William Black on the Lehman Con

Apr.26.10 | About: Lehman Bros (LEHMQ)

I have recently written about the transgressions of Lehman Brothers (LEHMQ.PK) that led up to their collapse into bankruptcy in September 2008. But it is time for me to stand aside for a detailed analysis and indictment delivered in a 24 page report by Prof. William H. Black, University of Missouri Kansas City. Black is a former government regulator with the RTC (Resolution Trust Corporation) which oversaw the workout of the Savings and Loan collapse of the late 1980s and 1990s.

The report was presented to the House Committee on Financial Services on April 20. Black faults the SEC for failure to act on information provided by sources as reliable as the FBI. But he comes down hardest on The Federal Reserve Board of Governors (and Chairman Ben Bernancke) and The Federal Reserve Bank of New York (and former president Timothy Geithner). He essentially accuses the Fed of complicity in fraud and cover-up of fraud.

Black also gives numerous details about how whistle blowers within Lehman were summarily fired when they tried to get the company to address the fraud. I had reported on one such case a few days ago, but Black has many additional cases.

Black says that Lehman, through subsidiaries, was a major promulgator of liar loan mortgages. He said that these mortgages resulted in losses between 50% and 85%. He said that it can take years to recognize these losses but the fees in generating the mortgages and the MBS (mortgage backed securities) they were packaged into were recognized up front. The process was to make short term profit which would lead to long term bankruptcy.

It was like a mob run operation which skims all the profits off a business and leaves a worthless shell. William Black is well qualified analyst here. He is a law professor, with a specialty in white collar crime, who has lived through a smaller scale criminal crisis during the resolution of the Savings & Loan debacle.

After reading Black's report, it is very understandable why the Fed and the Treasury were unable to get another firm to take over Lehman in September 2008 when it was going belly-up. With the foul stench emanating from the Lehman deal book and all the whistle blowers getting fired, there must have been strong currents of rumor and innuendo about just how bad the Lehman situation might be. Even without analysis, the "where there is smoke" maxim would have ruled the day. Especially when most of the other banks where quite insecure about their status already.

Mike Whitney has a great review of the Black testimony at Counter Punch.

Hat tip to Phil's Stock World.

Disclosure: No positions.