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.

So why should we trust ANY government designed stress test, particularly when the same permissive grader, Timothy Geithner, was the moving force behind the ones dreamed up last year, which have been widely decried by banking experts, including Bill Black, Chris Whalen, and Josh Rosner? We linked to a simple analysis by Mike Konczal that demonstrates that for the biggest four banks alone, merely on their second mortgage portfolios, the stress tests of 2009 were too permissive to the tune of at least $150 billion.

Anybody want to follow up on that?

— And most important of all, Zero Hedge writes about what the Lehman report reveals about the murky, ripe-for-corruption Primary Dealer Credit Facility the Federal Reserve used to give cash to probably insolvent banks, which pledged their toxic assets as collateral. (UPDATE: Let me walk this back and dent my thesis: Eric Dash of the NYT wrote first about the Lehman Freedom CLO in the report, and Zero Hedge tipped its hat to him in its post. Apologies—and make sure to read Dash’s piece.)

How toxic? We don’t know. Our pal, the late Bloomberg reporter Mark Pittman, sued the Fed to reveal this information and won. But the Fed is stalling by appealing the decision, presumably hoping the whole storm will have blown over by the time it’s forced to release the information. And with the way the press is treating this Lehman story three days after it dropped, why wouldn’t the Fed take that gamble?

Here’s Zero Hedge quoting from the Valukas report:

In March 2008, Lehman packaged 66 corporate loans to create the “Freedom CLO.” The transaction consisted of two tranches: a $2.26 billion senior note, priced at par, rated single A, and designed to be PDCF eligible, and an unrated $570 million equity tranche. he loans that Freedom “repackaged” included high-yield leveraged loans, which Lehman had difficulty moving off its books, and included unsecured loans to Countrywide Financial Corp…

Lehman did not intend to market its Freedom CLO, or other similar securitizations, to investors. Rather, Lehman created the CLOs exclusively to pledge to the PDCF. An internal presentation documenting the securitization process for Freedom and similar CLOs named “Spruce” and “Thalia,” noted that the “[r]epackage[d] portfolio of HY [high yield leveraged loans]” constituting the securitizations, “are not meant to be marketed.” Handwriting from an unknown source underlines this sentence and notes at the margin: “No intention to market.

And Dick Fuld’s press criticism/management, also from the Valukas report:

Lehman may have also managed its disclosures to ensure that the public did not become aware that the CLOs were not created to be sold on the open market, but rather were intended solely to be pledged to the PDCF. An April 4, 2008 e-mail containing edits to talking points concerning the Freedom CLO to be delivered by Fuld stated:

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.