The Jenner & Block Lehman Report and Lack of Financial Reform

I’m still going through the Dodd Bill.

So: The Lehman Report.

1. First of all why don’t we take the rest of the money for the FCIC (“Financial Crisis Inquiry Commission”) and just give it to Jenner & Block to keep investigating and writing? Their 9 volume study of what went wrong at the NY Fed and Lehman is our crisis’ Pecora Commission. People should be reading this and getting pissed off.

James Kwak has an overview. Like Ryan Chittum, I’m amazed at how well the blogosphere is covering it and the mainstream media is not.

2. One thing that I’m finding surprising is that the President and the Treasury Secretary aren’t out there beating the hell out of this story. For financial reformers, this report should be like a “Get 2 Free Financial Reforms” monopoly-style card falling out of the sky. Why isn’t the administration thumping the hell out of this story?

I remember when Anthem Blue Cross Blue Shield decided to raise rates 39% in the middle of a recession and Obama immediately got on the point that this is exactly why we need comprehensive health care reform. I remember thinking at the time “If a giant scandal blows up in the financial sector, I bet he’ll go equally as hard as to why this proves we need comprehensive financial reform.”

Oddly, that isn’t happening. Senator Ted Kaufman is giving a speech today about how this fraud calls for tougher regulation, which is fantastic. Why isn’t the administration?

3. I’ll go ahead and ask: Is Geithner implicitly recusing himself? Is he a material witness here? Why isn’t he out there screaming at every reporter and Sunday morning talking show he can find “see, this is exactly why we need to pass a strong bill”!? How much does his oversight of the NY Fed compromise him from using this scandal as a means to explain to ordinary Americans how dysfunctional and corrupt the culture of Wall Street has gotten? Randall Wray explores how much Geithner knew and what he did. Given the scrutiny, it makes perfect sense for Geithner to keep his mouth shut on this, even though this is the perfect moment in financial reform for him to yell from the rooftops about this.

Andrew Ross Sorkin, who isn’t a bomb thrower, asks the obvious:

The problems at Lehman raise even larger questions about the vigilance of the S.E.C. and Fed in overseeing the other Wall Street banks as well…There’s a lot riding on the government’s oversight of these accounting shenanigans. If Lehman Brothers executives are sued civilly or prosecuted criminally, they may actually have a powerful defense: a raft of government officials from the S.E.C. and Fed vetted virtually everything they did.

Yup, a pretty powerful defense. And this is at exactly the moment when the Dodd bill drops asking for citizens to give even more financial reform powers to the Fed, with standards to be determined internally. That’s not encouraging.

4. Naked capitalism has been killing it with their coverage. Frank Partnoy gets to the economics valuation part, different than the Repo 105 part, where the thought that “Lehman used LOWER discount rates for the riskier tranches than for the safer ones” makes me want to take a nap it is so depressing. This is what valuation looks like outside of exchanges.

5. Here’s Partnoy’s MMBM Presentation. The conclusion: “In sum, Congress should mandate that companies report all of their assets and liabilities. Companies that omit material assets and liabilities from their balance sheets should be subject to civil liability in the same way companies generally have been exposed to private rights of action for material misstatements. This is not a radical proposition: it is precisely what Congress did in 1933 and 1934, in response to that era’s financial crisis.”

I always love it when financial reformers have to go “this isn’t really radically. In fact, if it wasn’t so arcane, you would consider it common sense.” Sunlight, and all that. Tends to work.

6. Looks like I picked a good week to go “blog short” last year’s stress tests. check this out:

After March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress‐testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank. The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.” Lehman failed both tests. The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed. However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed. It does not appear that any agency required any action of Lehman in response to the results of the stress testing.

That is stunning. Almost all of my adult life I’ve been involved in doing math modeling for stress tests for some firm or another, financial and insurance firms for the second half, and I am outraged that this happened. It makes me sick, honestly.

No judgements, but there has to be another stress test of the largest 6 firms, with a special stress on their second liens. There is no credible way we can trust the past results. Our best option is to make sure that the results are consistent with projections from last year. There are millions of homeowners and thousand of bondholders who want to negotiate contracts, and the valuations of the second-liens are crucial to helping America move on from the housing bubble and start rebuilding our country and real economy.