March 12, 2010
As William K. Black said a year ago, the government’s entire strategy now – as in the S&L crisis – is to cover up how bad things are (”the entire strategy is to keep people from getting the facts”).
Paul Krugman and others pointed out that Geithner has been trying to artificially prop up asset prices, but that such a strategy cannot succeed.
As I’ve pointed out numerous times, the stress tests were a total sham, with a pre-ordained passing grade for the banks.
As I’ve noted repeatedly over the last couple of years, the government has allowed the giant banks to hide their liabilities and maintain dizzying amounts of leverage by using off-balance-sheet gimmicks:
BIS slammed “the use of gimmicks and palliatives”, and said that anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts “will only make things worse”.Fraud at Lehman
This is, of course, what Marc Faber and many other economists have said for years.
But Bernanke and the other central bankers (as well as Treasury and the Council of Economic Advisors and Barney Frank and Chris Dodd and the others in control of American and British and French and Japanese and German and virtually every other country’s economic policy) ignored BIS’ advice in 2007 and 2008, and they are still ignoring it today.
Instead, they are doing everything they can to (2) prop up asset prices by trying to blow a new bubble by giving banks trillions, (2) re-write accounting and reporting rules to let the big banks and other giants keep bad debts on their books (or in sivs or other “second sets of books”) and to hide the fact that they are bad debts, and (3) encourage consumers to spend spend spend!
Now, Geithner and Bernanke have been busted letting Lehman cook its books to try to hide its problems.
The New York Times notes:
The examiner, Anton R. Valukas, also for the first time, laid out what the report characterized as “materially misleading” accounting gimmicks that Lehman used to mask the perilous state of its finances…Shahien Nasiripour explains:
Lehman executives engaged in what the report characterized as “actionable balance sheet manipulation”….
A large portion of the [examiner's] nine-volume report centers on the accounting maneuvers, known inside Lehman as “Repo 105.”
First used in 2001, long before the crisis struck, Repo 105 involved transactions that secretly moved billions of dollars off Lehman’s books at a time when the bank was under heavy scrutiny.
The examiner … said in a report publicly released Thursday that senior officials failed to disclose key practices, opening them up to legal claims … the report concludes that the firm’s auditor, Ernst & Young, failed to meet “professional standards.”
The exhaustive report was unsealed today by Judge James M. Peck, who said
the report reads “like a best-seller.”
The examiner, Anton Valukas, also found that parties have claims to pursue against JPMorgan Chase and Citibank in connection with their behavior regarding the modification of agreements with Lehman and their increasing collateral demands in Lehman’s final days. These demands had a “direct impact” on Lehman’s diminishing liquidity — its cash on hand — which was a prime reason behind the firm’s demise.
The examiner’s report notes:
The business decisions that brought Lehman to its crisis of confidence may have been in error but were largely within the business judgment rule.But the decision not to disclose the effects of those judgments does give rise to colorable claims [i.e. valid legal claims] against the senior officers who oversaw and certified misleading financial statements — Lehman’s CEO Richard S. Fuld, Jr., and its CFOs Christopher O’Meara, Erin M. Callan and Ian T. Lowitt.***
There are colorable claims against Lehman’s external auditor Ernst & Young for, among other things, its failure to question and challenge improper or inadequate disclosures in those financial statements.
The examiner notes that the issue giving rise to these potential claims was Lehman’s creative use of repurchase agreements, otherwise known as repo. These are agreements between financial firms that essentially act as loans for cash — one firm pledges collateral to another in exchange for cash with a promise that they’ll buy back that collateral.
The examiner said the sole function of Lehman’s use of repo was “balance sheet manipulation,” according to the report:
Although Repo 105 transactions may not have been inherently improper, there is a colorable claim that their sole function as employed by Lehman was balance sheet manipulation. Lehman’s own accounting personnel described Repo 105 transactions as an “accounting gimmick” and a “lazy way of managing the balance sheet as opposed to legitimately meeting balance sheet targets at quarter end.” Lehman used Repo 105 “to reduce balance sheet at the quarter