Fuld has already stated in written testimony that he was unaware of the questionable accounting practices that enabled Lehman Brothers to hide their level of indebtedness from the public.

You bet. And while we’re on the subject, I’ve got this bridge I wanna sell you…

A good place for background is the prepared testimony of Anton R. Valukas, the expert appointed by the bankruptcy court to be the “examiner” to look at Lehman’s books, it’s e-mails and the interactions between Lehman and the SEC and the NY Fed. He lays out what Lehman was doing to deceive everyone, what the regulators knew by mid 2007, and the fact they did essentially nothing to change or regulate Lehman’s questionable actions.

So the drama today will be how Geithner, who was the head of the NY Fed at the time, and the SEC, then led by Bush appointee Cox, handled the criticisms Valukas makes of the regulators. Cox is not there; instead its the current SEC chair, Mary Shapiro, who just led the SEC in filing the complaint against Goldman Sachs.

Bottom line: regulatory authority was unclear, but under an international treaty, SEC was the de facto principal regulator, with NY Fed with some oversight. The SEC monitored Lehman’s status, but did nothing to force Lehman to fix any of its practices, its lack of liquidity (and hiding it) or its shady manipulation of its books to make it seem they had more capital then they really had (the “repo 105″ dealings reported by the media. Meanwhile, the NY Fed was supposed to be helping SEC monitor Leyman’s position, but it failed to pass on critical information to the SEC that the NY Fed knew, because both SEC and NY Fed had people inside Lehman’s HQ watching.

So Lehman violated its own risk management policies and the SEC knew this and did nothing. It manipulated its amount of available capital, and SEC knew that, or NY Fed knew that, and neither did anything to force Lehman to fix that; and they didn’t talk to each other enough.

Lehman engaged in off-books shady practices, hiding its risk, and NY Fed and SCE SHOULD have know this, but did nothing.

Fuld has already stated in written testimony that he was unaware of the questionable accounting practices that enabled Lehman Brothers to hide their level of indebtedness from the public.

The transactions were known as “Repo 105″ and allowed Lehman to move $50 billion off the balance sheet that it released to the public.

http://www.washingtonpost.com/wp-dyn/content/article/2010/04/19/AR2010041904938.html

What is this the Jon McCain defense the I don’t know how many houses I own? Nobody forgets or loses $50 billion.

Enron’s Ken Lay pled ignorance as well, and we all know how that turned out.

Ask the stock rating agencies what they would have rated Lehman at if they had known Lehman was $50 billion in the hole.
Lehman committed fraud on its investors who trusted their books. A poor guy can go to jail for check forging $1,000 why should Fuld be any different?

Yes he was forced to fake his own death.

So what are the chances that anyone on the committee will muster the requisite juice to pose some pointed questions? Sorta like shooting fish in a barrel, one would think.

Is there anybody with a Spine in the House who will say Fuld nobody forgets $50 billion dollars you are in contempt of Congress go to jail until you can remember all the details on how you hid $50 billion.
The idea that a CEO would forget $50 billion is beyond silly.

Rep. Ed Royce (R. Cal) making the Luntz/McConnell pitch that the Dodd bill extends bailouts — and completely misinterprets what the Lehman examiner Valukas found — he neglects to mention that the primary regulatory failure that Valukas found was by the SEC under Bush appointee Cox, who was in direct contact with Lehman’s CEO during the period when regulation might have made for a “soft landing.”

The Reps on the Committee are already posturing for the broader debate on financial reform. No surprises yet.

Lehman engaged in off-books shady practices, hiding its risk, and NY Fed and SCE SHOULD have know this, but did nothing.

Can people sue government officials for not doing their job? Government officials are immune from lawsuits for doing their job.
And yes I understand the choice of whether to act or not act is in their discretion however looking the other way at $50 billion in losses there is no way to justify not acting.

Scott Garrett, R. NJ, repeats the theme that we can’t trust regulators — while failing to mention that the regulators who failed with Lehman were Bush appointees. Conclusion: we can’t fix Wall Street with more regulation, therefore the reform bill with more/clearer regulation shouldn’t be passed.

We’re not likely to get a decent discussion of what a good regulator should do, and how do we get good regulators. Valukas talks about this problem:

“Someone must be in charge,” he writes, and “the agency in charge must have the will to act.”

They have to prove that they have the Bankers backs if they expect that campaign cash to flow per agreement.

Or maybe they’re really just a bunch of determined patriots trying to stop our country’s sad slide into socialism?

Rep. Ed Royce (R. Cal) making the Luntz/McConnell pitch that the Dodd bill extends bailouts — and completely misinterprets what the Lehman examiner Valukas found — he neglects to mention that the primary regulatory failure that Valukas found was by the SEC under Bush appointee Cox, who was in direct contact with Lehman’s CEO during the period when regulation might have made for a “soft landing.”

