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:

“Given that the press has not focused (yet) on the Fed window in relation to the [Freedom] CLO, I’d suggest deleting the reference in the summary below. Press will be in attendance at the shareholder meeting and my concern is that volunteering this information would result in a story.”

To be clear, I’m not saying the media have not done good work so far on this story. Bloomberg had a tough story this weekend looking at the implications of the report for Dick Fuld (emphasis mine):

“I am the one who ultimately signs off and I’m comfortable with our valuations at the end of our second quarter,” then- Chief Executive Officer Fuld said on the conference call. “We have always had a rigorous internal process.”

The rigor was based on a shaky foundation, according to a 2,200-page report about the firm’s demise by Anton Valukas, the examiner for the bankrupt firm. Lehman Brothers “reverse- engineered” a key measure of stability, masking the firm’s true financial condition, Valukas said. Some asset valuations were also “unreasonable,” he said.

Keen to show that it had reduced leverage, a gauge of a company’s ability to withstand losses, Chief Financial Officer Ian Lowitt said on the June 16 call that the firm had shrunk its net leverage ratio to 12 times from 15.4 in the second quarter.

It accomplished the feat by reducing net assets by $70 billion, said Lowitt, who had just replaced Erin Callan in his post. “We’re going to operate conservatively,” he said.

Unbeknownst to shareholders, the firm was hiding $50 billion in assets through off-balance-sheet transactions known as Repo 105s that temporarily removed holdings until days after the quarter closed, according to Valukas. In the first quarter, the firm had used the same strategy to hide $49 billion in assets, he said in the report.

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. Follow him on Twitter at @ryanchittum.