The Lehman Brothers collapse could end up in court for years. But it will not answer one key question: who was regulating banks? Why did US regulators pretend things weren't going off the rails?
It's been a year and a half since the financial services giant fell apart. The biggest bankruptcy in US history, it sent the global economy into paroxysms. The result: a credit squeeze as banks stopped trusting each other. The cost of money went through the roof and businesses started closing down and sacking people. Now we have evidence about the culprits who perpetrated the collapse which ultimately destroyed jobs, investments and savings.
Bloomberg reports that JP Morgan and Citigroup helped destroy Lehman Brothers by demanding more collateral and changing guarantee agreements. In a 2200 report filed in a Manhattan federal court, bankruptcy examiner Anton Valukas put it bluntly – if JP Morgan and Citigroup hadn't put the squeeze on Lehman Brothers, it would still be here, markets would look very different and you wouldn't have one in five Americans looking for jobs.
Valukas said: "The demands for collateral by Lehman's lenders had direct impact on Lehman's liquidity pool … Lehman's available liquidity is central to the question of why Lehman failed."
This could and will go further. Get ready for legal action. As Valukas writes in his report: "The Examiner has determined that there are a limited number of colorable claims for avoidance actions against JPMorgan and Citibank." If he's right, a jury will award damages at trial.
But it doesn't just end there. There is also scope for legal action against former Lehman chief Dick Fuld, not to mention its chief financial officers Chris O'Meara, Erin Callan and Ian Lowitt with claims that the group had engaged in accounting scams, shifting around assets with some pea and thimble trickery, and that the company was actually trading while insolvent for some time before its collapse. The Financial Times reports that Valukas found that the company's woes were "exacerbated by Lehman executives, whose conduct ranged from serious but non-culpable errors of business judgment to actionable balance sheet manipulation; by the investment bank business model, which rewarded excessive risk taking and leverage; and by government agencies, who by their own admission might better have anticipated or mitigated the outcome."
Which leads us to the question of why the Fed was ignoring these developments in the shadow banking system. It failed to monitor things and the world paid the price. The US had a screwed up system of bank regulation and there's no sign it's any better now.
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