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.

Weekend Worriers

Whenever a bombshell discloses
After Wall Street on Friday night closes,
The market is fraught
All weekend with what
The chance of new highs or new lows is.

Listening to the weekend's feverish speculation as to the market effect of the S&P downgrade of US sovereign debt, one could not help but hark back to the Lehman failure in 2008, when the world waited breathlessly for the Asian markets to open and point to our global economic fate. Early results this time around indicate a sharp sell-off of anything risky, though not necessarily US Treasury bonds themselves, the risk perception of which has not really changed.

Ernst & Young

Said Cuomo, enforcer of laws,
"The auditor's liable because
The public's reliant
On them that their client
Will tell it the way that it was."    

More than two years after the climax of the financial crisis, the first high-profile legal action is not a federal prosecution of one of the failed financial firms, but a fraud case by a state attorney general against an auditor.  New York State Attorney General Andrew Cuomo announced a civil suit against Ernst & Young, former auditor of Lehman Brothers.  The suit alleges that the auditor knew that its client disguised borrowing against assets as sales of those assets, but did nothing to stop the misleading of investors over a period of several years.

FCIC Blue, & Red

"The truth is unsparingly ugly:
That mortgage-backed bonds became bubbly,
Thanks to Wall Street's big guys
Who would securitize
The same mortgages triply or doubly."   

"The real estate market was screamin' out:
'We must cast the government demon out!
We'd have steadily grown
If they'd left us alone,
Except when they didn't bail Lehman out.'"

New York Times reporter Heidi Moore writes in DealBook that Democrats and Republicans on the Financial Crisis Inquiry Commission (FCIC) have drawn entirely different lessons from the financial crisis.  Like the characters in the classic Japanese film Rashomon, they witnessed the same crime but tell conflicting tales.  

Super Bawl

Said Hank Paulson, with trembling knees,
"Lehman's crisis blew in with the Brees
From the blue like a bolt -
Though I'm no Saint nor Colt,
'Twas un-Manning how credit might freeze."