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A whole new can of worms

The financial world is abuzz over the new 2,200-page report on the collapse of Lehman Brothers. It is a searingly thorough investigation, the kind that can have a profound impact on the way Wall Street does business. Maybe.

Read more about the report here. In brief, it details accounting tricks Lehman used to cover up the bad investments that led to its collapse.

Unfortunately, the investigation was done only because Lehman went bankrupt. The Wall Street Journal argues such thorough investigations should not be limited to bankruptcies but extended to bailouts as well:

From now on, any large bailout should be accompanied by an exhaustive examination that not only has the legal power to question employees of the troubled firm, but also creditors, counterparties, and regulators and other government employees. This is something Congress and the Treasury should build into their financial-sector overhaul legislation.

Indeed, such probes could help drive bad behavior out of the wider system. For instance, Mr. Valukas's report describes debt transactions possibly aimed at making Lehman's balance sheet look stronger than it was. Other banks, which may have engaged in or considered similar activities, will now be less likely to do such things.

However, as Congress considers new financial regulations, there's another lesson here. The stuff that happened at Lehman should've been caught. Sarbannes-Oxley? Not only that, but the report suggests regulators knew how bad Lehman's condition was and did nothing about it until it was too late. Seeking Alpha asks, where were the cops?

This report sets out a damning case against the pseudo-government and government actors, who it is alleged were well-aware of critical weaknesses in Lehman's risk controls and liquidity months before it collapsed, yet none of them did a damn thing about it until days before the bankruptcy filing.

Why should any of the clown-car riders who clearly knew that this situation existed for literal months before it blew up, yet did nothing, still retain their jobs and, in Geithner's case, obtain a promotion? These people are unqualified for supervisory positions involving anything more complicated than handing out towels in the men's room.

Senator Dodd and his colleagues in Congress have a lot of reading and thinking to do before finalizing any financial regulatory (so-called) reform.

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Very good post. Karl Denninger’s indictment in Seeking Alpha is compelling. Clearly, Geithener, Bernanke and Cox are too important to be held responsible for what amounts to criminal negligence. Shouldn’t they be doing hard time? Enron taught the financial industry the value of off balance sheet accounting and special investment vehicles, not unlike the Fed’s Maiden Lane vehicles.

But, of course, regulators do what congress and the president wants them to. The passage of Gramm-Leach-Bliley in 1999 was the green flag for anything goes in the financial industry.

As for the now even bigger TBTF banks they are using the same risk models that involve excessive leverage, but now they are doing it with public funds. Their debts are not being recognized. Eventually, they will be transferred to us. The result will be higher taxes and reduced social services for all but the upper class. The oligarchs, the big banks and their political cronies Obama, congress and the ‘regulators’ will live happily every after.

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