Some Dem should bring up those points during questioning and call Royce a liar! We need Dems with Spines Damm it!

Scott Garrett, R. NJ, repeats the theme that we can’t trust regulators — while failing to mention that the regulators who failed with Lehman were Bush appointees.

We need regulators willing to do their jobs. We should ask Scott if regulators can’t do the job should we just outlaw banks?

Geithner up: his prepared testimony has some useful discussions of the structure of the industry at the time, especially the link between money market funds (who provided overnight loans to investment banks) and investment banks and clearing banks, and why the Fed had to step in to guarantee their funds ($3 TRILLION!!!) to keep the whole system from collapsing. Recall “break the buck” problem when one MM fund’s capital fell below the minimum $1 per value.

Some Dem should bring up those points during questioning and call Royce a liar!

But that would be a shameful display of lack of comedy comity.

The GOP wants to hook us with the Banks issue fine lets ask them what they would do to fix the problem? Get all the Tax Payers money back with current market interest rates? And why they did not do anything when Bush was in charge!

Geithner: can’t leave this to the market discipline; must have clear regulator limits.

Free Markets can regulate themselves Bwahahaha!

Good one:)

Bernanke up: FED wasn’t Lehman’s regulator. It was SEC. But points out that SEC’s authority was “voluntary” — under an international arrangement, a bank not directly regulated had to agree to be regulated, and SEC was the designee, but without direct statutory authority (Valukas muddies this up in his testimony).

Fed developed “stress tests” for Lehman and others, and Lehman failed. (Valukas then says, “but noone did anything after it failed”)

And why they did not do anything when Bush was in charge!

But they did do something when Bush was in charge, they towed the party line and did what they were told.

It was a lot of hard work, and if things didn’t turn out so good from your perspective, well you should have become a financier.

and why the Fed had to step in to guarantee their funds ($3 TRILLION!!!) to keep the whole system from collapsing.

The banks never had enough cash in reserve to pay and they still don’t the whole system is Imaginary.

Imaginary Economics

A 600 trillion market is a fantasy there is not that much money on the Planet. The reason why Derivatives are exempt from margin requirements is because requiring banks to post even a 5% margin requirement on all their Derivative contracts would mean the banks would have to find 30 trillion dollars.

The entire World’s GDP is only 60 trillion dollars the banks do not have half the worlds GDP in their vaults. Thats why the margin requirement was dropped

http://seminal.firedoglake.com/diary/21899

Ben B: Fed tried to find buyer or someone to recapitalize Lehman in Sept 2008, but no one stepped up. But Fed had no authority to seize them; FDIC had no authority, nor did SEC. Regulatory gap in 2008 for firms like Lehman.

therefore: Need clear reg. authority; new resolution regime, just like FDIC.

You mean Corporate Welfare Queen buying Steaks and Driving a Caddy with their Tax payer funded bonus checks:)

Mary Shapiro, current Chair of SEC:

Deregulation in 1990-2000 left investment banks mostly unregulated.

She agrees with Valukas that SEC did not follow up after SEC/NYFed realized how bad Lehman was in early-mid 2007 — “insufficient”

Shapiro: current reform bills contain the main features we need:

better risk management limits on capital/leverage, clear resolution authority, regulation of derivatives via exchanges/clearing,

No authority implies no responsibility if they fail. After all the banks are not lending money to us like they said they would so just why did we have a bank bailout?
Who cares if creditors go after $600 in Derivatives there is not that much money on the planet.
Home loans who cares you can’t take a person’s home without the title and these morons selling home loan debt never transferred the titles.
Creditors would have to sue the bankers personally and I am fine with that.

Community Banks could have stepped up and did the loans the big banks aside from WallStreet who cares if they go under I and 99.9 % of the people do need million dollar financing.

Kanjorski tries to get the witnesses to say they support the resolution authority mechanism in the House bill.

“You dance very well,” he says to Bernanke, who tries to say he likes the idea and could work within that type of regime, but doesn’t endorse any particular language/bill.

Apparently, the ‘Fuld was punched in the gym’ story wasn’t true. This at least (the punching in the face part) needs fixing today in the hearings. I bet there’d be a stampede if you asked for volunteers [edited by mod].

[modnote: please no violent imagery, thank you.]

Very weak responses from Bernanke. You get the feeling he really just loves big banks.

Spencer Bachus (R. Dixie [Ala]): Repeats the bailout mantra. Then asks why didn’t the regulators require Lehman to correct its misstatements regarding its capital/risk problems?

Geithner: Corrects Bachus, who said the bill allows the US to bailout a failing firm; instead it allows the US to put the firm in receivorship.

