Jonathan Weil: Lehman fails but market cops are eating doughnuts


By Jonathan Weil
Bloomberg News
Monday, September 15, 2008

Now can we get some subpoenas flying?

What happened this weekend at Lehman Brothers Holdings Inc. is nothing short of remarkable, and I'm not just talking about its death. Sunday night, one by one, stunned Lehman employees were filmed by TV news crews leaving Lehman's offices carrying away boxes and duffel bags full of heaven knows what.

Is there anybody left in the government with a pulse? Where's the yellow police tape? How about a cease-and-desist order to prevent document destruction? Are we supposed to believe that everything carted out of Lehman this weekend was a personal effect?

Can anyone give me a good reason why Lehman offices shouldn't be treated as a crime scene now? Or why there has been no sign of any investigation by the Securities and Exchange Commission into any aspect of Lehman's accounting or disclosure practices? Where is the Justice Department? Where is New York Attorney General Andrew Cuomo? How about the Financial Industry Regulatory Authority?

Not only is Lehman dead. Fannie Mae and Freddie Mac, which cooked their books in broad daylight, are taxpayer-owned zombies. American International Group Inc. and Washington Mutual Inc., whose accounting practices also stink, are on the brink. And while it's true that AIG is the subject of SEC and Justice Department probes, there's no sign that anyone in the government is looking into whether executives at these other places violated the law.

Never has it been more evident that the SEC and other government agencies think their job is to protect financial companies and financial executives, rather than the investors they rip off.

... Chasing shorts

Just two months ago the SEC was firing subpoenas all over hedge-fund land trying to find a short seller to burn for spreading false rumors about Lehman. (They're still looking.) And yet there's no sign it ever occurred to anyone at the SEC to check if Lehman's books were cooked, or if Lehman's executives ever misled the public about the company's prospects.

There's no sign the SEC has done anything to inquire about the impossibly optimistic asset values on Lehman's balance sheet. There's no reason to believe the government has asked about Lehman's Enronesque dealings this year with an off-balance-sheet hedge fund run by former Lehman executives called R3 Capital.

There's been no signal that anyone in the government has expressed even a curiosity about whether Lehman executives believed the rosy falsehoods they spread this year about their company's financial health. All the SEC has been able to muster in the wake of Lehman's collapse so far are some boilerplate assurances that Lehman customers' assets will be protected.

... Only choice

After bailing out Bear Stearns Cos., as well as Fannie and Freddie, letting Lehman fail was the only acceptable option for the Treasury and the Federal Reserve. And it's a good start toward giving investors a reason to have confidence again someday that the capital markets are not a completely rigged game.

Merely letting companies fail isn't enough, though. For a free-market economy to work, investors must feel confident that they can trust the financial reports public companies produce. And to make that leap of faith, they must have confidence that the government will enforce the law when it's broken.

A big reason Lehman failed is that investors rightfully concluded that Lehman's financial reports and happy-talk assurances couldn't possibly be true. Yet there also was the sense that as long as Lehman remained alive, nobody in the government would do anything about it.

Before we get out of this banking crisis, we're going to need some scalps. There should be plenty for the government to find. Messes like the one we're in don't happen without a large number of highly paid people doing something very wrong.


Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.

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