The Fourteenth Banker Blog

April 20, 2010

The Fall of Lehman Hearings Today

Filed under: Running Commentary — thefourteenthbanker @ 2:48 PM

Today the House will hear witnesses on the Lehman bankruptcy including Ben Bernanke, Dick Fuld, Mary Shapiro and others. This should be good theater. Will our Congressmen go the the heart of issues facing the American public today? Or will they just cast about looking for scapegoats for this particular watershed event? The questions they ask will illumine how well they understand what we are facing as a nation. It is already a matter of record that somehow the entire broker/dealer model became precarious because of both investment decisions and mismatches regarding their funding. The salvation of some, Bear and Merrill, if you can call it salvation, came from bringing them under the umbrella of the capital and deposit funding of our largest banks. Is this a good thing? Should our bank deposits be used to fund trading houses? Should bank capital be tied up in businesses that are inherently very high risk? Or should bank capital be used to fund the businesses in this economy that produce innovation, employment, personal income, and ultimately prosperity. It is a question of resource allocation. The latest bank earnings reports indicate shrinking credit and earnings driven by trading.

So a Congressman might take the position that Lehman should have been saved. But how? Taxpayer bailout to put it under the wings of a bank, further concentrating power in financial conglomerates, with all their lack of attention to main street? Or should the collapse be considered a fair and reasonable outcome? Can you be “for” saving Lehman and “against” financial concentration? Will a brave Congressman stand up to the culture of greed and elitism that dominated that time and still dominates our system? Have any major changes for the better in Commercial Banks happened post Lehman? I don’t see any. In fact, I don’t see any serious changes at all, or even discussion of serious changes. The same people run things in the same way.

What questions would you want to ask? If you have a great question, it is possible to get it before the committee in time for the hearing.

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5 Comments »

  1. Would it not be interesting to ask why Lehman paid Fuld, its CEO for 15 years, a (total) compensation of $350M in the last 6 years for not taking responsibility and feigning ignorance of Repo 105 transactions totally? Is this not reminiscent of defenses taken by CEOs before the SOX era?

    Does the Board of Directors at Lehman bear any responsibilities for the accounting gimmick that led to the implosion? Are the Auditor’s E&Y accountable for their “theoretical” (sic) advise?

    The issue should not be whether the Lehman Brothers should have been saved, but to punish arsonists in Lehman and those who fueled the fire or kept it under wraps!

    Comment by Shivraj — April 20, 2010 @ 10:15 PM | Reply

  2. I would ask, what tenants of the Sarbanes Oxley law were prosecuted or not prosecuted. SARBOX was written as a direct result of ENRON which had off balance sheet entities to hide losses.

    What good are new laws if existing one’s are not enforced

    Comment by fiscalliberal — April 20, 2010 @ 11:34 PM | Reply

  3. Much secondary market trading and large parts of the derivatives, swaps and especially synthetics industries appear to be driven by one of two motives: 1. to evade regulation and disclosure — concealing debt or changing its accounting treatment, selling insurance without complying with insurance regulation, moving profits and losses from one quarter into another, concealing risk from internal and external supervisors, funders and regulators, refinancing without complying with the terms of existing debt contracts, diversifying (or eliminating diversification) in less visible ways in order to avoid notice of bosses, shareholders, creditors or regulators, concealing risk in order to transfer it to the unaware, etc.

    or 2. pure zero sum gambling by players who believe they are better at predicting the future than their counterparties (and half of whom, by definition, must be wrong).

    These are enormous and obvious social costs to these markets. Organized evasion of the law, in particular, is deeply anti-social and ought to be suppressed immediately even if the underlying laws are in need of reform. Evasion of internal controls, by deceiving supervisors, or market controls, by misleading counterparties, analysts and investors, threatens the integrity of our entire market system.

    In light of these problems, please explain the social utility of permitting these markets to exist. Wouldn’t we better off with (1) a tax on trading high enough to reduce volume 90% and (2) a ban on all derivative products unless they are proven “safe and efficacious” to the satisfaction of an FDA-like agency?

    Comment by Daniel G — April 21, 2010 @ 8:42 PM | Reply

    • Thank you for your comments. I agree that many of the markets serve a very nominal social utility, if any at all. There are some legitimate hedging purposes to some activities. However, if markets were used to effectively hedge, things would not have blown up like they did. Clearly the speculation by overly leveraged, unqualified, or unscrupulous “investors” serves no utility.

      I would agree that something very material needs to be done to discourage some of these activities. I would think that separating certain activities with regulation such as Glass Steagall, high capital requirements and an exchange to reduce profitability would be easier ways to reduce activity than trying to tax certain trades and not other ones. “Innovation” will just come up with different “products” to evade the tax.

      I also believe a better regulatory regime is essential. See this clip for example. http://www.youtube.com/watch?v=3-HTylLzXu8&

      Comment by thefourteenthbanker — April 22, 2010 @ 10:37 PM | Reply

  4. Wow!!! Did anyone else notice the sheer derision in Mr Black’s voice ? This just goes to show that if Washington really wanted to solve this problem they could find very very capable people such as Mr Black or Brooksley Born to get the job done.

    By the way that watered down version by Obama was certainly a joke!!!

    Comment by Vocalbanker — April 23, 2010 @ 1:38 AM | Reply


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