Sunday, April 22, 2012

Lulled by Fuld?

Said the Lehman bankruptcy inspector
Of the repo transactions that wrecked 'er:
"The Feds, who were looking
At books that were cooking,
Had fraud, but could never detect 'er."

In a rare attempt to explain the financial crisis to the average American, CBS's 60 Minutes brought "The Case Against Lehman Brothers" on Sunday evening. Steve Kroft interviewed Anton Valukas, the Chicago attorney appointed by the federal bankruptcy court to determine what led to Lehman Brothers' collapse. Mr. Valukas found that "there was enough evidence for a prosecutor to bring a case against top Lehman officials and one of the nation's top accounting firms for misleading government regulators and investors."

One of the most damning pieces of evidence was the letter written by Matthew Lee, the firm's top internal accountant, to senior management. Mr. Lee refused to sign off on Lehman's 2007 fiscal year end balance sheet, citing "possibly unethical and unlawful" conduct in their preparation. The so-called "repo 105" transactions were employed to make Lehman's balance sheet appear $50 billion lighter on reporting dates, and thus mask the extent of its over-leveraging. Mr. Lee was let go for his trouble, and the SEC, which was on the premises while repo 105 trades were occurring, has never brought charges against CEO Richard Fuld or others. Why didn't they catch the fraud? Says attorney Valukas: "They were getting the material. Whether they understood it is another question."

The entire interview is embedded below for your viewing pleasure, outrage and incredulity.


  1. Mark and I watched 60 Minutes last night and were astonished that anyone paying any attention at all could have missed or glossed over or failed to understand the repo transactions.

    Good limerick!

    And congratulations! You've won yet another Honorable Mention in last week's Limerick-Off. Great job! Limerick of the Week 58

  2. Now that I'm over 40, I find myself actually watching 60 Minutes on occasion. Last night I suffered through it with my wife, who strangely has been watching the program since her teens.

    While the reporting is great, 60 Minutes never fails to insert opinion into these stories, such as when Mr. Kroft states that the Lehman bankruptcy was responsible for "triggering a chain reaction that produced the worst financial crisis and economic downturn in 70 years." Wow! If not for Lehman, this whole mess could have been avoided! It wasn't the Fed's easy money policy, nor GWB's over-promotion of an "ownership society", nor Barney Frank's desire to "roll the dice" with destitute borrowers, nor our own partying with home equity lines-of-credit. Nope. It was all Wall Street, and Lehman in particular.

    60 Minutes has a special responsibility not to do this. It has the reputation, deserved or not, of being thorough and impartial. Statements and claims such as the one quoted above feed into a simplistic view of things which can be latched onto by voters and politicians to support ill-informed policy. When the straw breaks the camel's back, you cannot merely blame the straw.

  3. How funny - just this morning I was thinking of that same "straw breaking the camel's back" analogy. We appear to be dangerously in sync, Mr. Lawry. I agree that the Lehman segment, while on-target in its micro-analysis, really messed up the macro story with such a gross oversimplification.

    1. What we call the Left and the Right in these United States is much closer together than in other countries. We bitterly argue about what is roughly a 10% range of income taxes, but no one seriously argues for a wealth tax. We argue if the public sector shall be 18% or 25% of the economy. We fight about how much immigration we should allow and how to integrate newcomers, not whether or not they can come. We debate the balance of punishment vs. rehabilitation. These are minor differences. At the end of the day, this is a mercantile culture and we are all capitalists, who generally make an effort to obey the law.

      I was in New Zealand a while back when a 12 year-old kid (who happened to be Maori) killed a Chinese immigrant pizza delivery man for the cash he was carrying. The talk shows were buzzing with pundits and MPs blabbering about it. One MP had mentioned that juvenile crime had skyrocketed since 5 years prior, when punishment for juvenile crime was overhauled and significantly reduced. She mentioned that maybe some of that should be re-thought, but she was roundly savaged, branded a racist, and so forth. In the US, the conversation would have been very different.

      This was a big lesson on political discourse for me, and it keeps things in perspective. I'll take intra-American arguments over the alternative any day.


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