Translation: The FRBNY knew that Lehman was engaged in smoke and mirrors designed to overstate its liquidity (to reassure its stockholders) and, because of that, was unwilling to lend as much money to Lehman as it otherwise would have. The FRBNY did not, however, inform the SEC, the public, or the Office of Thrift Supervision (which regulated an S&L that Lehman owned) of what should have been viewed by all as ongoing misrepresentations. This means that FRBNY, a bank of the Federal Reserve, was criminally complicit in fraud! (Once again, Dylan Ratigan's assessment certainly seems to apply: "A captured government, working in collusion with certain banks, acts as a predator on the people.")
The FRBNY, then under the direction of Tim Geithner, remained willing to lend our taxpayer millions to an institution whose accounting he knew was fraudulent (i.e. criminally deceptive) and neither took steps to correct the rigged accounting, nor notify other regulators who could have done so. Nor did the FRBNY alert all those who had invested their savings in Lehman, under the illusion that all was well within the company.
What else can we conclude, other than that the Fed wanted to help maintain the fiction that toxic mortgage products were simply misunderstood assets, so for that purpose it allowed Lehman to maintain its deceptive and fraudulent accounting?! We now know from Valukas and from former Treasury Secretary Paulson that both the Treasury and the Fed knew that Lehman was massively overstating its on-book asset values: "According to Hank Paulson, Lehman had liquidity problems and no hard assets against which to lend" (p. 1530). And we know from Valukas' interview of Geithner (p. 1502) that:
"The challenge for the government, and for troubled firms like Lehman, was to reduce risk exposure -- but the act of reducing risk by selling assets could result in "collateral damage" by demonstrating weakness and exposing what is called "air" in the marks."
In plain English, the Fed didn't want Lehman and other SDIs to sell their toxic assets because the low sales prices would reveal that the values Lehman (and all the other SDIs) placed on their toxic assets (i.e. the "marks") were wildly inflated, to the point of being worthless hot air. Lehman claimed its toxic assets were worth "par" (no losses) (p. 1159), but Citicorp called them "bottom of the barrel" and "junk" (p. 1218), while JPMorgan concluded "the emperor had no clothes" (p. 1140).
Unavoidable conclusion from all this: The FRBNY acted criminally in covering up Lehman's artificially inflated asset values and artificially inflated liquidity. It constructed three, progressively weaker, stress tests and Lehman failed even the weakest test! Mercifully, the FRBNY then allowed Lehman to administer its own stress test. Need we tell you the results? (Mercy, or criminal complicity?)
The Valukas report cries out for an immediate Congressional investigation. As we did with AIG, we must demand the release of the e-mails and internal documents from the New York Fed and Lehman executives that pertain to analyses of Lehman's financial soundness. If no crime has been committed, what downside can there possibly be in making these records available for public analysis and scrutiny? (Or is the Obama administration and the U.S. Justice Department criminally complicit as well?)
Three years since the collapse of the secondary market in toxic mortgage product, we have yet to see significant prosecutions of the kind of fraud exposed in the Valukas report. The SDIs, with Bernanke's open support, exhorted (pressured) the Federal Accounting Standards Board (FASB) to change the rules so that banks no longer need to even recognize their losses. This has made the SDIs appear profitable to one and all, and allows them to pay their executives massive, unearned bonuses based on totally fictional profits. (More smoke and mirrors, and more taxpayer billions squandered -- "a captured government acting as a predator on the people."
If we are to prevent another, potentially even more devastating financial crisis, we must understand what happened and who knew what, when. With government help, many SDIs (systemically dangerous institutions) are hiding debt and losses, and presenting deceptive portraits of their soundness. We must stop the "three-card monte" accounting practices that create both the potential and the reality of fundamental misrepresentation.
AIG's CEO, its board of directors, and the trustees that are supposed to represent the interests of the American people have failed to respond to HuffingtonPost's December letter calling on them to release to the public the AIG documents that would be the treasure trove (along with other SDI documents) that would allow our nation to uncover, and end, the "gamesmanship," deception, and fraud that caused this financial crisis and that will surely bring us recurrent crises. We must all call on them now to act.
http://www.huffingtonpost.com/eliot-spitzer/time-for-truth-three-card_b_500867.html
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In his new feel-good book, The Big Short, author Michael Lewis argues that there was no criminal conspiracy, no unprecedented thievery, just mass delusion on Wall Street . . . plus a few lucky guys who weren't deluded, and who had the nerve to bet against the system, and won big. Really big.
On January 31, 2007, a broad range of CDO (collateralized debt obligation) spreads started to widen, dramatically. The long-feared meltdown was upon us -- not that most of us knew it at the time -- and a very small number of investors was about to get paid out on the trade of their lifetimes. This is the story of what used to be called the "subprime crisis," before it metastasized into something much larger and more dangerous than that. It's the story of how a few contrarians made phenomenally large profits -- by wagering hundreds of millions of dollars on the proposition that Americans across the country would end up being thrown out of their homes after they found themselves unable to make their mortgage payments. http://dailybail.com/home/michel-lewis-on-60-minutes-wall-street-inside-the-collapse-v.html
However, what these men did was not "socially useless," to quote the chairman of the UK's Financial Services Authority, Lord Turner. In fact it was much worse than that: it was actively harmful, since what they did provide was the fuel that kept the subprime mortgage furnace burning even when the country was running out of new junk mortgages to write. In most financial markets, bearish bets act as a dampener -- but in this one, they were a necessary part of the subprime-mortgage machine, and so it was that a Deutsche Bank mortgage trader named Greg Lippmann ended up making billions of dollars for his employer -- not to mention a $50 million bonus for himself -- by aggressively going out and finding fund managers to put on the short bets needed to keep the market ticking.
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