Spitzer/Rosner: “Lehman Scandal: Where’s the Follow Up?”

By Eliot Spitzer, former governor of New York who blogs for Slate.com and guest posts on New Deal 2.0, and Josh Rosner, the managing director of an independent financial services research firm

It doesn’t take a rocket scientist — and certainly not an accountant — to deduce one thing from the Lehman scandal. The misleading of regulators, investors and the public did not happen in isolation. Like Enron, WorldCom, Tyco, Wachovia, Washington Mutual, Fannie/Freddie, CDOs, Bear, AIG, bond insurers, GM, Chrysler, CIT, California, Greece and the countless others wrapped up in this crisis, Lehman is symptomatic of a banking system bent on finding ways to hide risk from the investing public and regulatory community. Every time the truth was uncovered, investors fled and new investors demanded returns that compensated them for the new understanding of the known risks and for those that might remain hidden. In some cases, the cost of that new capital broke the firms.

Traditionally, banks and investment banks acted as principals or agents, matching capital in search of economic return with borrowers needing capital to earn a real return on economic activity. Today, they have turned to manufacturing artificial demand for financial products on false pretense. We have seen them act in such a manner on behalf of their debt-issuing clients. And in the case of Lehman, they have done so on their own behalf. We can expect that other firms used this and similar tactics to hide their true financial condition – firms that are still in business and, to varying degrees, massaging or manipulating their numbers.

It should be clear to all that a deeper examination of the relationship between all the audit firms and their clients on the issue of risk-obfuscation is needed. Limiting any inquiry to Lehman alone is inadequate. To start, here are a few simple questions:

1. To the Fed: Where were you? Did you know what Repo 105 was? You claim that you were not the regulator but acknowledge that you were on site for 6 months before Lehman’s failure to make sure you would be repaid on your exposures, so wouldn’t deceptive accounting have reduced your faith in your ability to collect on your exposures?

2. To the SEC: What are you doing to ensure that other banks and investment banks are not using similar techniques to manipulate their books?

3. To federal investigators: Where are the subpoenas?

4. To the remaining post-Arthur Anderson audit firms: Have you signed off on any client transactions whose primary purpose was not driven by economic business decisions but rather to change the appearance of assets or liabilities? Are you aware of any of your client firms using any mechanism to optically reduce the appearance of leverage while actually retaining the risk?

5. To the investment banks and banks: Did you use Repo 105 or any other accounting practices, such as the end-of-quarter parking of assets at unconsolidated but related hedge funds or total return swaps for the primary purpose of shifting income?

6. To shareholders: Shouldn’t you demand to know if the firms in which you have invested have used deceptive accounting practices?

7. To Congress: You have authority to demand answers from virtually all of these entities, and especially the Fed, the SEC and the auditors. What are you waiting for? Why have you not already sought all the email traffic between the FED and Treasury and Lehman, and, as we have argued elsewhere, AIG and the Fed?

In the banking world, there are generally four types of risk; liquidity risk, credit risk, operational risk and reputational risk. Of these, only reputational risk failures threaten the entire value of the business and its goodwill. If our questions remain unanswered, the entire financial system will remain dangerously exposed.

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  1. CB

    Hi. Very off-topic question from a novice. I am just really curious and know this a forum where sharp minds and concise answers can be found.

    Question: Is it a violation of anti-trust laws for a collection of companies to pool their money and collectively bargain for low priced goods, then divide the bulk purchase amongst themselves? — i.e. a handful of grocery chains in one state approach Vlassic with a giant bulk order for pickles at a low price. Also, what if they are non-competitors scattered across different states?

  2. Doc Holiday

    To Spitzer: Dude, you seemed to be running these crooks out of business at one point — WTF happened? Do it again!

    1. Skippy

      The regulatory agencies and our Government are but handmaidens of convenience, whence the job is done shall be handed their walking papers, too further increase profitability.

      Rubber stamps not unlike health/safety officers, QC Mgr, payed out side verification (rating agencies) of which all are just chopping block jobs, heads set to roll if the big plan sees daylight and people see the sham for what it is.

      Skippy…can surgical intervention save the patient or is the disease such that a flame-thrower would serve better.

      Ahhh bring back the good old vanilla greed and let the good times roll…romanticism…Bah Can we just take the 50s out back and drill one in the back of its head cuz its killing us slowly.

    2. Andrew Bissell

      Unfortunately Spitzer has proven to be a crook himself, as his support for the Atlantic Yards eminent domain taking in New York City amply demonstrates. This sort of thing tends to undermine one’s credibility as a scourge of the corrupt.

  3. maniam

    CRMPG III(counterparty risk management polict group members)
    i.E. Gerald Corrigan Managing Director Office of the Chairman Goldman, Sachs & Co.
    ii.Douglas J. Flint Group Finance Director Deputy Head of Global Markets HSBC Holdings plc

    1.Madelyn Antoncic Managing Director Global Head of Financial Market Policy Relations Lehman Brothers
    2.Gary G. Lynch Executive Vice President Chief Legal Officer Morgan Stanley
    3.Craig W. Broderick Managing Director Chief Risk Officer Goldman, Sachs & Co.
    4.J. Chandler Martin Executive Vice President Bank of America
    5.Ken deRegt
    Managing Director Chief Risk Officer Morgan Stanley
    6.Edmond Moriarty Senior Vice President Co-Chief Risk Officer Merrill Lynch & Co.
    7.Andrew Feldstein Chief Executive Officer Chief Investment Officer Blue Mountain Capital Management
    8.Gavin G. O’Connor Managing Director Goldman, Sachs & Co.
    9.Peter Fisher Managing Director Co-head of Fixed Income BlackRock, Inc.
    10.Edward J. Rosen, Esq. Partner Cleary Gottlieb Steen & Hamilton LLP
    11.Adam Gilbert Managing Director JPMorgan Chase & Co.
    12.Zion Shohet Treasurer Head of Corporate Finance Citigroup
    13.Christian Lajoie Head of Group Supervision Issues BNP Paribas
    14.Barry L. Zubrow Chief Risk Officer JPMorgan Chase & Co.

