Market Talk

Repo 105? Yeah, let's do 105. And 106, and 107, and 108, and 109...

So I had some things I wanted to write about, Jon Kyl’s pathetic bashing of the unemployed, the parallels between Greece and the states of the United States, the continued foot-dragging on financial reform, but this Lehman report thing, well it’s jumped to the top of the charts — with a bullet. There are so many things to talk about with this report it’s hard to know where to start.

Let’s start with the five W’s:

A scathing report by a U.S. bankruptcy-court examiner investigating the collapse of Lehman Brothers Holdings Inc. blames senior executives and auditor Ernst & Young for serious lapses that led to the largest bankruptcy in U.S. history and the worst financial crisis since the Great Depression.

Accounting fraud? Off-balance-sheet debt? Lies? Deceict? Auditor negligence? What are we talking about here, Lehman Brothers or Enron? Congress should repeal Sarbanes-Oxley and start over, because this report makes it fully, painfully obvious that we learned absolutely nothing from Enron’s collapse (we did get a hit Broadway show out of it, though, so it’s not a total loss.) We allowed the same exact kinds of fraud that eventually sank Enron to remain on the scene, and get picked up by other players eager for a quick buck, despite the much despised Sarbox rules.

Al Capone kept cleaner books than these guys. And ask yourself this: do you really think Lehman Brothers and Enron were the only two companies that did this stuff? Who’s being naive now, Kay? The report also makes clear, because clearly it wasn’t clear to some interested parties, that the accounting rules need to be part and parcel, and a big part and parcel, of any and all financial reform.

This report is a daisy cutter through all the self-serving defenses for saving the banks, and more than one reputation is likely to be ruined by it. The financial meltdown wasn’t some hundred-year storm, and it wasn’t a crisis of confidence, and it wasn’t an attack of short sellers. It was a willful, conscious, mad dash for money, come hell or high water. Both eventually showed up.

Oh, and while the the ink isn’t even dry on that New Yorker hagiography, the Lehman report is bringing to the surface fresh allegations that Tim Geithner, who ran the New York Fed at the time of Lehman’s collapse, was at “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,” Yves Smith writes at naked capitalism.

Remind me again, New Yorker, what exactly did Geithner do that was so great?

From Smith:

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. If so, he is not fit to be Treasury secretary or hold any office related to financial supervision and should resign immediately.

Lehman engaged in massive accounting shenanigans, we’ll wait until the indictments are handed down to start calling them “alleged fraud,” to hide its true financial state, and while the details and specific instruments used may have differed, that’s essentially the same thing that Greece had been doing to mask its true financial state.

Maybe Paul Volcker was right, again. Maybe the only good financial innovation in the past 20 years was the ATM.

And this report should be good for at least one celebratory round of drinks for the short sellers, who were in some quarters (some quarters in the neighborhood of Wall Street) wrongly blamed for Lehman’s collapse. I’ve said this several times, but it’s worth repeating: short sellers don’t destroy healthy companies.

At the best, the shorts expose weak companies that should be culled from the herd. At the worst, the shorts just pile on to a dying corpse. In that sense, they weren’t very different from other banks, like Citi and JPMorgan, which were calling for more collateral as Lehman was drowning. “What actually kills the patient,” Barry Ritholtz asks at The Big Picture, “the disease that ravages the body, destroys its naturally ability to fight off invaders, and leaves it totally vulnerable? Or whichever random infection finally does them in?”

Lehman Brothers got what was coming to it. The only lingering question is, why didn’t anybody else?