Many Americans share my passion for courtroom dramas. We are riveted by the thrust and parry of trial lawyers and applaud when our legal matadors make the defendants break on the stand.
Unfortunately, my hopes to see someone decisively beating the truth out of misanthropes never seem to pan out in Congressional hearings. Despite innumerable statements by expert witnesses, commission chairpersons and chief executive officers, these hearings seem to drag on without resolution.
In a Wall Street Journal article on Wednesday, “Debt ‘Masking’ under Fire,” the newspaper reported that 18 large banks had consistently lowered one type of debt at the end of each of the past five quarters, reducing it on average by 42 percent from quarterly peaks.
Mary Schapiro, Securities and Exchange Commission chairwoman, admitted that the SEC is concerned that companies are misleading investors if the companies are not disclosing their true high levels of debt. Despite unanimous concerns that a large part of our current recession stemmed directly from over- borrowing by major financial institutions, nobody has pulled the plug on the ability of firms to borrow wantonly and then hide the fact.
The recent failure to nail Lehman Brothers’ former CEO, Richard Fuld, at an April 2010 hearing of the House Committee on Financial Services only added to my frustrations.
A seemingly contrite Fuld was able to bob and weave his way around his interrogators despite mountainous evidence against Fuld and his fellow travelers at Lehman Brothers. Specifically, Fuld claimed he knew nothing about the facts surrounding Repo 105 transactions and his firm’s masking of debt before reporting their financial quarterlies.
Repo 105 is an accounting maneuver in which a short-term loan is classified as a sale. The cash obtained through this “sale” is then used to pay down debt. Repo 105 effectively let Lehman Brothers temporarily hide their liabilities. Under 105, Lehman reported that it had sold its assets to pay down its liabilities. After Lehman’s financial reports were published, Lehman purchased back its original assets, increasing its liabilities again.
The inevitable consequence of the Lehman charade was a tragedy. On Sept. 15, 2008, Lehman filed the biggest bankruptcy in U.S. history when it was no longer able to roll over its humongous debt obligations.
Lehman’s failure nearly led to a global depression.
Within a few hours of Lehman’s bankruptcy filing, the world credit markets around the world froze up.
During this same hearing of the House Committee on Financial Services, Anton Valukas, the court-appointed examiner who did the post mortem on the Lehman Brothers bankruptcy, testified that his investigation found specific evidence that Fuld was aware of Repo 105. Valukas charged that Lehman failed to disclose the transaction to the regulators, to the public and to its creditors, using Repo 105 to appear less leveraged and therefore healthier in the eyes of the public by temporarily shifting up to $50 billion in assets off the firm’s books.
Valukas provided an Nevertheless, congressional inquisitors failed repeatedly to confront Fuld with evidence of his firm’s fraud.
When Rep. Gregory Meeks (D.-N.Y.) asked SEC Chairwoman Schapiro, “Is that (masking of debt) still being tolerated by regulators, especially in light of what took place with reference to Lehman Brothers,” Schapiro said, “We are considering whether … we need new rules to prevent sort of the masking of debt or liquidity at quarter end.”
It certainly would be nice if our congressional representatives took lessons from Perry Mason.
Their kicking the can down the road fails to resolve one of the major causes of our recession-excessive leverage. It should be a major part of our financial reform efforts.
Originally published in the Sarasota Herald-Tribune