Bernanke confirms they didn’t have the ability to inject capital, but then says he’s not asking for that; he wants US to have the resolution ability, same as Geithner.

Apparently, the ‘Fuld was punched in the gym’ story wasn’t true.

Snark or are the Bankers trying to drum up some fake sympathy?

Geithner does not confirm the Valukas finding that the NY Fed was aware that Lehman was overstating its capital position.

Bacus is trying to get Geithner to admit to Valukas’ charge, but Geithner ducks.

So far, every Republican member has used his/her time to repeat the mantra that the Dem’s reform bill allows the US to bailout firms by injecting capital into a failing firm to save it.

Every Dem has had to rebut that, and Barney Frank stops the questioning to call out the Republicans and explain the resolution authority is to take down a firm, not save it; to put it into receivorship, unwind it and sell off its pieces. So the hearing is turning into a debate over the Luntz talking point.

Luntz must be so proud.

And immediately after Barney’s lecture, the next member (Royce) on the Republican side simply repeats the same talking point — a permanent bailout authority.

Watching this performance, I can’t see why any Democrat would ever cooperate with any Republican on this issue.

Geithner says you can’t create a regulatory regime with perfect foresight — s you have to expect there will be failures, and you have to have credible system to manage the failures.

So far, every Republican member has used his/her time to repeat the mantra that the Dem’s reform bill allows the US to bailout firms by injecting capital into a failing firm to save it.

Message discipline the GOP can’t claim they are not all taking orders from the big giant head. GOP plan number 1 if you repeat a lie often enough you can get it repeated on tv.

Every Dem should say if not for Unregulated Free Markets we would not need to bailout these banks in the first place.

The Dems should say fine lets have a vote we can take back all the bailout money with interest and return it to the government. CALL THEIR BLUFF DEMS GET A PAIR!

Brad Sherman (D. Cal) – says the Senate bill is closer to the Republican characterization (because it takes care of some counterparties when firm is seized).

This is a mischaracterization, in my view. The govt would still need to step in with $$ if necessary to prevent a run on the system that takes it all down. The two bills just try to control that process that better.

The ‘Good Cop, Bad Cop’ game can’t work if one of the actors forgets which part they’re playing.

The single biggest thing that the party in power requires in order to continue to hood-wink it’s base is an opposition party that can stay on message.

If after decades of the GOP being the Pro Business Party even Luntz can’t rebrand the GOP as the anti Banker party this is only an insider baseball play.
The Village and Media should eat it up. But it won’t move the GOP higher than the Dems in the polls.
The Tea Baggers next move claim they are undecided voters and that they represent all the undecided voters of course the media will swallow their flawed reasoning.

Geithner: idea of the bills is to use the resolution authority for small banks and use the same idea for larger institutions. e.g., put it into receivorship, break it up, sell it off, miminize loss to system.

We don’t know how much money we would need to do that, so the debate between whether the ex ante fund (taxes on banks) should be $50 or $150 billion can’t be resolved.

He doesn’t explain, and isn’t asked, why the Administration said it didn’t need or want the fund or the tax, even though they have asked for a post hoc tax to pay for TARP.

Plan is just another post hoc tax next time?

Judy Biggert, (R. Ill) – worried about govt getting too involved in private companies. If we do banks now, will be do the same for smaller companies later?

First Republican not to read Luntz talking points.

Geithner says you can’t create a regulatory regime with perfect foresight — s you have to expect there will be failures, and you have to have credible system to manage the failures.

Yes, but you can build a regulatory structure with perfect hindsight, that is, outlaw every behaviour understood to have been a cause for our current mess, or simply reinstate regulation that had worked so well up until de-regulation.

It’s not lack of foresight that is our problem, it’s a refusal to examine in hindsight, what is, or should be fresh in all our memories.

I think the plan is not to have this target out there for Repubs to shoot out for now, hope to avoid any failures during their watch so the issue doesn’t come up, but if one occurs, don’t have implicit limits on how much they can dip into treasury. Just a guess.

Well, we need to be looking forward, don’tcha know?

End result the banks are still gambling with imaginary money so sooner or later the gambler’s luck will run out again half measures won’t prevent another banking crisis maybe even before the next election. Certainly airline stocks could dive with the volcano closing all flights to Europe. Dubai, Greece could default on their debt at any time and there is noway Iceland will be paying anything with a volcano going off that alone could drop how many English banks?
And no GOPers the voters have no doubt if we were to poll them that if their was another banking crisis that you all would vote to save the banks again.
Repeating the brainwashing nonstop is not that effective.:)

Scott Garrett (R. NJ) tried to get Bernanke to concede it had primary reg authority “during this period.” [I can't believe how sleazy these questions are],

. . . but Bernanke explains that the Fed authority arose only AFTER Lehman became a bank holding company (which Fed does regulate) in late 2008 (per Paulson’s and Fed’s recommendation), and even then, the doc Garrett refers to says SEC remained the primary authority for the matters at issue.

