According to the report, Lehman used what amounted to financial engineering to temporarily shuffle $50 billion of assets off its books in the months before its collapse in September 2008 to conceal its dependence on leverage, or borrowed money. Senior Lehman executives, as well as the bank’s accountants at Ernst & Young, were aware of the moves, according to Mr. Valukas, the chairman of the law firm Jenner & Block and a former federal prosecutor, who filed the report in connection with Lehman’s bankruptcy case.
The intent here was to deceive regulators and shareholders. Lehman used a very questionable type of repo transaction to hide these liabilities. It was so obviously against the intent of the safety regulations that they could not find an American law firm to sign off on it. Instead, they went to London and got a British firm to give them an OK.
There were three parties involved in this deception: Lehman executives, Ernst & Young, and the New York Fed.
The NY Fed, of course, was run by Timothy Geithner, who is currently the Treasury Secretary. Either he knew about this and ignored it, or he was so grossly incompetent that he didn't know. Neither is an excuse. He allowed an insolvent company to hide its insolvency while middle class pension funds invested in its stock and bonds. When Lehman collapsed, a lot of retirees were among the people who took the big hit. Geithner must resign.
Ernst & Young is yet another accounting firm following in the proud footsteps of Arthur Andersen, the company that enabled Enron to commit massive fraud. There is a real problem with our auditing system. Accounting firms are auditing the companies that pay them; this sets up an obvious and inherent conflict of interest which results in firms like Ernst & Young abdicating their duty to protect taxpayers and investors from fraud, and instead actively sanctioning whatever shady activity will earn management the most in bonuses this year.
Valukas found that Lehman CEO Dick Fuld was "at least grossly negligent." But Fuld's lawyer claims that he “did not know what those transactions were — he didn’t structure or negotiate them, nor was he aware of their accounting treatment.”
There were three parties involved in this deception: Lehman executives, Ernst & Young, and the New York Fed.
The NY Fed, of course, was run by Timothy Geithner, who is currently the Treasury Secretary. Either he knew about this and ignored it, or he was so grossly incompetent that he didn't know. Neither is an excuse. He allowed an insolvent company to hide its insolvency while middle class pension funds invested in its stock and bonds. When Lehman collapsed, a lot of retirees were among the people who took the big hit. Geithner must resign.
Ernst & Young is yet another accounting firm following in the proud footsteps of Arthur Andersen, the company that enabled Enron to commit massive fraud. There is a real problem with our auditing system. Accounting firms are auditing the companies that pay them; this sets up an obvious and inherent conflict of interest which results in firms like Ernst & Young abdicating their duty to protect taxpayers and investors from fraud, and instead actively sanctioning whatever shady activity will earn management the most in bonuses this year.
Valukas found that Lehman CEO Dick Fuld was "at least grossly negligent." But Fuld's lawyer claims that he “did not know what those transactions were — he didn’t structure or negotiate them, nor was he aware of their accounting treatment.”
This is ludicrous. These transactions hid nearly $50 billion worth of bad assets. They were the only thing keeping Lehman Brothers afloat. Dick Fuld made nearly a half a billion dollars during his career at Lehman, and averaged nearly $64 million a year in the six years preceding his firm's demise. For someone who makes that much money, you'd think he'd have some fucking idea where $50 billion dollars went. It's not a small amount of money. It's more than the combined value of the entire economies of Albania, Nepal, Cambodia, Haiti and Nicaragua, countries which are populated by some 60 million human beings.
Of course when it comes time to get paid, these Masters of the Universe believe that they are truly irreplaceable, "doing God's work", and worth every million they make. But when they destroy the economy and we try to hold them responsible, they suddenly claim they spent their entire tenure in the corporate bathroom, and that it's someone else's fault. Well, I don't buy that. For a half billion dollars in compensation, your job is to know these things. Here's hoping Tricky Dick Fuld gets charged with crimes; civil fines aren't going to hurt him in the least.
This should get interesting, as more information starts coming out. A year and a half after the financial collapse, and the destruction of trillions of dollars of middle class net worth, there have been virtually no arrests or investigations. There is absolutely no doubt that fraud was committed countless times and in countless ways, but no one has been held accountable. The executives are still there and collecting their bonus checks. The regulators are still there, or have been promoted to Cabinet posts like Geithner. The accountants are still looking the other way and taking money to do it.
Maybe this report will finally convince the Justice Department to get involved. Congress seems to be too busy trying to cut unemployment benefits for the people who got screwed out of their jobs in this whole mess.
Yves Smith has more here.
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