In the years leading up to its collapse, Lehman Brothers nearly doubled its risk and took a scattershot approach to valuing its assets, according to an oversight report released Thursday. The investment bank didn't break the law by doing any of this.
And there's no reason to think it couldn't happen again somewhere else....
In addition to spotlighting many questionable choices made by Lehman higher-ups in the past half decade, the Seton Hall report warns that "the legal system that allowed Lehman's failure will permit similar failures in the future because, for the most part, Lehman's actions did not violate the law."
The report combs through a nine-volume account published last year by Anton Valukas, an examiner appointed by the U.S. Bankruptcy Court to probe the collapse of Lehman Brothers....
Denbeaux and his co-authors identify two major patterns in Lehman's business conduct -- a steady ratcheting up of risk and a consistent misvaluing of assets on the balance sheet -- that the report says worked together to undermine the security of the bank....
The report also finds that Lehman had no consistent method for determining the value of its assets, which ended up increasing the precariousness of the company's position.Some real estate investments, according to a Lehman vice president quoted in Valukas' report, were valued based on a combination of financial projections and "gut feeling...."
For all these irregularities, the Seton Hall report places the most emphasis on the fact that none of Lehman's practices were found illegal in Valukas' assessment, which Denbeaux said sets a disquieting precedent.
The concern, Denbeaux added, is that, however ill-advised Lehman's habits of pushing up its risk limits and carelessly valuing its assets, Valukas' report found them to be acceptable from a legal standpoint, meaning they have been effectively legitimized.
"My assumption is that anyone looking at this ... should say something has to be done and the law has to be changed, or we have to be prepared to accept this happening over and over and over again," Denbeaux said.Read the whole post at The Huffington Post
by Alexander Eichler
There doesn't seem to me to be any good way of precluding this other than reconfiguring the financial sector and breaking up the TPTFs based on anti-trust legislation. Time to update Teddy Roosevelt's progressive agenda.