Remedial Education

It's been 18 months since the Lehman Crash and we are still trying to learn the lessons of the Crash of '08. The more I see headlines like this...

Findings On Lehman Take Even Experts By Surprise

...the more I think some of us will never learn.

While Mr. Fuld and other former top Lehman officials are already defendants in a number of civil lawsuits, the new discoveries by Mr. Valukas have taken even veteran observers by surprise. Chief among these was the revelation of a particularly aggressive accounting practice, known internally as Repo 105, that Mr. Valukas said helped the investment bank mask the true depths of its financial woes.

Examiners in bankruptcy cases are appointed by the Justice Department to investigate accusations of wrongdoing or misconduct. Their job is to determine whether creditors can recover more money in these cases, and their findings often serve as guides for more lawsuits and even regulatory action.

What examiners are not asked to do is play judge and jury. Though the report contains strong language — Mr. Valukas deems Mr. Fuld “at least grossly negligent” in his role overseeing Lehman — it stops short of accusing anyone of criminal conduct or of violating securities law.

Come on. This was a "surprise?" Maybe if you were living in Manhattan, involved in the finance industry, or simply naive, it wasn't obvious; but the during the period between the fall of Bear Sternes through September 2008, it was clear that something was not right at Lehman Brothers, and moreover that Lehman's rosy claims for its future prospects were horses***. You wouldn't know that from Lehman's executives or its regulators, but there were a lot of people placing high profile bets that Lehman was headed for a fall. Maybe they were Demon Short Sellers, but the fact is that they were right and virtually all of the pros who were blindsided by the Lehman bankruptcy (it came out of nowhere!) were catastrophically wrong. The continued expressions of surprise from "experts" and the mainstream press is really dispiriting.

Now that everyone can express their surprise and wonderment, the calls for criminal prosecutions will follow. Not sure how much good that will do, besides satisfying the bloodlust of the people who saw no evil at the time it would have done some good. Might as well start drafting your amicus briefs after the Supreme Court grants cert to US v Fuld in 2016. As Larry Ribstein notes, criminal prosecutions for this sort of thing are devilishly hard: Lehman = Enron + SOX = England

As in Enron we will likely find that criminal guilt is more elusive than it seems. The Nigerian barge prosecutions in that case were vacated, the honest services statute that helped convict Jeff Skilling is under attack in the Supreme Court, and guilty-sounding emails may turn out to be less than that as we saw in the Bear Stears acquittals. SOX may make it easier to get a conviction, but prosecutors will still have to show that the executives knew of a lurking problem that they failed to deal with. The expert advice may complicate that proof.

Here's a secret tip for those of you who want Richard Fuld, et al. to go to jail so they can "meet Bubba." They'll do the time if they know they can return to their wealth and status when they get out. Reducing them to penury through civil action would, I think, be much more dreadful than a couple years in Club Fed.