March 19, 2010
A March 18 report by Henny Sender at the Financial Times revealed that former officials from Merrill Lynch had contacted the Securities and Exchange Commission as well as the Federal Reserve of New York to complain that Lehman Brothers had been incorrectly calculating a key measure of its financial health. The regulators received this warning several months before Lehman filed for bankruptcy in September of 2008. Apparently Lehman’s reports of robust financial health were making Merrill look bad:
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.
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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.
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The former Merrill officials said they contacted the regulators after Lehman released an estimate of its liquidity position in the first quarter of 2008. Lehman touted its results to its counterparties and its investors as proof that it was sounder than some of its rivals, including Merrill, these people said.
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“We started getting calls from our counterparties and investors in our debt. Since we didn’t believe the Lehman numbers and thought their calculations were aggressive, we called the regulators,” says one former Merrill banker, now at another big bank.
Could the people at Merrill Lynch have expected the New York Fed to intervene and prevent the accounting chicanery at Lehman? After all, Lehman’s CEO, Richard Fuld, was also a class B director of the New York Fed. Would any FRBNY investigator really want to make trouble for one of the directors of his or her employer? This type of conflict of interest is endemic to the self-regulatory milieu presided over by the Federal Reserve. When people talk about protecting “Fed independence”, I guess this is what they mean.
The Financial Times report inspired Yves Smith of Naked Capitalism to emphasize that the New York Fed’s failure to do its job, having been given this additional information from Merrill officials, underscores the ineptitude of the New York Fed’s president at the time — Tim Geithner:
The fact that Merrill, with a little digging, could see that Lehman’s assertions about its financial health were bogus says other firms were likely to figure it out sooner rather than later. That in turn meant that the Lehman was extremely vulnerable to a run. Bear was brought down in a mere ten days. Having just been through the Bear implosion, the warning should have put the authorities in emergency preparedness overdrive. Instead, they went into “Mission Accomplished” mode.
This Financial Times story provides yet more confirmation that Geithner is not fit to serve as a regulator and should resign as Treasury Secretary. 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.
Those “Lehman-related e-mails” should be really interesting. If Richard Fuld was a party to any of those, it will be interesting to note whether his e-mail address was “@LehmanBros”, “@FRBNY” or both.
The Lehman scandal has come to light at precisely the time when Ben Bernanke is struggling to maintain as much power for the Federal Reserve as he can — in addition to getting control over the proposed Consumer Financial Protection Agency. One would think that Bernanke is pursuing a lost cause, given the circumstances and the timing. Nevertheless, as Jesse of Jesse’s Cafe Americain points out — Bernanke may win this fight:
The Fed is the last place that should receive additional power over the banking system, showing itself to be a bureaucracy incapable of exercising the kind of occasionally stern judgment, the tough love, that wayward bankers require. And the mere thought of putting Consumer Protection under their purview makes one’s skin crawl with fear and the gall of injustice.
They may get it, this more power, not because it is deserved, but because politicians themselves wish to have more power and money, and this is one way to obtain it.
The next time the financial system crashes, the torches and pitchforks will come out of the barns and there will be a serious reform, and some tar and feathering in congressional committees, and a few virtual lynchings. The damage to the people of the middle class will be an American tragedy. But this too shall pass.
It’s beginning to appear as though it really will require another financial crisis before our graft-hungry politicians will make any serious effort at financial reform. If economist Randall Wray is correct, that day may be coming sooner than most people expect:
Another financial crisis is nearly certain to hit in coming months — probably before summer. The belief that together Geithner and Bernanke have resolved the crisis and that they have put the economy on a path to recovery will be exposed as wishful thinking.
Although that may sound a bit scary, we have to look at the bright side: at least we will finally be on a path toward serious financial reform.
Geithner And Summers Draw Flak
August 30, 2010
It’s coming from everywhere. House Minority Leader, John “BronzeGel” Boehner, while giving a speech in Cleveland on August 24, called for the ouster of Treasury Secretary Timothy Geithner as well as the removal of National Economic Council Director, Larry Summers. Bridget Johnson reported for The Hill that on August 28, Representative Tom Price (R-Georgia) echoed the call for Geithner and Summers to step down: “They need to resign because the policies that they’re putting in place are not being effective.”
An editorial from the Republican-oriented Investors Business Daily expanded on Boehner’s criticism of the duo, without really giving any specific examples of what Geithner or Summers did wrong. That’s because what they did wrong was to protect the banks at the expense of the taxpayers — the same thing a Republican administration would have done. As a result, there have been simultaneous calls from the left for the sacking of Geithner and Summers. Robert Scheer wrote a piece for The Nation entitled, “They Go or Obama Goes”. Here is some of what he said:
Economist Randall Wray wrote a great piece for Wall Street Pit entitled, “Boehner Gets One Right: Fire Obama’s Economics Team”. Professor Wray distinguished his argument from Boehner’s theme that because neither Geithner nor Summers ever ran a business, they don’t know how to create jobs:
As an aside: If you take offense at Professor Wray’s suggestion that the government should get actively involved in job creation, be sure to watch the interview with economist Robert Shiller by Simon Constable of The Wall Street Journal.
The Zero Hedge website recently published an essay by Michael Krieger of KAM LP. One of Krieger’s points, which resonated with me, was the idea that whether you have a Democratic administration or a Republican administration, both parties are beholden to the financial elites, so there’s not much room for any “change you can believe in”:
“Keeping people divided and distracted” helps preserve the illusion that there really is a difference between the economic policies of the two parties. If you take a close look at how President Obama’s Deficit Commission is attempting to place the cost of deficit reduction on the backs of working people, the unified advocacy for the financial sector becomes obvious. What we are left with are the fights over abortion and gay marriage to differentiate the two parties from each other.
It’s time to pay more attention to that man behind the curtain.