There is a massive, 2,200 page tome that was released yesterday that goes into excruciating detail as to why Lehman failed. Anton Valukas, the examiner, assuredly had a lot to work with. We weren’t quite expecting an encyclopedia, but we guess we shouldn’t be surprised either. And what did he find? Bad mortgages? Sure, of course. No collateral other than that closet full of stress balls and tote bags that ultimately got auctioned on eBay? At the very end, yeah.

He also found a massive sleight of hand where Lehman shuffled fitty bill or so in crap assets off its books (books certified by Dick Fuld, of course) in a desperate attempt to stay solvent. He refers to it as “reverse engineer[ing] the firm’s net leverage ratio for public consumption”, but you and I might refer to it as “making s**t up”. This apparently started in late 2007, well before Lehman became a household name.

Karl Denninger’s had time to parse this, and it looks like the NY Fed under Geithner may well have known and looked the other way:

Although various Government agencies had information that raised serious questions about Lehman’s reported liquidity and about the sufficiency of its capital and liquidity to withstand stress scenarios, the agencies generally limited their activities to collecting data and monitoring.

Oh. They looked but didn’t act. I see. Indeed, they looked pretty closely….

After March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress‐testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank.5753 The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.”5754 Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed.5756 However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757 It does not appear that any agency required any action of Lehman in response to the results of the stress testing.

While Geithner is implicated as being “concerned” about Lehman in the paper, the most-troubling part the narrative is here:

The challenge for the Government, and for troubled firms like Lehman, was to reduce risk exposure, and the act of reducing risk by selling assets could result in “collateral damage” by demonstrating weakness and exposing “air” in the marks. 5823

Air? Uh, that’s an apparent admission that FRBNY and Tim Geithner specifically knew that the marks that these banks were taking on their assets was materially and intentionally false.

Where have we seen this? Oh yeah – in all those banks that have failed of late, with 25-40% discounts to their claimed balance sheet values when the marks are actually reduced to losses to the deposit fund by the FDIC! So let’s see here. We now have:

Geithner, and presumably everyone under him, knew the marks on these assets were fictions months before Lehman failed, yet they intentionally concealed this fact from the market and took no action (nor did the SEC) to disclose this intentional misdirection.

The misdirection and false claims in this regard are almost certainly continuing today, as evidenced by the FDIC seizures literally on an every-week basis.

The thought of an unknown number of banks lurking out there, ready to fail, with regulators quite aware of it and happy to hide that fact from us until the day it implodes, kinda makes me want to sleep with the lights on, or at the very least ask Mom if she still has my binky.