SEC and NY Fed just can’t catch a break lately. Former Merrill Lynch officials reportedly warned both agencies that Lehman was engaging in some saucy balance sheet manipulation as far back as March 2008, months before Lehman’s collapse. From the FT:
Former Merrill Lynch officials said they contacted regulators about the way Lehman measured its liquidity position for competitive reasons. The Merrill officials said they were coming under pressure from their trading partners and investors, who feared that Merrill was less liquid than Lehman.
The warnings take on a special significance after last week’s report by Anton Valukas, the Lehman bankruptcy court examiner, who found that Lehman had used questionable financing tools to flatter its balance sheet before its September 2008 collapse.
The findings raise questions over what federal regulators knew about Lehman’s accounting and when they knew it. In the account given by the Merrill officials, the SEC, the lead regulator, and the New York Federal Reserve were given warnings about Lehman’s balance sheet calculations as far back as March 2008.
The latest revelation shouldn’t come as a shock to anyone. But it also further compromises both agencies, because previously they could have argued they didn’t know how bad Lehman’s problems really were until it was too late. But now, knowing that rival firms were warning them months before the collapse, they’ll have a hard time making that one stick.
“So which theory is it: stunning bureaucratic incompetence, wishful thinking and denial or a cover up? Or a combination of the above?” Yves Smith ponders at naked capitalism. “No matter which theory or theories you subscribe to, the continuing revelations of how the SEC and perhaps more important, the New York Fed conducted themselves in the months before Lehman’s collapse paint an increasingly damning picture.”
Smith, who has been very critical of Geithner in the past, says this is further evidence that he shouldn’t remain Treasury secretary for much longer.
“This Financial Times story provides yet more confirmation that Geithner is not fit to serve as a regulator and should resign as Treasury Secretary,” Smith says. “But it may take Congress forcing a release of the Lehman-related e-mails and other correspondence by the New York Fed to bring about that outcome.”