Biggert is an idiot. A freaking moron. She didn’t ask any questions because this shit is way, WAY over her head.

We have bankruptcy laws which work just fine on businesses — with the exception of the bloody investment firms in holding company structures permitted under Graham-Leach-Bliley.

Jeb Hensarling (R. Dinosaurland/Tx) — says he’s grateful the hearing is now less partisan, and then repeats the Republican talking point about the “bailout fund” in the bills. What a cynical slimeball.

Shorter Geithner;

“It’s impossible hard to build a functional regulatory framework because you never know what these crooked bastards are going to do next.”

Ok Tim, but we’ll settle for outlawing their prior behaviour as a good place to start.

Hensarling: under the voluntary program, did the SEC have the authority during this period to require Lehman to get more capital to reduce its risk?

Mary Shapiro — for the broker deal part of Lehman, probably; for the holding company (which Lehman became later) probably not (for SEC).

So the matter is unclear [and there wasn't a clear statutory basis for this "voluntary" program]

Q. Did SEC has a duty to tell the public what it knew about the misstatements by Lehman?

A. SEC didn’t tell Lehman to disclose correct info.

Stephen Lynch, (D. MA): wrt to the exploding derivatives market, which went from $2 trillion to $60 trillion in mid 2000s, is reporting of these derivatives enough? Clearing house?

Geithner: not just central clearing, trading on exchanges, and the parties should be subject to oversight.

The clearing house(s) (could be many) have to oversee the parties [I think he doesn’t realize that this ultimately requires a single, quasi-govt clearing house that is a credible counterparty for all trades, and this implies the abilty to impose insurance tax on all parties using the exchange/clearing house to keep from putting tax payers on the hook for defaults. We already figured this out in electricity markets, which have huge regional clearing, backed by insurance imposed on all parties.

Al Green (D. Saner part ofTex): says the issue is now whether to allow failure but how to allow failure without systemic side effects.

Geithner agrees. Draw a circle around the firm to make sure the fire doesn’t spread.

Bernanke agrees. Isolate the failure as much as you can and wind it down. Back then, we’d didn’t have this tool; we could only allow it to fail.

Shapiro: our role difference — we try to create transparency via honest disclosure, also rules for trading/investing, plus enforcement when the rules are violated.

$60 trillion in mid 2000s, is reporting of these derivatives enough? Clearing house?

Typo? my source for my diary on the subject said $600 trillion and its the WallStreet Journal

http://online.wsj.com/article/SB10001424052748704718204574616470817688220.html

Ed Perlmutter (D. Colo): cites Bernanke interview with Valukas. Ben told Valukas SEC under Cox was understaffed and didn’t have the right skills — “in over its head.”

SEC was “observer, not a regulator” (that’s what examiner Valukas said).

What was happening between SEC and Fed during that period?

Ben: SEC had enforcement culture, not regulator culture. We worked together to set of stress tests.

Q. But you didn’t share info?
A. We signed agreement to share in July 2008, and it was fine. (so he ducks the question).

Both right. The numbers he was citing were in Valukas’ testimony, IIRC for specific years and firms. Bigger number likely also correct for different time and set.

My bad he was probably referring to the American Market only I now realize.

Joe Donnelly (D. Ind) asks about the value/purpose of synthetic CDOs — they don’t seem to provide value, but do create/spread risks, and perverse incentives, as per Goldman Abacus.

Geithner: best way to protect system is make them transparency, force people to hold higher margins — shock absorbers.

Joe: these were “fake instruments,” selectively picked. It’s not laying off risks; it’s creating them just to have betting instruments.

Geithner: true, they were bets on the housing markets — ducks the question Joe is asking, which is, WHY DO WE EVEN ALLOW THEM?

I’ll go with ’cause they are on the same team in reality’ for 200 Alex…

Joe seems to have a brain and a Spine ok I want a front pager to cover this Geithner Ducks Question on why we even have CDOs!

Mary Shapiro, when asked whether SEC failed to do its job (albeit under Cox)

The SEC did not have the staff, the authority or the proper regulatory mindset to oversee the largest financial firms.

She’s asked whether we should just ban “repo 105″ transactions? she ducks.

Missing the point. Bernanke clarifies: if it’s not a true sale, it shouldn’t be treated as a sale (because it’s a loan and thus should be carried on the books). Lehman had to use London rules, not US, to claim it was a sale, but it was really a loan, so it should have been listed on Lehman’s books. Lehman wanted to call it a sale to make it look like it’s capital was greater than it was — that was the deception.

If Obama’s Treasury Secretary can’t answer that question then who can?

