Thursday, 23 December 2010

New York Attorney General jumps in where SEC has feared to tread

At first glance, the latest news from the de facto American kleptocracy is rather difficult to fathom. Apparently, in the absence of a prosecution by the unaccountable (and possibly corrupt) senior officials at the US Securities and Exchange Commission, the New York Attorney General has decided to prosecute the London-based accounting firm, Ernst and Young, for assisting the (now failed) New York-based investment bank, Lehmann Bros., to hide the truth about how its (multi-million dollar salaried) company officers had managed to acquire debts totaling $768 billions against assets valued at only $639 billions. Your readers will remember that the sudden collapse of Lehmann Bros. signalled the start of the current world financial crisis which we are all now paying for.
This latest, amoral, corporate twist in the Lehmann Bros. scandal, and the complacent way it has generally been reported, are emblematic of our times. The expert from the Wall St. Journal (who was interviewed by the BBC) just accepts that (so far) no individual responsible for Lehmann Bros.' collapse has been held fully to account, and that the case against Ernst and Young will almost certainly not go to trial, because a 'financial settlement' will be reached. However, on March 11th. 2010, Jenner & Block (a court-appointed examiner) published the results of a year-long investigation into the failure of Lehmann Bros. This complex document revealed the simple truth that the senior officers of Lehmann Bros. maliciously agreed to the occulting of the bank's massive trading-losses (for which they were responsible) by repeatedly using a devious 'accounting procedure' known as 'Repo 105.' In plain English, on various occasions the bank's bosses secretly swapped $50 billions of the banks assets temporarily into cash just before publishing the bank's regular financial statements in order to mislead its investors by maintaining the appearance of solvency. Apparently, against the advice of certain more-honest employees at Ernst and Young, this so-called 'procedure' was proposed and executed by the accounting firm's less-than-honest senior officers, and approved by the ( now former) boss of Lehmann Bros, Richard S. Fuld, Jr. The corporate structure known as Ernst & Young now stands accused of financial malpractice, but Mr. Fuld still faces a prison term.

Lehmann Bros.' bankruptcy was the largest collapse (by value) of an investment bank since Drexel, Burnham, Lambert folded (amid fraud allegations) in 1990. Immediately following Lehmann's bankruptcy, an already weakened stock-market began to fluctuate massively. The Dow-Jones Index suffered its largest one day loss and largest one day gain. What followed has been labelled the 'perfect storm' of 'economic distress factors'. Eventually, a bailout package (Troubled Asset Relief Program) was prepared by Henry Paulson, Secretary of the US Treasury, in which the US Congress promised to prop up the crumbling US banking system by giving it $700 billions of US tax-payers money. Thus, preventing the entire world economic system from collapsing. The Dow-Jones index eventually closed at a six-year low of 7,552.29 on November 20th 2008. Three months later it had nose-dived to 6626.

The fall of Lehmann Bros. had a catastrophic effect on small investors; particularly bond holders and holders of so-called 'Minibonds' - e.g. in Germany, these essentially-worthless pieces of paper (linked to the artificially-high values of the share- index system), were peddled mostly to ill-informed, elderly persons, students and families by the German arm of Citigroup (the German Citibank now owned by Credit Mutuel).

David Brear (copyright 2010)

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