How Washington Abetted the Bank Job

By SUSAN P. KONIAK, GEORGE M. COHEN, DAVID A. DANA and THOMAS ROSS
NYT

A FEW weeks ago, two Republican House members asked Ben Bernanke, the chairman of the Federal Reserve, whether the Fed knew — before Lehman’s bankruptcy examiner revealed it — about the bookkeeping scam at Lehman known as “Repo 105.” This scam allowed Lehman to disguise how much debt it was carrying, right up until it collapsed. Lehman got new loans to pay off old loans, pretended the new loans were “sales,” and through a complicated series of steps made both the old and new loans disappear just in time for its quarterly reports.

Mr. Bernanke said the Fed had known nothing about this. After all, he explained, the Fed wasn’t Lehman’s regulator — the Securities and Exchange Commission was. The Fed had placed some people at Lehman — not as many as the S.E.C. had — but they were there only to ensure that Lehman paid back money it was borrowing from the government. Can’t lay this on him.

Meanwhile, the S.E.C. insists that it could not have known what Lehman was up to because it was “understaffed” and “ill-suited” to run a voluntary oversight program. But, the commission says, since the Lehman bankruptcy examiner’s report it has sprung into action, investigating whether other banks might also have cooked the books.

Any minute now, expect to hear that the Treasury, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation — our other federal bank regulators — were just as shocked that Lehman used make-believe sales to hide its ocean of red ink.

(More here.)