L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City writes at New Economic Perspectives: ‘Wall Street has for many years been producing financial instruments designed to mislead shareholders, creditors and regulators about the true financial position of its clients’.
The 00’s began with the collapse of Enron and the Big Five accounting firm, Arthur Andersen, that helped cooked its books. Now get ready for the 10’s version, the sad, sad story of Lehman Brothers’ accountants, Ernst & Young.
The buzz in the business columns is that E&Y, one of the remaining Big Four accounting firms, could be facing an equally ignominious demise as a result of the fallout from the devastating Valukas report.
Valukas turned over his 2,200-page opus last Friday to the Lehman bankruptcy court, as step toward explaining how a company insisting it was solvent could suddenly spring a $130 billion leak. Now we know: it lies, it gets its auditors to lie and it convinces federal banking regulators to lie. Simple.
Wouldn’t it be great to be able to act like Lehman Bros did through its now notorious Repo 105 agreements? Say you are insolvent but want to keep borrowing money. You convince your grandmother to ‘buy’ some asset you own at an inflated price on the 29th of each month so you can show a healthy balance sheet for your creditors. But you simultaneously agree to buy back the asset on the 2nd and toss granny 50 bucks for her trouble. Neat! Also fraudulent!
One wag compared Repo 105s to a college student getting a neighbor to hide his bong during room inspections.
Hiding one’s debts in order to obtain more loans that you cannot pay back is jailworthy behavior when done by individuals, but it seems to be business-as-usual on Wall Street. That can hardly shock us at this point, but it is rather staggering to realize that Mr Hope & Change installed none other than Timothy Geithner to reign over our national treasure after a career of enabling this criminal approach to finance.
No doubt the people who lost millions on Lehman Brothers by not being privy to this information are hopping mad, and we can safely assume that the lawsuits are being composed as we sleep. But Wray points out that the there is no reason to think the debt cover-up has ended and even calls another financial crisis involving the four too-big-to-fail megabanks imminent.
Geithner is a disaster, and Obama is going to have to choose between Wall Street and Main Street very soon. Already the questions are rolling out about how much Geithner knew of this latest scam and when did he know it.
But there is a bigger question about the transparency of our entire economic system. At what point do people simply stop believing in the financial and business information available to them because they no longer trust anybody? Madoff, the banks, the auditors, the regulators, the sainted Greenspan, the Republicans, the Democrats—everyone appears to be bought off, in the bag, complicit, actively abetting or too far out of their league to understand what’s going on. Can the apparatus of modern capitalism thrive or even survive under such circumstances?
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