On Tuesday, Former regulator William Black appeared before the House Committee on Financial Services and beat the living-tar out of Lehman CEO Dick Fuld for 8 full minutes. It was a moment of sheer, unalloyed pleasure that will be savored for a long time to come.
“Lehman’s failure is a story in large part of fraud,” Black roared. “Lehman was the leading purveyor of liars’ loans in the world. For most of this decade, studies of liars’ loans show incidence of fraud of 90%. … If you want to know why we have a global crisis, in large part it is before you.”
When the camera shifted to Fuld, he looked confused. “Why is this bearded man saying these terrible things about me. I am a Wall Street banker,” he mused. “Don’t they know that I create jobs and allocate capital to enterprising entrepreneurs?”
Black again: “Let’s start with the repos. We have known since the Enron in 2001 that this is a common scam, in which every major bank that was approached by Enron agreed to help them deceive creditors and investors by doing these kind of transactions…..And so what happened? There was a proposal in 2004 to stop it. And the regulatory heads…killed it.”
By now, Fuld was fidgeting in his chair; tugging at his collar and looking over his shoulder to see if the exits were still where he remembered them to be. “Repos, repos, repos,” he thought angrily. “All these people think about is repos. We provided a service; liquidity for the markets, capital for new businesses. We make the system work. That’s enough, isn’t it? Who is this irritating fellow? I haven’t seen him at the club, have I?” Fuld wondered if Black wore sandals and belonged to a food co-op.
Black again: “We have known for decades that these are frauds. We have known for a decade how to stop them. All of the major regulatory agencies were complicit in that statement, in destroying it. We have a self-fulfilling policy of regulatory failure because of the leadership in this era.
We have the Fed.. finding that this is three card monty. Well what would you do, as a regulator, if you knew that one of the largest enterprises in the world, when the nation is on the brink of economic collapse, is engaged in fraud, three card monty? Would you continue business as usual?”
Fuld was now visibly shaken. “Why won’t this man stop? Can’t anyone make him stop?” His eyes darted back and forth like a man trapped in a alleyway while two shadowy figures draw ever-closer.
“Lehman’s nominal corporate governance structure was a sham,” Black thundered. “Lehman was deliberately out of control with regard to “risk” in its dominant operation – making “liar’s loans.” Lehman did not “manage” the risk of making liar’s loans. It engaged in massive, fraudulent transactions that were “sure things” … Firms that loot through accounting scams will report superb (fictional) income in the short-term and catastrophic losses in the long-term.”
Black was swooping in for the kill. Fuld leaned back on the ropes; his arms hung limp by his side while the bearded man delivered one savage roundhouse after another. People close by, said they heard a slight gurgling sound as Fuld dropped to his knees gasping, “No mas.” In a matter of seconds, the great bank maharajah lay spread-eagle on the canvas panting heavily and staring upwards blankly.
But Black wouldn’t stop: “Lehman’s underlying problem that doomed it was that it was insolvent because it made so many bad loans and investments,” he crowed. “It refused to recognize its losses honestly. It could not resolve its liquidity crisis because it was insolvent and its primary source of fictional accounting income collapsed with the collapse of the secondary market in nonprime loans. Investors knew that Lehman was grossly inflating its asset values, so they were generally unwilling buy stock in Lehman or acquire it.”
Fuld appeared to be slowly regaining consciousness. Looking up, he could barely make out the shape of a man beating his chest and exhorting the crowd in cheers. It was Ali-Frasier all over again; “Rumble in the Jungle”.
His eyes began to flutter erratically and roll backwards into their sockets. He wondered if he’d still be able to get his prescription skin cream in prison and whether his cellmate would understand that he’s happily married man.
“The Federal Reserve Bank of New York (FRBNY) knew that Lehman was engaged in fraud designed to overstate its liquidity,” Black moaned….”The FRBNY remained willing to lend to a fraudulent systemically dangerous institution… The Fed wanted to maintain a fiction that toxic mortgage product were simply misunderstood assets, so it allowed Lehman to keep dealing the three card monte scam….The Fed didn’t want Lehman and other SDIs to sell their toxic assets because the sales prices would reveal that the values Lehman placed on their toxic assets were inflated with worthless hot air…..”
“Of course, they were worthless”, Fuld muttered scornfully. “Does he think we were selling precious gemstones here? This is Wall Street, buddy; not some sissy-ass university where they make rope-soled shoes and quote Milton. We make money here; big money. And if you can’t cut the mustard, you’re gone. What’s this guy blabbering about, anyway?”
Black again: “Criminologists refer to entities that spread fraud epidemics as “vectors”. Lehman was one of the largest vectors that spread the fraud epidemic. … The Fed, due to its unique HOEPA authority, and the SEC, because it has jurisdiction over every publicly traded company, were the only entities that could have shut down the vectors spreading the fraud epidemic. This should have been there most important priority. They had ample warnings of the epidemic of liar’s loans and the fact that it was spreading rapidly. Lehman, Citi, WaMu, Indymac, and Bear Stearns were on everyone’s list of the worst vectors, yet the Fed and the SEC took no effective action until after virtually every major originator of liar’s loans had failed.”
“Vectors, schmectors. Spare me the sanctimony,” Fuld thought sarcastically, pulling himself up into a sitting position. “Of course, the Fed was in on it. Is grass green, for chrissake? They knew everything. Everything. And what a pathetic bunch of bunglers. That sniveling wanker Geithner wouldn’t last 5 minutes at Lehman. They’d eat him for lunch. He’d be better off taking a dip in shark tank, than trying to hack-it on Wall Street. Namby pamby!”
“Lehman was a ‘control fraud!'” Black growled with the ferocity of an Old Testament prophet. “That is a criminology term that refers to situation in which the persons controlling a seemingly legitimate entity use it as a “weapon” of fraud . Financial control frauds’ “weapon of choice” for looting is accounting.”
“Okay. I’ve had enough,” Fuld thought as he rose to his feet. “Where are the cops? I’m ready to go. If I have to listen to this guy for another minute, I’ll scream.”
But before he had even straightened up, two burly police officers handcuffed Fuld, placed a black hood over his head and led him towards the door where a contingent of fully-armed prison guards waited for him. He made no attempt to resist. The assembled crowd sat in stunned silence. All that could be heard was the muffled sobs from beneath the hood.
William Black’s full “must read” statement can be seen here (PDF).