    i.Darren Littlejohn
    Goldman, Sachs & Co.
    ii.Ranbir Hira
    Cleary Gottlieb Steen & Hamilton LLP
    iii.Manar Zaher
    Goldman, Sachs & Co.
    iv.Jennifer Philbrick
    Cleary Gottlieb Steen & Hamilton LLP

    are the above together in cooking lesson or in collusion?

    are they involved in war crimes(currency)?
    for looting and devastating households,companies and nations,are they not committing crimes against humanity?
    will they be tried like war criminals?(e.g.polpot,saddam,radovan karadzic,hideki tojo)

  4. Avg John

    Risks? We don’t need no stinking risks! We deal in just the rewards side.

    Are these the risks of the investment\banking community or the risk of the average American taxpaying citizen?

    The only risks the banking community is assuming is the risk the stupid herd of public sheep will begin to realize they’ve been sheared.

  5. attempter

    I guess we know the answers to all of those.

    1. We’re the banks’ Fed. That’s “where” we always are, including where it comes to taxpayer exposures. We ought to know – we’re the ones who undemocratically, unconstitutionally exposed them.

    2. Nothing.

    3. Exactly where we want them to be – nowhere.

    4. Huh? Duh?

    5. HAHAHA!!!!!!

    6. In spite of the Big Lie about the majestic executive “responsibility to shareholders”, shareholders have been completely disempowered. In the end they’re also a cash cow for these criminals. Some of them are willing, but in the case of pension funds and such, the people have been structurally shackled to this “market”. That’s one of the chains we need to break, using whatever force necessary.

    7. We’re doing exactly what we’ve been bribed to do.

    As these answers demonstrate, the current law wouldn’t be able to deal with crimes of this magnitude and criminality this systematic. That would be true even if “the law” hadn’t been rigged to legalize most of the crimes.

    Nothing short of a new Nuremburg paradigm is sufficient to the evil of this day.

    1. Doug Terpstra

      Strangely, the Wash Times article cited in your link talks about the problem itself but makes no connection to the larger issue. This seems to expose a dysfunctional culture that a journalist might somehow relate to the SEC’s dereliction of duty, like the tag line “SEC Fiddles While the Imperial Economy Burns.”

  6. Sid Finster

    Counterparties to financial institutions know that such institutions will be granted unlimited free money for as long as it takes, regardless of the institution’s stanky accounting practices or the craptacular nature of the collateral proffered.

    So where is the reputational risk? If anything, this will enhance the reputation of the financial institutions.

    Sure, you know that Billy is a drunk and a fraud and normally you wouldn’t lend him the money to buy so much as a can of soda, except for the fact that Billy’s rich uncle will make his creditors whole.

    After all, Sid recently lent Billy $100,000. When Billy failed to pay up, Sid went to Uncle and got his money with interest right away, no embarrassing questions asked.

  7. Jackrabbit


    Thanks for having the courage to speak out about this issue despite the scandal. In my eyes, and I image the eyes of many, your willingness to address these issues show a strength of character and a concern for the well being of this country that is greatly lacking in many of our current leaders.

  8. Doug Terpstra

    Spitzer writes: “Every time the truth was uncovered, investors fled and new investors demanded returns that compensated them for the new understanding of the known risks and for those that might remain hidden. In some cases, the cost of that new capital broke the firms.”

    That’s how it should work in theory, but haven’t the new investors here, future taxpayers, eliminated risk entirely and made it safe for the market to rise indefinitely? I thought that was the purpose of involuntary bailouts: to protect shareholders from moral hazard and the investor class from loss of wealth and privilege. Did I miss something?


    When I think back to the late 90’s and earliest part of this decade I seem to recall there was also an SEC chair who seemed disinterested with enforcement. Harvey (don’t worry be happy) Pitt- Golden Boy for the Big 6…5…4? It was only after a certain NY AG achieved repeated initial successes against the Wall Street crooksters of that time that Mr. Pitt was motivated to take action.

    Just like then, the regulators will not act until they are embarrassed enough/ forced to act.

    Mr Spitzer, your questions are most welcome!!!
    (Any chance you can get the answers from those guys?)

  10. Greg S

    “Follow up”? You are joking. Both political parties have dirty hands and none in Washington want to see any sort of “follow up” happen. Follow up will only occur when the voters take enough interest to make it very clear to the politicos that they are out of there unless they start doing their jobs, which supposedly is looking after the public interest.

  11. Contrarian Pundit

    I’ve obtained a copy of a letter Ernst & Young sent to a client’s audit committee, defending the firm in light of the Valukas report.

    You can find a PDF here: http://www.contrarianpundit.com/?p=612

    What do people think?

    The person who sent it to me is an accounting expert. He said: “If Lehman did sizeable transactions at the end of each quarter and then reversed them soon thereafter, I believe this is “window dressing” to make the financial statements look better than they otherwise would look. This should have been disclosed in the footnotes.”

    No brainer?

    1. Greg S

      It is a no brainer for anyone who has the power to investigate and who actually wants to investigate.

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