[THS] Mike Whitney: Lehman`s failure is a story in large part of fraud

[The Harder Stuff in news and commentary]

http://www.informationclearinghouse.info/article25284.htm


"Lehman’s failure is a story in large part of fraud"
Black's Knockout Testimony

By Mike Whitney

April 21, 2010 "Information Clearing House" -- On Tuesday, Former regulator William
Black appeared before the House Committee on Financial Services and beat the
living-tar out of Lehman CEO Dick Fuld for 8 full minutes. It was a moment of sheer,
unalloyed pleasure that will be savored for a long time to come.

"Lehman’s failure is a story in large part of fraud," Black roared. "Lehman was the
leading purveyor of liars’ loans in the world. For most of this decade, studies of liars’
loans show incidence of fraud of 90%. ... If you want to know why we have a global
crisis, in large part it is before you."

When the camera shifted to Fuld, he looked confused. "Why is this bearded man
saying these terrible things about me. I am a Wall Street banker," he mused. "Don't
they know that I create jobs and allocate capital to enterprising entrepreneurs?"

Black again: "Let’s start with the repos. We have known since the Enron in 2001 that
this is a common scam, in which every major bank that was approached by Enron
agreed to help them deceive creditors and investors by doing these kind of
transactions.....And so what happened? There was a proposal in 2004 to stop it. And
the regulatory heads...killed it."

By now, Fuld was fidgeting in his chair; tugging at his collar and looking over his
shoulder to see if the exits were still where he remembered them to be. "Repos,
repos, repos," he thought angrily. "All these people think about is repos. We provided
a service; liquidity for the markets, capital for new businesses. We make the system
work. That's enough, isn't it? Who is this irritating fellow? I haven't seen him at the
club, have I?" Fuld wondered if Black wore sandals and belonged to a food co-op.

Black again: "We have known for decades that these are frauds. We have known for
a decade how to stop them. All of the major regulatory agencies were complicit in
that statement, in destroying it. We have a self-fulfilling policy of regulatory failure
because of the leadership in this era.

We have the Fed.. finding that this is three card monty. Well what would you do, as
a regulator, if you knew that one of the largest enterprises in the world, when the
nation is on the brink of economic collapse, is engaged in fraud, three card monty?
Would you continue business as usual?"

Fuld was now visibly shaken. "Why won't this man stop? Can't anyone make him
stop?" His eyes darted back and forth like a man trapped in a alleyway while two
shadowy figures draw ever-closer.

"Lehman’s nominal corporate governance structure was a sham," Black thundered.
"Lehman was deliberately out of control with regard to “risk” in its dominant
operation – making “liar’s loans.” Lehman did not “manage” the risk of making liar’s
loans. It engaged in massive, fraudulent transactions that were “sure things” ...
Firms that loot through accounting scams will report superb (fictional) income in the
short-term and catastrophic losses in the long-term."

Black was swooping in for the kill. Fuld leaned back on the ropes; his arms hung limp
by his side while the bearded man delivered one savage roundhouse after another.
People close by, said they heard a slight gurgling sound as Fuld dropped to his knees
gasping, "No mas." In a matter of seconds, the great bank maharajah lay spread-
eagle on the canvas panting heavily and staring upwards blankly.

But Black wouldn't stop: "Lehman’s underlying problem that doomed it was that it
was insolvent because it made so many bad loans and investments," he crowed. "It
refused to recognize its losses honestly. It could not resolve its liquidity crisis because
it was insolvent and its primary source of fictional accounting income collapsed with
the collapse of the secondary market in nonprime loans. Investors knew that Lehman
was grossly inflating its asset values, so they were generally unwilling buy stock in
Lehman or acquire it."

Fuld appeared to be slowly regaining consciousness. Looking up, he could barely
make out the shape of a man beating his chest and exhorting the crowd in cheers. It
was Ali-Frasier all over again; "Rumble in the Jungle".

His eyes began to flutter erratically and roll backwards into their sockets. He
wondered if he'd still be able to get his prescription skin cream in prison and whether
his cellmate would understand that he's happily married man.

"The Federal Reserve Bank of New York (FRBNY) knew that Lehman was engaged in
fraud designed to overstate its liquidity," Black moaned...."The FRBNY remained
willing to lend to a fraudulent systemically dangerous institution... The Fed wanted to
maintain a fiction that toxic mortgage product were simply misunderstood assets, so
it allowed Lehman to keep dealing the three card monte scam....The Fed didn’t want
Lehman and other SDIs to sell their toxic assets because the sales prices would reveal
that the values Lehman placed on their toxic assets were inflated with worthless hot
air....."

"Of course, they were worthless", Fuld muttered scornfully. "Does he think we were
selling precious gemstones here? This is Wall Street, buddy; not some sissy-ass
university where they make rope-soled shoes and quote Milton. We make money
here; big money. And if you can't cut the mustard, you're gone. What's this guy
blabbering about, anyway?"

Black again: "Criminologists refer to entities that spread fraud epidemics as "vectors".
Lehman was one of the largest vectors that spread the fraud epidemic. ... The Fed,
due to its unique HOEPA authority, and the SEC, because it has jurisdiction over
every publicly traded company, were the only entities that could have shut down the
vectors spreading the fraud epidemic. This should have been there most important
priority. They had ample warnings of the epidemic of liar's loans and the fact that it
was spreading rapidly. Lehman, Citi, WaMu, Indymac, and Bear Stearns were on
everyone's list of the worst vectors, yet the Fed and the SEC took no effective action
until after virtually every major originator of liar's loans had failed."

"Vectors, schmectors. Spare me the sanctimony," Fuld thought sarcastically, pulling
himself up into a sitting position. "Of course, the Fed was in on it. Is grass green, for
chrissake? They knew everything. Everything. And what a pathetic bunch of
bunglers. That sniveling wanker Geithner wouldn't last 5 minutes at Lehman. They'd
eat him for lunch. He'd be better off taking a dip in shark tank, than trying to hack-it
on Wall Street. Namby pamby!"

"Lehman was a 'control fraud!'" Black growled with the ferocity of an Old Testament
prophet. "That is a criminology term that refers to situation in which the persons
controlling a seemingly legitimate entity use it as a “weapon” of fraud . Financial
control frauds’ “weapon of choice” for looting is accounting."

"Okay. I've had enough," Fuld thought as he rose to his feet. "Where are the cops?
I'm ready to go. If I have to listen to this guy for another minute, I'll scream."

But before he had even straightened up, two burly police officers handcuffed Fuld,
placed a black hood over his head and led him towards the door where a contingent
of fully-armed prison guards waited for him. He made no attempt to resist. The
assembled crowd sat in stunned silence. All that could be heard was the muffled sobs
from beneath the hood.

William Black's full "must read" statement can be seen here:
http://www.house.gov/apps/list/hearing/financialsvcs_dem/black_4.20.10.pdf