How Bad Is the Lehman Bankruptcy Report for Geithner?


If you're looking for a reader's guide to attorney Anton R. Valukas' report [pdf] on the bankruptcy of Lehman Brothers in September 2008, Yves Smith at Naked Capitalism has a quirky, erudite take that calls the cops on Secretary of the Treasury (then president of the Federal Reserve Bank of New York) Tim Geithner.

And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets. If so, he is not fit to be Treasury secretary or hold any office related to financial supervision and should resign immediately.

So much depends upon a likely. Speaking as somebody who believes Geithner must not only be removed from office but be imprisoned like Magneto in a metals-free environment where there will be no conductivity for his brain waves of pure bamboozlement, I'm not sure the court report makes a very strong case against him. Smith calls for more evidence gathering, and huzzah to that.

But in his brief appearances in the 336-page report, Geithner's main concern seems to be with preventing a panic over the diseased state of Lehman. Geithner not only acknowledges his efforts at concealment, but seems to believe they were the right thing to do:

In addition to the losses Lehman would incur by selling "sticky" assets at firesale prices, deleveraging also raised the additional problems of market perception and valuation.3187 As Secretary Timothy Geithner explained to the Examiner, selling "sticky" assets at discounts could hurt Lehman by revealing to the market that Lehman "had a lot of air in [its] marks" and thereby further draining confidence in the valuation of the assets that remained on Lehman's balance sheet.3188

The first sentence is drawn from a November interview between Geithner and Valukas, the second from "Reducing Systemic Risk In A Dynamic Financial System," a speech Geithner delivered in June 2008. To say dressing up Lehman's bleeding sores was wrong, you need to acknowledge that a central bank should not engage in the suppression of information, and I'm pretty sure we lost that argument a long time ago.

Smith suspects (not without reason) that this mission to regulate the market's feelings toward Lehman led Geithner to connive at what certainly looks to have been a fraud: the erroneous counting of "501 Repos"—assets Lehman sold with an agreement to repurchase — as straightforward sales. That is, the outside world thought these toxic assets were gone from Lehman's books, when in fact they were merely festering. Smith has some interesting words about whether, and why, Lehman counterparties went along with this charade. (Likeliest answer: They were all betting on the come like the rest of America.) Geithner, typically, says he would have caught the problem if only we'd given him more power:

From 2003 to 2009, Treasury Secretary Timothy Geithner served as President of the Federal Reserve Bank of New York ("FRBNY"). The Examiner described to Secretary Geithner how Lehman used Repo 105 transactions to remove approximately $50 billion of liquid assets from the balance sheet at quarter?end in 2008 and explained that this practice reduced Lehman's net leverage. Secretary Geithner "did not recall being aware of" Lehman's Repo 105 program, but stated: "If this had been a bank we were supervising, that [i.e., Lehman's Repo 105 program] would have been a huge issue for the New York Fed."3489

"That's somebody else's department" being the first order of government, I suspect this will be enough to get the catlike Treasury Secretary off the hook. But we live in interesting times.