"Geithner and Bernanke's Possibly Criminal Roles
Lehman Brothers Scandal Rocks the Fed
By MIKE WHITNEY
After a year-long investigation, court-appointed bank examiner Anton Valukas has produced a deadly 2,200 page report which details the activities that led to the Lehman Brothers bankruptcy. The report is a keg of dynamite. The question now is whether anyone in government has the nerve to light the fuse. Valukas provides powerful evidence that Lehman executives were involved in “balance sheet manipulation” by implementing an arcane accounting procedure called “Repo 105” which masked the bank's true financial condition from investors and regulators.
According to Valukas, Lehman was “Unable to find a United States law firm that would provide it with an opinion letter permitting the true sale accounting treatment" using Repo 105. So, Lehman executives went outside of the country in an effort to enlist the support of a London law firm that would approve the procedure.
It is impossible to overstate the significance of Valugas's findings. The report exposes the opaque but central role of the repo market which provides essential short-term loans for financial institutions. (Lehman used repos to conceal the full extent of its collapse, by dint of the amount of leverage it was using, meaning the pitiful asset anchor tethered to a vast zeppelin of debt) More importantly, it shows the cozy and, very probably criminal relationship between the country's main regulatory bodies and the Wall Street behemoths. The activities of the New York Fed (NYFRB), which at the time was headed by Timothy Geithner, is particularly suspect in this regard. The report should trigger an immediate Congressional investigation, probing the whole affair and most importantly the role of the Fed.
Naked Capitalism's Yves Smith, who has apparently sifted through all 2,200 pages of the report, has done some first-rate analysis of the details. Here's an excerpt from her Friday posting:
"Quite a few observers... have been stunned and frustrated at the refusal to investigate what was almost certain accounting fraud at Lehman. ....The unraveling isn’t merely implicating Fuld (Lehman’s CEO) and his recent succession of CFOs, or its accounting firm, Ernst & Young, as might be expected. It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abettingLehman in accounting fraud and Sarbox violations....
“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 .....
“…at a minimum, the NY Fed helped perpetuate a fraud on investors and counterparties. 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." (Naked Capitalism)
Repeat: "Accounting fraud", "collusion", "aiding and abetting." This is strong language from a woman who spent more than 25 years in the financial services industry, alternately working at Goldman Sachs, McKinsey & Co., and Sumitomo Bank. Smith typically chooses her words carefully and is not easily given to hyperbole. Yves Smith again: "Here is the part of the report that discussed how the Fed aided and abetted Lehman misconduct:"
Read the rest at http://www.counterpunch.org/whitney03152010.html
If you weren't convinced before that we should subject the Federal Reserve to a real audit for once...
The NY Fed branch is primarily implicated in shady dealings in this case. That branch has a long history of shady dealings. Try this - look up Benjamin Strong on the NY Fed web page.
http://www.newyorkfed.org/aboutthefed/BStrongbio.html
There is a very brief biographical sketch there. So brief and bland as to be nearly pointless. They certainly don't seem very interested in owning up to what this guy really represents. The reality is that Mr. Strong was at the meeting of a group of influential individuals who ginned up the idea of creating a Federal Reserve in the first place back in 1910, the famous Jekyll Island meeting. Then he became the first head of the NY Fed, where he proceeded to bend the rules to the breaking point and had a hand in causing the Great Depression. I leave it to you, dear reader, to do a search for information on Benjamin Strong and his counterpart at the Bank of England, Montagu Norman and learn something about this under your own steam.
The fact that there were 12 Federal Reserve districts, which were intended to prevent the concentration of power in NY City, made no difference then, and it still doesn't seem to make any difference now, 100 years later. At least the outline of the financial reform bill being discussed in the Senate now includes the idea of having the head of the NY Fed being appointed by the President. That is something at least. I'm not sure how much of a difference it will really make given the way politics works, but at least it acknowledges the problem.
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