in the credit markets are *securities* and the SEC doesn’t have any greater responsibility than to regulate those who deal in securities, including investment banking firms like Lehman.

  42. Yves Smith Post author


    Your accusation is inaccurate. I suggest you review the relevant section of the Lehman report, as well as the history of Congress’s dealings with the SEC over the last two decades.

    The SEC did not have statutory authority over Lehman’s holding company. Its authority is “voluntary”, a sort of regulatory default. The lack of statutory authority creates ambiguity as to its basis for action (for instance, it cannot use statutory violations as a basis for action, nor can it threaten to revoke a license, since it does not have licensing authority. The examiner’s report, had you bothered to read it, is definitive upon this point (p. 1484):

    The Gramm‐Leach‐Bliley Act of 1999 had created a void in the regulation of systemically important large investment bank holding companies.5733 Neither the SEC nor any other agency was given statutory authority to regulate such entities.

    In keeping, to induce the US LIBHCs to participate in an toothless regulatory scheme, the SEC weakened net capital requirements, an action that many experts see as having played a direct role in the crisis (as it is allowed investment banks to attain higher levels of leverage). Even then, the CSE program focused on liquidity, NOT solvency. Recall that Bear’s liquidity vanished in a mere ten days, even as those at the helm of the firm were convinced its liquidity buffers were adequate. With balance sheets financed 50% by repo with any average tenor of a week or less, ANY broker dealer can be brought down by a liquidity crisis, just as even solvent banks can be brought down by a run.

    Moreover, the SEC has had its wings clipped even where it has had clear authority. It has been WIDELY chronicled that Congress has repeatedly acted to limit SEC enforcement capabilities, starting with Arthur Levitt’s tenure as SEC chief (the mere appointment of Levitt, the first non-attorney in decades, was also a sign of intent, to neuter the agency). The SEC is the only major financial regulator which does not keep the fees it collects, but instead turns them over to the government and in turn gets an allowance, um, budget, that is considerably lower. But more important, when Levitt wanted to step up enforcement on the retail front (much less controversial and resource intensive than on the institutional investor side) he was not merely blocked by Congress, but actively threatened with budget cuts.

    So the SEC in effect has been given responsibility, yet SYSTEMATICALLY denied the resources to do its job. Its response has been to retreat and focus on activities that have high bang for its limited bucks, primarily insider trading cases.

    Third, as you well know, securities exposures are only a small part of the risks of a levered trading firm. They all use derivatives (NOT regulated by the SEC) to hedge said exposures. It would have been politically impossible for the SEC to stop the entry of securities firms into OTC markets (yes, Levitt followed Rubin, Summers et al. in opposing the regulation of credit default swaps, but that horse was already out the barn and in the next county. Broker dealers had been active participants in OTC derivatives of various sorts since the early 1990, and interest rate and FX swaps, since the early 1980s).

    Fourth, the report makes clear that the Fed withheld information from the SEC. See this piece:


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