Diary

LEHMAN SCANDAL, DAY 2: NY Times rips apart Geithner's NY Fed

Tim Geithner must be removed as Treasury Secretary immediately. Saturday’s New York Times (the goods came out on the slowest news day) virtually indicts Geithner and the New York Fed in the Lehman Brothers scandal. Every legislator must demand a new Treasury Secretary who the nation can trust.

The Treasury Secretary is not an elected position. There need to be no investigation of Geithner (although there should be) to remove him. The Treasury Secretary serves at the pleasure of the president. Go ahead, fearless press! Ask the president the question! Is Geithner staying, or do you (Obama) want to stand by him as the country is dragged through a lengthy investigation of corruption?

Charles Rangel stepped aside for small potatoes. Massa’s tickling was small potatoes. Geithner has his hand on trillions.

Saturday’s New York Times has two stories on Lehman. Let’s start with the Wall Street-reaction story:

Findings on Lehman Take Even Experts by Surprise
By MICHAEL J. de la MERCED
Published: March 12, 2010
For the year that it took the court-appointed examiner to complete his report on the demise of Lehman Brothers, officials from Wall Street to Washington were anticipating it as the definitive account of the largest bankruptcy in American history.

And the report did just that when it was unveiled on Thursday, riveting readers with the exhaustive detail contained in its nine volumes and 2,200 pages.
(…)
Patricia Hynes, a lawyer for Mr. Fuld, said on Thursday that her client “did not know what those transactions were — he didn’t structure or negotiate them, nor was he aware of their accounting treatment.” She did not return an e-mail seeking additional comment on Friday.

The ignorance defense–nice try, counselor Hynes. The fact is, Lehman CEO Dick Fuld signed off on all the financial statements. He assumed personal liability. The fact is, Fuld’s salary during this time was ONE HALF A BILLION DOLLARS. Lehman had been doing this shady stuff since at least 2001. Spare us the “I know nothing!” defense.

The accounting tactic, first used by Lehman in 2001, had one catch, according to Mr. Valukas: no American law firm would sign off on its use.

Enter Linklaters, a highly respected British law firm that gave Lehman the answer it wanted. So long as the repos were conducted in London through the bank’s European arm, and so long as the company took other cosmetic steps to make these transactions appear to be sales instead of financings, Linklaters determined that they would pass regulatory muster.

Lehman was doing this shady accounting stuff on over $50 billion of toxic assets with its London branch since 2001. Someone tell the $500 million Lehman CEO!

Which raises an important question: What value is the Sarbanes-Oxley Act? Remember how this great act was passed to prevent another Enron? Lehman was much larger than Enron. How could the accounting firm of Ernst & Young sign off on Lehman’s books?

In a just world, Dick Fuld and Ernst & Young would be prosecuted.

Representatives for the S.E.C. and the United States attorneys offices in Manhattan and Brooklyn declined to comment.

Get to work, fellows.

The second Saturday New York Times article on Lehman leaves Geithner’s name out for the most part, but pretty clearly implicates the Geithner-led New York Fed in cooking Lehman’s books to defraud investors:

Fed Helped Bank Raise Cash Quickly
By ERIC DASH
Published: March 12, 2010
They were considered the dregs of Lehman Brothers — “bottom of the barrel,” as one banker put it

But as Lehman executives tried to keep the floundering bank afloat in 2008, they used these troubled investments to raise quick cash that helped mask the extent of the firm’s troubles. And they did it with the help of the Federal Reserve Bank of New York.
(…)
Lehman, desperate for financing, seized its chance. It packaged billions of dollars of troubled corporate loans into an investment called Freedom CLO. Then, in a series of transactions, it shifted Freedom back and forth to the New York Fed, in exchange for cash. Those moves helped make Lehman look healthier.

Essentially, Lehman was able to temporarily warehouse illiquid investments that were worrying its investors at the New York Fed in return for cash. The Fed created this facility immediately after the near collapse of Bear Stearns. Some suspect that other banks engaged in similar maneuvers.

“There were a number of tricks designed to make their balance sheet look stronger than it was,” said Janet Tavakoli, a structured finance analyst. “And they weren’t alone.”

Oh. wonderful! Who else did the New York Fed help cheat on its balance sheets? Is this the NY Fed’s job–to engage in fraud to help “too big to fail” banks?

Why did Lehman use its London office all these years? The NY Fed was there to do it for them!

And guess who else knew about all this? Ben Bernanke!

In March 2008, Lehman packaged 66 corporate loans to create the $2.8 billion Freedom CLO, which it planned to use exclusively for transactions with the Fed, the examiner’s report found.

The idea, according to a former Lehman trader familiar with Freedom, was to temporarily reduce the size of Lehman’s balance sheet. The Repo 105 transactions, according to the examiner, were created with a similar goal in mind.

The deals with the New York Fed let Lehman pledge Freedom — a mix of low-quality assets, plus some cash — in return for all cash from the Fed.

Bernanke and Geithner must go. The Fed must be investigated. This is fraud.

Is any staffer of any member of Congress reading this? Does the integrity of our banking system mean anything to you?

Let’s turn to Chris Dodd, who (amazingly) is still a senator and still writing banking laws:

Dodd to offer his own financial regulation bill
By: JIM KUHNHENN
Associated Press
03/11/10 7:00 PM EST
WASHINGTON — With one eye on the calendar and the other on elusive bipartisanship, Senate Banking Committee Chairman Christopher Dodd plans to offer his own version of a sweeping overhaul of financial regulations without Republican support.

Dodd said Thursday he would release his proposal on Monday and begin the committee’s work on the bill the week of March 22.

“Clearly, we need to move along,” he said.

His decision immediately complicated the prospects for a Senate bill already months in the making, and it raised new questions about Congress’ ability to respond to a financial crisis that erupted more than 18 months ago with the collapse of Lehman Brothers.

We don’t need more regulation. We need regulators with integrity who know what they’re doing.

Chris Dodd and Barney Frank shouldn’t be trusted with writing a grocery bill. Hold up with the progressive solution to “financial reform.”

Geithner and Bernanke (and Obama) have important questions to answer, and they had better answer ’em now. The nation’s finances must not be run by crooks.