Perhaps the patient would like to change his behavior, perhaps not. But it will certainly be hard to do while the fallout from early crises keep invading his well-being. I have always known that it would take years, and maybe even decades, before we fully understood all the factors behind the near collapse of our financial system in 2008.
When your public and professional actions cause the spotlight to be extended to your family, it’s extremely rough. It is in many cases sad and unfair. Lehman executives, along with many others in the financial industry, found their private lives put on display. The narrative was irresistible: financial fat cats living large while Middle America loses its pension benefits. For a time the cameras were out in force, trolling the wealthy communities of Greenwich, Connecticut; Harrison, New York; and other enclaves of privilege.
Former Lehman trader Larry McDonald, for one, spared no sympathy for the Fulds. “Dick Fuld should publicly apologize,” he told me. “So many people are in pain. Their unemployment has run out, their COBRA [health insurance] has run out. These are back-office people.”
It is impossible to calculate the scope of the suffering in Middle America that resulted from the crisis, but just among the doomed employees of Lehman Brothers and other failed banks, the pain rose to an intolerable level.
Meanwhile, umbrellas, ties, duffel bags, coffee cups, and other items bearing the Lehman Brothers logo started making an appearance on eBay. The sales would go toward paying Lehman’s creditors.
Months later, long after Lehman Brothers had disappeared from the front pages and faded from public interest, the court-appointed examiner who had been quietly studying the events leading up to Lehman’s bankruptcy filed a 2,200-page report. Suddenly, Lehman was back in the spotlight. I suppose the good news, if you were Fuld or Gregory or Callan or anyone else in a critical position, was that there didn’t appear to be criminal charges in the offing—at least, not yet. But that didn’t mean there wouldn’t be lawsuits and legal challenges, because the report made a strong case that Lehman was hiding the truth in the months before it fell.
Deserving particular scrutiny was its use of a device called Repo 105 in the second quarter of 2008 to move $50 billion off its balance sheet. A repo is a sales and repurchasing agreement that involves transferring assets in exchange for cash, with an agreement to repay the money and take back the assets later. In principle, it’s not much different than a loan, where assets are held as collateral on future payment. The difference in Repo 105 was that Lehman recorded it as a sale and no longer had any record of the assets on its balance sheet. Nor did the firm disclose Repo 105.
In a daylong hearing before the House Financial Services Committee on April 20, characterized as an “autopsy” of Lehman, Fuld insisted that he was completely unaware of Repo 105. “I have absolutely no recollection whatsoever of seeing documents related to Repo 105 transactions while I was the CEO of Lehman,” he said. Was he credible?
Such fancy footwork certainly breaks the spirit, if not the letter, of the law. Mary Schapiro, who replaced Christopher Cox as head of the SEC, admitted to Congress that the agency’s oversight was sorely lacking—right up to the moment of Lehman’s bankruptcy. Its investigators only skimmed the surface, looking at obvious trades and statements. They didn’t go deep enough to uncover Repo 105.
When I caught up with Schapiro in Washington on March 29, 2010, she told me that not only was the SEC looking very carefully at Lehman, but it was examining every major financial institution to see if there were “Repo 105–type issues.” Schapiro was a fresh face and offered new hope that the SEC would no longer be asleep at the wheel. She inspired some confidence in regulatory circles. Even before the latest Lehman revelations, many people had viewed Cox’s tenure as lax, exemplified by Bernie Madoff’s $65 billion swindle, which happened right under the agency’s eyes. There was also an odd item breaking about SEC investigators watching pornography on their office computers at the height of the crisis. One staffer had watched porn for eight hours straight! Could it get any worse?
When the SEC does not perform its role, and institutions get away with deceptive practices and worse, it tarnishes the credibility of the financial system. This is not just a symbolic black mark. The markets rely on investor confidence, and when that is shaken the results are recorded in tangible declines on balance sheets. Just consider how many millions of people pulled their money out of the stock market between September and December 2008. Their actions were fear driven and may have gone against the best advice of their financial advisers, but it didn’t matter. Once confidence was gone, the stock market couldn’t operate effectively. But one Bush administration source noted to me that “the market is a tough taskmaster and it punishes bad behavior pretty harshly. I don’t think we will ever have a repeat of the kind of crisis that we had in the past.”
It was a good start. But as the revelations kept coming, and Americans kept bearing the burden, many of them wanted to see bankers going to the woodshed. Tactically, the financial-reform discussions centered on the boogeyman dubbed “too big to fail.” The scares surrounding the potential collapse of institutions like AIG and Citigroup opened a debate about whether any institution should be allowed to grow to the extent that its collapse put the nation—or the global economy, for that matter—in jeopardy. New regulations would become the next change that was to be met on Wall Street. Under the
