Sunday, October 26, 2008
Lehman's Kiting Scheme
"It turns out that Lehman, like other big dealers, was running a perfectly legal but highly risky game moving money from firm to firm. ... But when the [derivatives] contracts terminate as the result of bankruptcy, the extra collateral is supposed to be returned. ... The contracts were a big business for Lehman: When the firm went under in September, roughly 1 million derivative deals had its name on them. ... Both the BofA and the Dubai fund have filed suit against Lehman. They're not alone. Some two dozen Goldman Sachs hedge funds say in a suit that Lehman owes them 'hundreds of millions of dollars.' ... After Lehman used the collateral for its own deals with other firms, they could have used the money for their own purposes. ... By using their customers' collateral as their own collateral, Lehman and other firms could borrow more money, using the proceeds to buy the kind of high-risk securities that are now imploding", my emphasis, Matthew Goldstein and David Henry at Businessweek, 20 October 2008.
Amazing. Lehman used customer assets, which appear to be a "bailment" for its own purposes. Will anyone go to prison for this? If Joe Schmoe (JS) did something like this with his checking account, an affected bank would scream and JS would be indicted for bank fraud for "check kiting". Where were Lehman's CPAs, Ernst & Young when this went on? Doesn't the PCAOB have CPAs look at a client's "risk controls"? Well Mark Olson, what will you do about this? Call "NY Big Law" to tell you all was legal? Where was Chris Cox's SEC when this went on? I remember when WPPSS went under in 1983, some disgusted trustee said something to effect, "Well if we want justice [for the bondholders], there's only one way to get it. Strap on our sixguns, mount our horses and ride after it". The person quoted in Fortune, as having said that was a trust officer with a major NY bank, to the best of my recollection.