It is difficult to be shocked about new revelations stemming from the financial crisis, but today’s DealBook column by Andrew Ross Sorkin was a real revelation. S.E.C. examiners, working during the watch of Christopher Cox as S.E.C. commissioner, apparently saw nothing wrong with Repo 105. Here are a few excerpts:
“Even though Lehman dressed up its accounts for the great unwashed public, it did not try to fool the authorities,” Yves Smith, the author of “ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism,” wrote on her blog last week. “Its game-playing was in full view.”
Indeed, it now appears that the federal government itself either didn’t appreciate the significance of what it saw (we’ve seen that movie before with regulators waving off tips about Bernard L. Madoff). Or perhaps they did appreciate the significance and blessed the now-suspect accounting anyway.
Oddly, when the bankruptcy examiner asked Matthew Eichner of the S.E.C., who was involved with supervising firms like Lehman, whether the agency focused on leverage levels, he answered that “knowledge of the volumes of Repo 105 transactions would not have signaled to them ‘that something was terribly wrong,’ ” according to the examiner’s report.
There is plenty of blame to go around. Lehman’s CEO Richard Fuld was criminally negligent, shockingly incompetent, or both. Ernst & Young, the firm’s auditors, concluded that Repo 105 was acceptable under generally accepted accounting principles but obviously failed in their larger responsibility to users of Lehman’s financial statements. Now we find that the S.E.C. and other government regulators were fully aware of the Repo 105 shenanigans for nearly six months prior to Lehman’s collapse.