In the most incisive reporting yet by a
major news outlet concerning the NY Fed's stealthy enabling of Lehman Brothers and other Wall Street firms to cook their books prior to the September '08 economic crash, this morning's New York Times, in two articles, linked
HERE and
HERE, adds much more depth to the allegations spelled out for us in the past day's news cycle concerning the publication of a 2200-page bankruptcy court examiner's report by former federal prosecutor and top Chicago, white-collar criminal defense counsel Anton Valukas. (I posted a diary on this, yesterday, entitled: "
NY Fed Under Geithner Implicated In Lehman Acc't'g Fraud...")
In "
Findings on Lehman Take Even Experts by Surprise," by NYT reporter Michael J. de la Merced, and
"
Fed Helped Bank Raise Cash Quickly," by Eric Dash, we learn that the New York Federal Reserve Branch, then run by current Treasury Secretary Tim Geithner, on the heels of the Bear Stearns collapse in March 2008, enabled a longstanding Fed program, known as the "Repo" (desk) at the Fed's ("Overnight") "Discount Window," in Wall Street slang, to enable up-until-then-ineligible firms (the program was established specifically for banks,
not investment firms) such as Lehman Brothers to pass off "junk" (that's the term used by Citigroup in one of the articles, which also indicates that there really wasn't much of a market for a significant portion of this paper, at least when it came to lending anywhere near 100-cents-on-the-dollar for it) as credible collateral for which these firms then received billions of dollars to fund daily cashflow.
Essentially, as we learn from Valukas' report, Lehman posted these short-term loans as "sales," as opposed to liabilities, while placing (hiding) them off their balance sheets, as well. At the height of the matter, in August 2008, just before Lehman's collapse, these off-balance sheet "sales" reached totals of 50 billion dollars.
Greatly exacerbating the situation in Lehman's case--and quite at the heart of the matter, as both the bank examiner's report and the NY Times articles explain it--the reporting here tells us that "Lehman Brothers' accounting gimmicks are eerily reminiscent of those used by Enron," and that the bank examiner noted that their accounting firm, Ernst & Young, acted with such complicity in the fraud that the Times quotes a former chief accountant of the Securities and Exchange Commission, Lynn E. Turner, as suggesting that the Department of Justice and the SEC should be called in to follow-up on the matter.
Findings on Lehman Take Even Experts by Surprise
By MICHAEL J. de la MERCED
New York Times
March 13, 2010
...Lehman also had the backing of Ernst & Young, which certified the bank's financial statements despite receiving warnings from a whistle-blower who said there were accounting improprieties. An Ernst & Young spokesman said on Thursday that the firm stood by its work for 2007, the last year it conducted an audit of Lehman's financial results.
But Lynn E. Turner, a former chief accountant for the S.E.C., accused Ernst & Young of abdicating its responsibility to the audit committee of Lehman's board by not presenting the concerns.
"This is pretty aggressive and pretty abusive. I don't know how under GAAP this follows the rules whatsoever," he said, referring to Generally Accepted Accounting Principles.
"That reeks of an auditor who, rather than being really truly independent, is beholden to management," he said, adding that the S.E.C. and the Justice Department should follow up on Mr. Valukas's findings.
Eric Dash's article focuses much more intently on the New York Fed's role in all of this.
Fed Helped Bank Raise Cash Quickly
By Eric Dash
New York Times
March 13, 2010
...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.
The newly released report on the collapse of Lehman Brothers -- which lays out what it characterizes as "materially misleading" accounting at the bank -- also sheds surprising new light on Lehman's dealings with the New York Fed...
--SNIP--
...the report by Mr. Valukas nonetheless raises fresh questions about the role of the New York Fed in supporting Lehman during the frantic months leading up to its collapse. It suggests that Lehman executives believed the Fed would be able to help the bank avert disaster and provide it with a business opportunity.
"Bernanke and Co. may have `saved the day' " a Lehman executive, Geoffrey Feldkamp, wrote in an e-mail message to a colleague in March 2008, according to the report. Neither Ben S. Bernanke, the chairman of the Federal Reserve, nor Treasury officials saved Lehman, of course. But it was that month that the Fed started a special lending program open to Wall Street banks like Lehman that could not borrow directly from it. The Fed also lowered its standards for the kinds of collateral that it would accept against such short-term loans.
As Dash reports it, Lehman used "illiquid investments that were worrying its investors" as collateral for cash. We're also informed that "...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."
After Lehman (and AIG, Citi, Fannie Mae, Freddie Mac, Wachovia, Indy Mac, Merrill Lynch and others) crashed and burned in September, by the end of that year, the government had established more than 20 formal Wall Street bailout programs (the most well-known being the TARP), which have already commited more than $3 trillion in taxpayer funds and backstops/guarantees to support our country's financial services industry. Meanwhile, using little more than accounting "magic," including nothing short of modifying the very basic concept of a corporate balance sheet, itself, the industry has recorded near-record and record-breaking (supposed) profitibility in 2009.
But, it's important to keep the chronological order of events in perspective here, since the Lehman story--and perhaps others yet unknown but much like it--occurred behind closed doors under the stealthy oversight of a Republican administration that allowed markets to continue to trade in the securities of these firms while their very existence was dependent upon, and propped-up by, little more than blue smoke and mirrors.
Unfortunately, in one of the better pieces on all of this, Bloomberg's David Reilly reminds us, almost a year ago to the day, that our government continues to enable Wall Street in its efforts to socialize losses as it still privatizes imaginary profits, thus "extending and pretending" the pain for us all, roughly two years after the NY Federal Reserve and Ernst & Young did just the same for Lehman Brothers, behind closed doors, six months before they crashed and burned in September 2008. Reilly noted that this now-institutionalized effort extends to the very core of accounting industry standards, themselves, in: "Accounting Brothel Opens Doors for Banker Fiesta."
Paraphrasing a Harry S. Truman quote I use frequently, "The only thing we have to fear is the history we don't know."
Slowly, as is self-evident from today's NY Times articles, the historical details--and the subsequent coverup--surrounding the greatest economic crash this country's witnessed since the Great Depression are coming to the fore. To be continued...