By James Kwak
According to ex-Lehman executives interviewed by Max Abelson (hat tip Felix Salmon). To summarize, they say that using borderline-legal transactions to massage your balance sheet at the end of a quarter is completely normal, everyone does it, $50 billion is no big deal anyway, only “nonprofessionals” would even notice, and the only reason the bankruptcy examiner made so much noise about it was to justify the fee for his work. (Abelson does point out that, according to internal Lehman emails cited in the report, there were Lehman executives at the time who were worried about what they were doing and did not think it was standard practice.)
The unnamed sources may be right about one thing: it may be true that everyone was doing it, or at least something similar for the same purpose. One source said, “If Valukas went into Goldman Sachs, what do you think the report would look like? This would be a fairly tale compared to that.” In other words, Lehman simply had the misfortune to not be bailed out by the U.S. government, leaving its finances open for all the world to see.
But it’s not clear to me how this makes the situation any better. So instead of just Lehman cooking the books, the point is that everyone is cooking the books? And they are cooking the books more, so $50 billion is only chump change? Even if it’s legal, this seems like a problem. (And I don’t think you can resort to the argument that sophisticated money managers knew what was going on and weren’t worried, so therefore the rest of us shouldn’t worry either; if sophisticated money managers were so good, then the collapse of Lehman wouldn’t have had systemic consequences.)
The Lehman report could be interpreted two ways. One is that Lehman was a case of bad apples. If you had asked me before about fraud and the financial crisis, I would have said that there was probably some fraud around the edges, but it was unnecessary–the crisis could have been produced by entirely legal behavior, and probably was. But exposure of accounting fraud (or near-fraud) at Lehman could have the unfortunate effect of causing people to focus on fraud as an explanation of the crisis, implicitly letting all the other banks (and regulators) off the hook.
The other interpretation is that if Lehman was doing it, then probably everyone was, or at least a lot of people were. Maybe Goldman didn’t need to because it was shorting the housing market, but any other bank that was about to get blown up by its own toxic assets would have a strong incentive to push the limits of legal accounting as far as it could to buy itself a little more time.
The implication of Abelson’s sources is that the latter interpretation is correct.