Mary Shapiro addressing Q about how Lehman set up it’s risk management function. The examiner/Valukas noted that Lehman had a good risk management scheme, but the risk managers reported to a separate unit within Lehman, and not necessarily to the senior execs or the Board. Shapiro says this system should report to the Board, which should always check the risk rules against the actual portfolio.

In other words, the Lehman Board failed to do its oversight job within Lehman, and the senior exec failed to set up a system that would allow/require this. This set up questions for the last panel, when the former Chairman and CEO of Lehman, Dick Fuld, is on the panel.

Breaking 10 minutes to get ready for next panel

I know the game is crooked, but it’s the only game in town.

We should probably settle for a promise that the next time one of the players runs out of money he must leave the game.

I admit it’s sort of old school, but the new rules don’t seem to be doing the job.

OT sort of;

I used to play poker every week with the same bunch of guys.

I lost all my money one night, borrowed $20 from another player and ended up breaking everyone else at the table. When I left the game, they continued playing with IOUs.

The next week, the other players agreed to a new rule, when you’re broke you’re out, no loans, no exceptions.

Maybe that wasn’t so OT?

Resuming at 2:00 p.m. Eastern, with Anton Valukas, the examiner appointed by the bankruptcy court for Lehman. Worth reading his testimony. Very clear and readable. Summary at comment #2

http://www.house.gov/apps/list/hearing/financialsvcs_dem/hrfc_04202010.shtml

Many thanks for the liveblogging and commentary, Scarecrow.

Here! Here!

Kanjorski: Who was to blame for Lehman failure? Regulators or Lehman?

V: Lehman had appropriate risk limits in principle, but repeatedly didn’t follow them. Those were Lehman’s decisions. The regulators knew this, but they didn’t require Lehman to change.

Kanj: what about setting regulatory risk limits in statute [as Volker prefers], versus leaving this to be set by regulator discretion [as the Administration would prefer]? Which is the best way?

e.g., if a systemic risk council has to decide when/whether to intervene, should the criteria be set by the council, or set by statute?

V: says he’s not qualified to answer that.

Bachus: wrt to fact public didn’t fully know about Lehman’s troubles.

V. Points to fact regulators didn’t reveal everything. More important, we need regulators capable of understanding the scope of the problem. Neither the SEC or Fed had sufficient understanding of everything happening. If they shared, it would have helped, but not enough.

B: When Lehman failed the stress test in 2008, did Lehman correct?

V. No one required them to address it [though Ben B said Lehman did try to improve it's capital]

B: wrt to misreporting of Lehman’s capital pool . . .
V. Lehman was concealing that some of the capital is was claiming was committed to the clearing banks and should not have been counted. Public did not know this. Regulators knew but didn’t do anything.

Lynch: wrt to the auditors/accountants — Ernst and Young.

V: E&Y had found the problems with the rep 105, but when E&Y briefed the board, it didn’t tell the Board that there was $50 billion in misstatements about whether these repo 105 were sales vs loans. E&Y should be sued for that failure to disclose what it found.

L: wrt to the risks of Lehman’s many CDOs, there were limits on paper to how much, but in practice, Lehman didn’t follow them.

V: Lehman had a robust risk analysis, but didn’t follow it; it’s just ignored and exceed the risk limits, or raised the limits to keep them from binding.

Lynch — purpose of repo-105 was to “doctor up” their capital statements?

V. The documents admit that

Ed Royce, returns to the bailout fund, noting Steny Hoyer says the fund is “not central” to reform (moron).

Claims that the existence of the fund increases risk of bailout if investors know it’s there to bail them out [this is outside V. testimony].

Making up side down argument, because Lehman did not have insured depositors. He says FDIC model works for small banks, but if applied to large banks, it creates moral hazard.

[No, it's the systemic risk -- which requires govt intervention whether you have a bankruptcy model or a resolution model that does that]

V. wrt to who was primary regulator for Lehman at the time, the agencies agreed that SEC was.

Royce wants to blame the Fed, not SEC [bcause NY Fed = Geithner=>Obama, but SEC = Bush/Cox]. Asks Q about market risk perceived by public.

V. I”m not qualified to answer that question.

Scott Garrett (R. NJ) — from examiner report, NY Fed counsel Baxter became aware of Lehman problems in misreporting its capital/liquidity — so Lehman was telling Fed everything, when the Fed asked, so the Fed knew, right?

V. SEC knew part of the misreporting in 2008, but not disclosed to Fed; later, the Fed found out another part of the misreporting, but didn’t tell SEC. They didn’t share with each other until later. So SEC didn’t know the full scope of misreporting and neither did NY Fed — and the public didn’t know any of this.

Why wasn’t the information shared?

V. At agency staff levels, the attitude was, “if you ask, I will tell you, but I won’t volunteer to share what I know if you don’t ask for it.”

