A month ago, I called for the indictment of Lehman Brothers executives – as well as an investigation of the role played by then‑N.Y. Federal Reserve head Tim Geithner – for the “materially misleading” actions (that is accounting-speak for scams) that those execs undertook to cover up their financial misdeeds that sent Lehman over the edge – and helped drag the rest of the economy with it.
Today, there is more reason to look at the illegality undertaken on Wall Street – and a greater urgency for the creation of a strong, independent Consumer Financial Protection Agency.
The new information from the New York Times:
It was like a hidden passage on Wall Street, a secret channel that enabled billions of dollars to flow through Lehman Brothers.
In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books.
The story continued:
The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.
While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.
None of this was disclosed by Lehman, however.
Entities like Hudson Castle are part of a vast financial system that operates in the shadows of Wall Street, largely beyond the reach of banking regulators. These entities enable banks to exchange investments for cash to finance their operations and, at times, make their finances look stronger than they are.
To sum up: Lehman executives deliberately hid investments. There is no other way to explain these actions other than a plan to deceive regulators and the public.
Which brings us to the next important point: what did Tim Geithner know about these kinds of transactions? If he simply takes the Robert Rubin Defense of a sudden ignorance and a claim of a lack of power to do anything about the very issues in his portfolio of responsibility, then, the public can, and should, have a right to lose confidence in his ability to competently serve in government.
It is worth renewing the demand made a month ago by Naked Capitalism:
We need to demand an immediate release of the e‑mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed’s review of Lehman’s solvency. If, as things appear now, Lehman was allowed by the Fed’s inaction to remain in business, when the Fed should have insisted on a wind-down (and the failed Barclay’s said this was not infeasible: even an orderly bankruptcy would have been preferrable, as Harvey Miller, who handled the Lehman BK filing has made clear; a good bank/bad bank structure, with a Fed backstop of the bad bank, would have been an option if the Fed’s justification for inaction was systemic risk), the NY Fed at a minimum helped perpetuate a fraud on investors and counterparties.
The final larger policy point comes directly from this observation:
“How can anyone — regulators, investors or anyone — understand what’s in these financial statements if they have to dig 15 layers deep to find these kinds of interlocking relationships and these kinds of transactions?” said Francine McKenna, an accounting consultant who has examined the financial crisis on her blog, re: The Auditors. “Everybody’s talking about preventing the next crisis, but they can’t prevent the next crisis if they don’t understand all these incestuous relationships.”
The answer is: the current regulators – whether at the Federal Reserve Board or SEC – are not capable of providing serious oversight. It is, as i have argued for some months, inconceivable that we hand additional power to prevent future collapses to the Federal Reserve Board – which has proven entirely incapable of protecting consumers from the Lehman et al type of scams. The mentality and culture of the Fed is to close to the very outlook espoused by Wall Street and financial services industry leaders: we know best and let the market decide.
It is precisely that kind of mentality that caused millions of people to lose their life savings and millions of people to lose their jobs.
We must have a powerful, independent Consumer Financial Protection Agency to do the job that the Wall Street CEOs and the Fed have utterly failed to do: look out for the people.
This post originally appeared at Working Life.
Reader donations, many as small as just $5, are what fund the work of writers like this—and keep our content free and accessible to everyone. But when donations slow down, it puts our future reporting at risk. To get back on track, we're aiming to add 400 contributions from readers by midnight on Thursday.
It only takes a minute to donate. Will you chip in before the deadline?