The New York Observer has a wonderful interview with Jim Chanos out today. In it, he talks about probable fraud and criminality at Lehman. I want to use his comments as a lead-in to a wider discussion about fraud and criminality in financial services.
The Chanos interview reads:
The Observer: Did anything surprise you about the Lehman Brothers report? Or did it just validate everything you thought?
Mr. Chanos: Except for the shameful New York Fed/Lehman “stress test” disclosures, nothing in it surprised me. We had concerns about Lehman well before 2008. People thought they were tough, no-nonsense guys. But we were saying, actually, they’re incredibly aggressive risk takers with a wide berth for what they consider the truth. We’ve known for a while that the hole in their balance sheet was around $150 billion. To put that in perspective, the hole in Enron’s balance sheet was roughly $65 billion. We can quibble on a billion here, a billion there, but $150 billion? I have to think that fraud was involved. It wasn’t just bad business judgment.
So do you think there will be any perp walks? And why haven’t there been any yet?
I would be stunned if there weren’t at least indictments at Lehman and some of the other large institutions that have failed. I don’t know why there haven’t been any yet, but it’s amazing that it’s taken them this long. We’ve known about Lehman’s books since late 2008, but we just needed it confirmed by someone who wasn’t a short seller, since we’re not to be trusted. [laughs] We’ve known something was wrong with their books since the collapse.
So, where are the perp walks? How long does it take before we see any investigations? It boggles the mind that $150 billion is vaporized
Forget about Lehman for a second, three years after the subprime crisis first hit and 18 months after the panic, there haven’t been any arrests, any indictments, nor any convictions at any major bank or at any of the government-owned financial institutions Fannie, Freddie and AIG. How do you lose trillions of dollars in the most lax regulatory environment without somebody, somewhere, at some time lying or stealing? It makes no sense.
If anything has caused tens of millions to lose faith in the financial system it is this. People may not know exactly who lied and who stole, but they want to see investigations – at a bare minimum. And they want to hear our political leaders saying "the investigations are ongoing. This is a priority for us. We want to get to the bottom of this" – repeatedly and vociferously. Right now the silence is deafening.
It doesn’t take a rocket scientist — and certainly not an accountant — to deduce one thing from the Lehman scandal. The misleading of regulators, investors and the public did not happen in isolation. Like Enron, WorldCom, Tyco, Wachovia, Washington Mutual, Fannie/Freddie, CDOs, Bear, AIG, bond insurers, GM, Chrysler, CIT, California, Greece and the countless others wrapped up in this crisis, Lehman is symptomatic of a banking system bent on finding ways to hide risk from the investing public and regulatory community…
It should be clear to all that a deeper examination of the relationship between all the audit firms and their clients on the issue of risk-obfuscation is needed. Limiting any inquiry to Lehman alone is inadequate.
–Eliot Spitzer and Josh Rosner, 17 March 2010
If we are to believe Bryan Marsal, the man overseeing the Lehman bankruptcy, Wall Street has learned nothing from this calamity. He says it will happen again. It is time the government started asking the questions, getting the subpoenas, reading the e-mails and acting like they give a damn. The observations of Chanos, Spitzer, Rosner and Marsal say they don’t. If the politicians don’t demand action, I guarantee you there will be hell to pay come elections in November.
The End-Times Investor – The New York Observer