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.

…is never, ever Timmay.  The US Senate, moving at its usual lightning pace, has almost sort-of agreed in principle to an outline of a plan to form a committee to explore the possibility of creating a council that may or may not  identify systemic risks to the nation’s financial system. This is what passes for a victory for reform.

This council would be led by the Treasury Secretary, which sounds like such a fabulous idea if you remember what happened when Timmay ran the NY Fed. Timmay has proven himself willing to stand up and speak up when he sees things going wrong, except for all those times he did neither.  Other members of the council would include an effeminate elf, a manly dwarf, a bearded wizard, two men, and three more teeny hobbits.

The bearded wizard, Bernanke, is just glad to still have a job and seems to be on board with handing over some of the Fed’s responsibilities to someone else so that next time he can spread the blame around a little more.

Assigning the Treasury Department the job of spotting incipient trouble and addressing it quickly has support among senators from both parties, though several important provisions, including whether the council would have the ability to bypass existing banking regulators and impose its own rules on huge financial firms, remain to be worked out.

The effect would be to diminish the authority of the Federal Reserve, whose regulation of banks has been criticized for failing to head off the problems.

Though some in the Fed continue to push for the central bank to be the overseer of systemic risk, the chairman, Ben S. Bernanke, is willing to go along with a Treasury-led council.

If you’re skeptical that having a council made up of regulators for whom the council is their second (or third) job is going to solve all our problems, you’re not alone.

But some in the Fed remain skeptical. James Bullard, president of the St. Louis Fed, said in an interview [...] “But I’m telling you, this business of how we’re going to give this to a committee and we’re going to have an effective response to the next crisis. That is a joke.”

Ha ha ha, jokes are funny.

Human parody Timmay Geithner has added his voice to the cacophony surrounding Ben’s confirmation will-he-or-wont-he, threatening (as much as Timmay can threaten anyone) doom and gloom if Ben doesn’t come back as Fed Head.

Asked about possible market reaction to a defeat, Geithner said: “I think the markets would view that as a very troubling thing to the economy as a whole. But, as I said, I don’t think they should be uncertain. I think they should be confident because we are very confident he will be reconfirmed.”

Oh noes! “Very troubling!” That’s the least ominous “or else” we have ever seen.  But it’s not surprising, considering the source: forty-five minutes of hardcore searching and that, that right up there, was the angriest picture of Timmay that I could find.  Most every picture of him that you find is either of him with his head turned slightly downward, sheepishly grinning like he just farted and is certain he will get away with it, or making some ridiculous hand gesture before some Congressional panel or another, trying in vain to explain why he is not a complete failure in life.

Also of note is the revelation that Timmay genuinely believes everyone in the country should love him.

“If you’re on the right, you should be relatively pleased with our strategy, because we were able to pull the government out of the financial system much more quickly than people thought,” he said. “We have a much, much smaller footprint today than when I came into office. And if you’re from the left, you should be able to look at the strategy and say, by solving this today at much lower cost, we have more resources available to do things that many people think are important for the government to do better.”

It’s funny because the opposite is true.

In a disclosure that probably surprises absolutely no one,  there’s been some emails unearthed that show that the Federal Reserve Bank of New York – under Tim Geithner at the time – didn’t want it revealed that the bankrupt insurer was paying some of our favorite too-big-to-fail financial institutions full value for their swaps, you know, just because Timmay couldn’t bear to see Lloyd sad:

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.

Bloomberg broke this story several months ago, which prompted Issa to start looking for a paper trail. You might remember that Neil Barofsky, the TARP-spector general, took the Fed’s handling of the AIG failout to task as well:

“Federal Reserve officials provided AIG’s counterparties with tens of billions of dollars they likely would have not otherwise received,” Barofsky wrote in a Nov. 17 report. “The default position, whenever government funds are deployed in a crisis to support markets or institutions, should be that the public is entitled to know what is being done with government funds.”

This article slaps a $13 billion number on the difference between the discount AIG was expecting and the full value that the Fed had them cough up, which I keep forgetting is a lot of money because that $700bn number they’ve been bandying about for the last year makes everything look like small potatoes. Anyway, with as much as Timmay apparently liked to meddle I guess the next e-mails to be released will say something about him bringing cookies to Robert Willumstad’s office and complaining about how he’ll never meet a good bank this way, so at least those will be fun to read.