And just like that the Lehman Brothers scandal drops off the front pages. And not just the front pages—the section fronts, too.
Say, we just learned about a $50 billion fraud on Thursday. Think there might be some newsworthy follow-ups here? Actually there are, and both The New York Times and Wall Street Journal have them, but they stuff them inside.
The Journal, which scored recently by bringing David Reilly back into the fold after a stint at Bloomberg, posts a Reilly news article looking at the culpability of Lehman auditor Ernst & Young. The paper dumps it on C7. The NYT has one on the same angle—a very good one to examine closely—and slides it inside on B2.
Somehow the Times thought more people would care about Sorkin’s scoop on a $3 billion deal for Tommy Hilfiger or that it was more important than an auditor approving accounting fraud. They don’t and it’s not.
Look, I know that Lehman collapsed a year and a half ago, but this is a major story—one that finally gets awfully close to putting the crimes in the crisis. I’ll go ahead and say it: If you’ve wanted to know about the Valukas report and its implications, you’ve been better served by reading Zero Hedge and Naked Capitalism than you have The Wall Street Journal or New York Times. This on the biggest financial news story of the week—and one of the biggest of the year. These papers have hundreds of journalists at their disposal. The blogs have one non-professional writer and a handful of sometime non-pro-journalist contributors.
I’m hardly the only one who has noticed this. James Kwak of Baseline Scenario wrote this earlier today:
Overall, I’m surprised by how little interest the report has gotten in the media, given its depth and the surprising nature of some of its findings.
So, hi, MSM folks. Here are some bloggers’ Lehman ideas for you to borrow. But please, for once, give them credit:
— At Naked Capitalism, professor Frank Partnoy writes that:
The Repo 105 section of the Lehman report shows that Lehman’s balance sheet was fiction. That was bad. The Valuation section shows that Lehman’s approach to valuing assets and liabilities was seriously flawed. That is worse. For a levered trading firm, to not understand your economic position is to sign your own death warrant.
To its credit, the FT’s Alphaville blog (noted) is now on this angle.
— Naked Cap’s Yves Smith quotes at length an email from a reader who says the other Wall Street banks did similar accounting tomfoolery:
Around Dec 2007 bank I work for was approached by XXX to transact a total return swap transaction. The underlying for the TRS would be a large portfolio of ABSes (and CDO tranches - name your toxic stuff, it was there). The deal was offered as “You do TRS with us, we sell you the portfolio and at the end of the deal we buy the portfolio back, no risk, hey?”. It was very clear to me that this was a balance-sheet dressing exercise, as they were very keen to do the transaction before their reporting date.
When I pointed it to our legal dept., they said that since they are doing legal thing, it’s all OK. In the end we turned the transaction down anyway (and, in line with my suspicions about the reason once the reporting date passed they enthusiasm for the transaction evaporated).
Does anyone really doubt that?
— Yves Smith again, noting that Tim Geithner’s New York Federal Reserve ran stress tests on Lehman, and the company failed all three—but Geithner did nothing to them. This is a quote Smith pulls from the Valukas report:
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.5753 The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.”5754 Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed.5756 However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757 It does not appear that any agency required any action of Lehman in response to the results of the stress testing.
Smith’s subsequent analysis:
So after the Fed was unable to come up with an objective-looking stress test that Lehman could satisfy, they permitted Lehman to devise a test with low enough standards to give itself a clean bill of health.