Al Green: wrt to the $50 billion being shuffled on/off balance sheets via the repo-105 transactions with several counterparties. [missed the Q]

AG: why hasn’t anyone been arrested/indicted? Why don’t we have criminal investigations? [welcome to the pitchfork crowd, Al] “If this isn’t fraud, it will do . . .”

Brad Sherman: As the examiner, you work for the creditors?

V. No, my role is to answer questions put to me by the court, to determine the facts, and to determine whether there is “a colorable claim” for potential causes of actions. Don’t work for the creditors.

BS: wrt to Lehman letters and e-mails from Matt Lee, Senior VP Lehman, addressing repo 105 transactions . . . trying to track who wrote/sent/got them, to set up later questions.

We’re getting mostly Dems now, which means the Republicans have left. Apparently they only wanted to see if they could use or snare Geithner on the bailout fund talking points, and once that panel ended, it’s T-time. They don’t seem to care about the guy who knows more than all of them what actually happened.

time to sit back and just watch/listen for a while.

Thanks, Scarecrow, really appreciate the live blogging.

Hensarling: wrt to the repo 105 transactions (which misled on capital/leverage), did SEC had the authority to make the do this right?

V. Yes, SEC could have required them to disclose [more accurately] what they were doing.

H: did the misreporting allow millions of trades by others to be done without full disclosure?

V. Yes.

Jackie Speier asks a zinger: Lehman’s Chairman/CEO Fuld said he didn’t know about that repo-105 transaction misleading people. Is that credible?

V. The following people did know: and he list everyone down to the janitor. then says, it’s now clear how Fuld could not have known.

“there would be no reason to do that kind of repo transaction if you were going to disclose it”

That’s a set up to ask Fuld in the next panel.

Staff had evidently see the writing on the wall, don’t make waves, don’t take yourself or this agency too seriously or you might end up downsized.

SEC staff jobs were evidently something like no-show mafia jobs, only they were probably required to occupy their cubicles at least some of the time, and respond to unimportant correspondence if they were sure it would not have a negative effect on the folks they were ostensibly responsible for regulating.

And then there’s the responsibility to run interference just in case any civilians like Harry Markopolos show up with information/evidence about crooked ponzi schemers hedge fund managers like Bernie Madoff.

Anyway, we can be forgiven for thinking these people were not doing their jobs, because we misunderstand what the real nature of the job was.

Last panel includes

Dick Fuld, former Chairman and CEO of Lehman
Thomas Cruiksank, former board member
Matthew Lee, former Senior VP

Bill Black: professor, but bank critic, former regulator and experienced in sorting out the S&L crisis.

Their testimonies at the House committee website:

http://www.house.gov/apps/list/hearing/financialsvcs_dem/hrfc_04202010.shtml

CEO Fuld: “I do not recall . . .”

Never heard of the repo 105 mistatements; examiner findings are wrong; Lehman was unfairly criticized. Repo 105 were “sales,” as required by the rules

Unrepentent and blameless.

Interesting that in his prepared Testimony/opening statement, Fuld goes out of his way how much attention he paid to everything that was going on to make sure they were “complete and accurate,” and “I never signed an SEC filing unless it was first approved by the firm’s chief legal officer.”

Great. It’s the Cheney defense. “John Yoo said it was okay to crush children’s testicles, so we did, and nobody every said anything, that I recall, that might have alerted me to the notion it was not okay to crush a child’s testicles.”

Fuld and Cruikshank both selectively rely on the examiners findings that said a, b, and c, were fine, and then ignore the findings that x, y, and z were not.

Here’s a member of the Bd of Directors saying that no one every suggested to the Board that calling a “loan” a “sale” on your quarterly statement would mislead anyone. Astonishing.

There was $50 billion sloshing around in these repo 105 transaction, the Board knew the firm was struggling to survive, and this Board member says he didn’t know anything at all. There should be a cause of action for stupidity, or lying about it, either way.

There’s probably a non-disclosure clause written into Fuld’s golden parachute.

Testimony outside of the prescribed story will have terrible consequences.

I mean it’s obvious; he can’t be worried about prosecution.

Bill Black: “a stern regulators” we need to be blunt.

We stopped a crisis before it happened in 1991, by preemptive litigation and supervision. It was a raging epidemic of accounting fraud. We needed more statutory authority, and we didn’t get it.

Lehman’s story is about fraud, begining in 2001, a leading purveyor of liar’s loans — shown to be fraudulenty in 90%. Lehman sold that saying it wasn’t fraud. That’s how we got here.

Liars’ loans make money by selling bad paper, deceiving others. When people cheat, you can’t do business as usual. Regulator must act differently. The SEC had only 24 people on this, but that was their call to have only 24 people in that unit. It’s criminal negligence.

