"The Fraud Factor"
I think it’s Jamie Galbraith who’s been spending the past year trying to get people to pay more attention to the fact that as a speculative bubble intensifies you tend to see good old-fashioned fraud play a bigger and bigger role. I think we’ve basically seen that with Greece. And now Lehman Brothers. Here’s Francesco Guerrera, Nicole Bullock and Henny Sender for the FT:
The hard-hitting report [by court-appointed examiner Anton Valukas] found evidence that Mr Fuld and Christopher O’Meara, Erin Callan and Ian Lowitt, who were chief financial officers of Lehman during its last days, failed to disclose the use of an accounting device that enabled the bank to hold $50bn off its balance sheet in both the first and second quarter of 2008.
Mr Valukas alleges the use of the accounting mechanism – called “Repo 105” – was for the sole purpose of lowering the level of leverage on Lehman’s balance sheet, thus making the bank appear healthier than it was. […]
“Furthermore, the evidence available to the examiner shows that the Repo 105 transactions were done in accordance with an internal accounting policy, supported the legal opinions and approved by Ernst & Young, Lehman’s independent outside auditor.”
Obviously the details of this sort of thing are a bit beyond my area of expertise (see Tyler Durden for an informed explication). But you had a lot of problems with the big accounting firms associated with the tech stock bubble in 2001. And the Panic of 2007 seems to have implicated bad behavior by the bond rating agencies and a reiteration of some of these accounting issues. There’s a theory out there about why the free market ought to produce sound accounting and ratings agencies, but the empirical evidence says otherwise. And it’s ultimately going to be important to address these issues. It’s more polite to talk about an impersonal crisis, but it’s clear that on both the micro scale (getting individuals to take out mortgages) and the macro scale (distorting the real quantities of leverage banks were carrying) that a lot of fraud and deception was in the room when this all went down.