"The Fed's behavior made it clear that officials didn't believe they needed to do more with this information. The FRBNY remained willing to lend to an institution with misleading accounting and neither remedied the accounting nor notified other regulators who may have had the opportunity to do so....We now know from Valukas and from former Treasury Secretary Paulson that the Treasury and the Fed knew that Lehman was massively overstating its on-book asset values." (Time for the Truth" William Black and Eliot Spitzer, Huffington Post)
Yves Smith over at Naked Capitalism summed it up perfectly at the time:
"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...at a minimum, the NY Fed 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." (Naked Capitalism)
Repeat: "Culpable," "collusion," "aiding and abetting Lehman in accounting fraud and Sarbox violations." And these are the guys who want unlimited power to bail out anyone at any time regardless of the cost?
Don't make me laugh!
What Dudley really wants is the power to put out the fires which the serial arsonists at the Fed have started with their shabby, easy money policies and "light touch" regulation. They need to get their own house in order before they go asking congress for more favors.
Here's a novel idea: Why not just fix the system? Why not create regulations that actually work, that increase stability and make the system safer?
Nah, that would cut into profits, so it's a non-starter. Isn't that what's going on here; Dudley's trying to shrug the costs onto taxpayers so he doesn't ruffle feathers on Wall Street. It's all about the bottom line. Here's more from the Times:
"[Dudley] argued in his recent speech that it would make no sense to draw a line between banks and other kinds of financial firms if both were playing essentially the same role in the broader economy.
"Both should be regulated, and both should be backstopped.
"'If we believe that these activities provide essential credit intermediation services to the real economy that could not be easily replaced by other forms of intermediation, then the same logic that leads us to backstop commercial banking with a lender of last resort might lead us to backstop the banking activity taking place in the markets in a similar way,' he told the New York Bankers Association." (NYT)
Hold on there, Dudley; "essential credit intermediation" can mean anything from issuing short-term loans to productive businesses to off-loading dodgy Collateral Debt Obligations (CDOs) to gullible investor groups. Are we going to throw a lifeline to every snakeoil salesman and scamster in the industry?
Yep. That's the Dudley method. Bail "em all out and start over! What's a few trillion among friends? It's all funny money anyway, isn't it? More from the Times:
"Banks and other financial companies increasingly draw money from sources that do not have similar backstops, including the sale of commercial paper to money market funds and complicated arrangements called 'triparty repos' that basically allow financial firms to borrow money by pledging assets as collateral.
"These are short-term loans that must be renewed regularly, often daily. As a result, panic among investors can almost instantly undermine financial stability, which is exactly what began to happen in 2007: Panic spread, financing disappeared, and the global financial system came perilously close to complete collapse.
"There is broad agreement that something should be done to improve the stability of money-market funds and the triparty repo market. So far, nothing much has happened." (NYT)
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