Geithner and Bernanke sent only a handfull of people to watch, but in the S&L, we sent 50 people to one S&L. The Fed just failed to do its job.

Bill Black: we’ve known since Enron about accounting fraud, just like Lehman’s. There was a proposal to stop it, but the regulators stopped it in Congress. We’ve known for a decade these are frauds and how to stop them. kAll the regulators were complicit.

The Fed NY finds its 3-card Monte, so what did they do? Business as usual was not acceptable. They met a lot. They should have used the nuclear stick. They needed to ax the heads of these institutions.

Say, like the Bank of England, “we’ve lost confidence in the CEO” and that guy is gone. But we didn’t do that, and that exacerbated the loss. Meanwhile, lehman was pumping out $3 billin a month on liars’ loans.
That’s not acceptable to allow that to continue.

Black: The Fed could have stopped this. They didn’t.

He said it loud and clear, with great examples.

Matthew Lee, former senior VP: This is the guy who send warning letters and e-mails to Lehman execs to warn them they were doing bad stuff — directly contradicting Fuld.

Kanjorski to Fuld: You said you did nothing wrong; Lehman’s failure just happened, right?

Fuld: I wish it were that easy.

K: did you have any responsibility for the failure?
Fuld: I take full responsibility for the decisions I made, and I made them on info I thought was accurate.

K: what caused L to fail? What factors?
Fuld: Starts with history of Lehman, how it grew to international firm, 40 countries . . .

K: you got to be too large?
F: no, others were larger.

K: why did L fail.
F: we did stuff, we grew to $4 billion to $28.5 billion equity. Strong risk management . . .

K: why did L fail?
F: stalling

K: not enough staff? exec decisions? Don’t give me an advertisement.
F: I’m just explaining our mentality.

K: What about your cap reserve funds and their adequacy?
F: Not sure what you meant.

K: what about counting the billions committed to clearing banks that you counted as available capital (wrongly)?
F: we had procedures, and no one told me that we were deficient.

K: no one told you you couldn’t cover your obligations?
F: we had access to the Fed windows.

K: so youd were looking for a bailout?
F: we hadn’t used it before the bailout. We all said to each other “we’re fine.”

K: that wasn’t correct, was it?
F: Uh . . .

[What's astonishing about this exchange is that I can't see a single aspect of this guy's demeanor that would convince any rational person to put this jerk in charge of a $28 billion firm, or a lemonade stand. ]

Bill Black has really been on the war path. The real question in reform should maybe how we get better people to become regulators. Maybe a 4X increase in salary, maybe some type of serious bonus (hundreds of thousands) for uncovering large fraud?

Spencer Bachus to Bill Black: convinced by Geithner’s explanations about limits on their leverage to fix this?

Bill Black: NO. Bernanke didn’t use the leverage he had.

SB: okay for regulator to look the other way?
BB: no, we have a duty to make referrals to the enforcers when we find fraud.

BB: we had 50 people at the Federal Home Loan regulator in SF; the equivalent would be to send 300 people from the Federal Reserve in NY. So there’s no excuse . . .

SB: what about Geithner asked about the misrepresentations in accounting?
BB: Geithner didn’t answer the question; the problem was that the firm was insolvent, and no one was owning up to that.

SB to Fuld: anyone tell you that L wasn’t financially sound.

Fuld: Nope, nobody told me nuttin’

SB what were the Fed/SEC teams doing at your bank?

Fuld: they saw everything we were doing.

SB did they ask you to do anything different?

Fuld: I don’t recall . . . but there was some conversation with Geithner [that I'm a little hazy about . . .] and those conversations were “strong and productive.”

Did you tell the regulators that you were on the Board of Dirextors of the NY Fed? [i.e, did you threaten or pull rank?}

Fuld: Don’t remember. I did have conversations with the Fed.

Barney Frank: In 1994, we passed law on credit, which Greenspan then ignored wrt to allowing regulation of subprime mortgages. The authority that Ben B later used later was in that statute, which Greenspan refused to use when it mattered.

That act gave the Fed another tool to use against subprime risks, without tanking the economy, but they didn’t use it.

We tried another bill in 2007 to mandate use of this tool, but it didn’t pass the Senate.

Frank to Lee: what response did you get from Lehman execs and Ernst and Young?

From Lehman, they were annoyed; E&Y said they alreay knew about this stuff (which begs the question why E&Y didn’t cover their obligations by telling the Board?).

Lehman went to counsel in London to find someone to tell them their repo-105 accounting treatment was legal.

Hensarling to Fuld, quoting from examiner who said L did not honor it’s own risk limits.

What did you tell the SEC about that?

Fuld: Given our level of revenues . . . then he diverts to explain something not at issue about how much the firm could lose over the year [but the limits applied to shorter periods].

H: were the limits breached?

