Lehman bankruptcy report exposes Wall Street criminality

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Lehman bankruptcy report exposes Wall Street criminality
15 March 2010

A report released March 11 by a bankruptcy court-appointed examiner
concludes that in the months leading up to its September 2008
collapse, the Wall Street investment bank Lehman Brothers issued
financial statements that were “materially misleading” and its top
executives engaged in “actionable balance sheet manipulation.”

The 2,200-page document details accounting fraud on a massive scale,
involving secret transactions that enabled the bank to falsify its
level of debt and conceal the scale of its losses from toxic
mortgage-linked assets.

Lehman’s collapse on September 15, 2008 sparked a global crash of
credit markets, which was used by the US government and governments
around the world to justify the outlay of trillions of dollars in
public funds to bail out the banking system. The financial crisis
precipitated the deepest recession since the 1930s, wiping out
millions of jobs. Now, governments are imposing brutal austerity
measures to make the working class pay for the bankrupting of state
treasuries for the benefit of the bankers and speculators.

The Lehman report demonstrates that workers’ jobs, homes, wages and
life savings, as well as their access to health care, education and
even such rudimentary necessities as light and heat, are being
sacrificed to pay for the criminality of the financial elite, which
has further enriched itself from the catastrophe of its own making.

In the wake of the report’s release, major Wall Street firms such as
Goldman Sachs and JPMorgan Chase have expressed shock over the Lehman
revelations and averred that they never employed the accounting dodges
used by their former competitor. One is reminded of the film
Casablanca, in which Captain Renault declares his “shock” at
discovering gambling in Rick’s casino.

All of the major banks employed intricate schemes, such as “structured
investment vehicles,” to shift their losses off of their balance
sheets, and made billions by repackaging what they knew to be dubious
sub-prime loans and selling them as “collateralized debt obligations.”
Lehman’s practices have been exposed only because it was the weakest
of the big Wall Street firms and was forced into bankruptcy, in large
part because its bigger rivals, smelling blood, took aggressive
actions to push their struggling rival over the edge.

According to the examiner’s report, Lehman specialized in vastly
overvaluing its mortgage-backed securities and manipulating its books
to produce end-of-quarter financial reports that concealed its true
level of indebtedness. As the author of the report, Anton R. Valukas
of the law firm Jenner & Block, put it: “Unbeknownst to the investing
public, rating agencies, government regulators, and Lehman’s board of
directors, Lehman reverse engineered the firm’s net leverage ratio for
public consumption.”

The bank’s major accounting gimmick was known internally as “Repo
105.” Repos, short for repurchasing agreements, are a standard
practice on Wall Street. To obtain short-term cash to fund operations,
a bank will borrow from another bank, giving that bank some of its
assets with the stipulation that it will buy back the assets within a
set number of days.

For accounting purposes, such transactions are recorded as financings,
not sales, and the assets that are shifted, often overnight, remain on
the balance sheet of the bank doing the borrowing. Lehman, however,
valued its repo assets at 105 percent or more of the cash it received,
and on that basis recorded its “repo 105’s” as sales―moving bad debts
off of its balance sheet just long enough to doctor its quarterly
financial reports.

According to the examiner, Lehman by such means shed $39 billion from
its balance sheet at the end of the fourth quarter of 2007, $49
billion in the first quarter of 2008, and $50 billion in the second
quarter.

The accounting scam was so smelly that Lehman was unable to find a US
law firm that would sign off on its legality. In the end, it retained
a British firm that sanctioned the maneuver as legitimate under
British law. Lehman had to conduct its “Repo 105” operations through
its London-based branch and shift funds from the US to Europe to carry
out the deals.

Valukas asserts that CEO Richard S. Fuld Jr. and three chief financial
officers knew of and approved the shady transactions, and the bank’s
auditor, accounting firm Ernst & Young, covered up for the executives.
The examiner concludes that the four executives breached their
“fiduciary duty” to Lehman’s shareholders and board of directors, and
adds that there is “sufficient evidence” to support a legal claim that
Fuld was “at least grossly negligent.”

The examiner’s report further details the role of the Federal Reserve
Bank of New York in allowing Lehman to exchange worthless securities
for public funds from March of 2008, when Bear Stearns collapsed and
was taken over by JPMorgan Chase in a deal subsidized by the Fed, to
September of that year, when Lehman filed for bankruptcy protection.
The president of the New York Fed at the time was Timothy Geithner.
Obama rewarded Geithner for his services as chief bagman for Wall
Street by making him his treasury secretary.

Neither Fuld, whose compensation for 2007 totaled $22 million, nor any
other Lehman executive has been prosecuted for their crimes. Nor has
any other top executive on Wall Street.

In response to the greatest social catastrophe since the Great
Depression, the Obama administration and the Democratic-led Congress
have rejected any serious reform of the financial system. They have
held no one accountable for plunging the US and the world into an
economic disaster. Instead, they have devoted their efforts to
covering the bad debts of the financial oligarchs and enabling them to
expand their swindling and increase their wealth.

The Lehman story is not an aberration. Corruption, fraud, criminality
are not simply the results of a few “bad apples,” or merely the
expression of the subjectively determined depravity of certain
executives. The collusion of all official institutions―the White
House, Congress, the regulatory agencies, the media―testifies to the
systemic character of financial gangsterism.

The criminality of Wall Street is rooted in the crisis and
contradictions of the capitalist system. Financial parasitism on an
unprecedented scale, with all of its noxious corollaries―increasing
social inequality, imperialist war and political reaction―is a
manifestation of the putrefaction of the profit system, above all in
its center, the United States.

The working class needs to draw the appropriate conclusions. The
financial executives whose fraudulent practices played a role in
precipitating the economic disaster must be prosecuted. Their
ill-gotten wealth must be expropriated and used to provide relief for
the unemployed ensure the provision of basic social needs. The banking
system must be nationalized and run as a pubic utility under the
democratic control of the working population.

It is not a matter of reforming the system, but building an
international socialist movement to consign it to the dustbin of
history where it has long belonged.

Barry Grey

http://wsws.org/articles/2010/mar2010/pers-m15.shtml

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