Fuld: under this other limit, there would have been a problem, but it gave us a cushion.

H: did you breach the limit?

Fuld: We weren’t supposed to go below it.

H: did you violate market to market rules for commercial assets?
Fuld: we fixed it later.

Hensarling: wrt to Lee e-mails with the warnings and the response that “it is another drug we are on.” Are you familiar with that?

Fuld: I know about that, but don’t know what that meant, and wasn’t aware of the repo 105 it was referring to.

H: asks about another employee who called repo 105 misleading?

Fuld: never heard of the guy.

Sounds like Fuld has been taking tap dancing lessons…

Not very good at it though.

Dennis Moore: wrt to Fuld statement “I have no recollection . . about repo 105, where your employees hiding this from you?

Fuld: No; it wasn’t hiding anything; these were [okay] transactions.

another diversion: any given day, L moved a trillion back and forth, including 50-100 billion per day of govt securities. No reason I would have notices these repo 105 thingies.

I was focused on other stuff [except the stuff that was concealing the fact that L was insolvent and/or seriously misleading regulators and investors about the risks L was taking.]

Moore: wan’t the fact you were covering up your violation of leverage limits?
Shouldn’t a CEO be concerned about $50 billion sloshing around?

Fuld: it’s a lot; but within how large we were, it wasn’t my focus.

M: shouldn’t have been your focus?
Fuld: I wasn’t . . . uh, given what I know now, our process and our counsel signed off on this, and there was nothing wrong with this.

M: Was there anything wrong at L?

Fuld: What we did wrong is we didn’t understand the contagion; we did see the depth and violence of this crisis; earyly on we had too much commercial, but we correct that; we correct other stuff.

M: so “mistakes were made, correct?”

F: judgments were made.

Ed royce: Bernanke was setting fed funds rate . . .[uh, no, it was that other guy back then]; brings up Fannie and Freddie and . . .

To Fuld: given smaller Bear Stearns receive assistance, were you working under the assumption you would be bailed out?

Fuld: No sir.

Ed: So bailouts don’t create a moral hazard? [who disputes this?]

[Incredible: Royce is trying to use Fuld, the least credible figure we've seen this century, as the expert witness that having bailout funds creates moral hazard. What a moron. After Fuld ducks, Ed answers his own question and give us a speech on why the Fed ran negative interest rates for four years in a row, which has nothing to do with this. ]

Miller asks whether L was different from F&F, had no interest in helping low income.

Fuld: everyone understood the Administration had a policy of helping low income [which means what I did was consistent with national policy]

M: weren’t you competitors with F&F?
F: sometimes.

M: so you never expected a bailout, but others have written that you assumed you would be rescued.

Miller [just like Ed royce] asks Fuld how the govt should tell firms they won’t be bailed out?

Fuld: [unresponsive] goes off on another tangent, claiming they weren’t looking for bailout, but would have been nice to have access to the Fed windows to get loans.

Miller asks again: What do we need to do to convince you?
Cruikshank: I wasn’t expecting bailout, but those things they did for Bear Stearns sure would have been nice.

Lance: were there corporate governance failures at L?

Cruikshank: No, they were very good. Our problems were just what I said . . . [goes off on the history of his youth] Real estate was problem [meaning?]

[So the bottom line is that L was a well run, well governed company that just failed for no reason he can figure out.]

Lance to Bill Black: you agree that the Fed and SEC were excused because they weren’t the clear regulators?
Black: NO. They should have been making referrals to the Justice Department, etc, not pretend they have no responsibility to respond to violations of law when they find it.

Al Green asks about the repo 105 deals:

Black: the repo 105 deals where misleading the degree of leverage, which is a material matter, and so the filings were fraudulent, and those were felonies.

Were they commit fraud?

Black: repeatedly.

Did you bring this view to the attention of the SEC?
Black: yes; I wrote all the time to explain the fraud.

Jackie Speier: Why did you sell your home to your wife for $100 [one hundred dollars]?

Fuld: It was to put the house in her name, without regard to Lehman.

JS: but it happened in December, after L faile.

Fuld: I had made the decision long before that.

Final Questions from Mary Jo . . . asks Fuld if he was aware of the arguments/statements being made by those who were shorting Lehman, and the fact they were raising questions about L quarterly reports [where the repo 105 deals were being used to mistate L's leverage performance].

Fuld says he was aware of short sellers and some of their claims but insists he never heard/read anything that linked to repo 105.

End of hearing.

WOW! Could not watch for more than a half hour but you make me feel like I was there.

Many Thanks, SC

Watched the entire hearing. It seemed very obvious that Fuld’s greed and malfeasance took Lehman down. I believe he walked away with 100′s of millions. Bill Black was great. What an odd coupling to have Black and Fuld on the same panel.