Geithner Ignores Blame in Lehman Failure
Richard Suttmeier submits: Treasury Secretary Geithner’s Bullet Points on the Financial Meltdown:
- Our financial system allowed risk to move towards areas where regulations were most lenient.
- In the lead-up to this crisis, we saw a complete breakdown in basic checks and balances in the system.
- Credit rating agencies failed to do an adequate job of assessing the risks in structure credit products and disclosing their ratings methodologies.
- Boards of directors failed to exercise critical judgment and address critical weaknesses in risk management.
- Accounting and disclosure regimes did not adequately inform investors of material risks in a timely fashion.
- Executive compensation rewarded short-term gains with little attention to the risk of long-term loss.
- The derivatives market, operating largely in the dark without oversight, grew to enormous scale, with firms able to write hundreds of billions of dollars in commitments without the capital needed to back them up. (Is this not the same risks today?)
The primary dealer status should have given the regulators and hence the economy an orderly unwinding of Lehman Brothers (LEHMQ.PK). In my opinion the NY Fed could have figured out a way to use the Primary Dealer Credit Facility to help Lehman. My market call remains; “Sell Strength,” raise cash to 75%, as the Dow is headed for 8,500 before 11,500.Geithner tells us that “when we saw when firms mismanage themselves to the edge of failure, the government had limited ability to step in and protect the rest of the financial system.” This is where I differ with regard to Lehman Brothers. Lehman was a primary dealer and hence a customer of the Federal Open Market Desk, which Geithner ran when he was President of the NY Fed. In my judgment the Fed had access to give Lehman the credit they needed to gradually liquidate, rather than just letting the firm fail.Instead, Geithner says, “It certainly didn't have any ability - as we do with banks – to step in and - in an orderly and safe way - wind down major investment banks like Lehman or major insurance companies like AIG (AIG). The Fed and the other banking regulators could have used the facilities that were used to address the Bear Stearns situation.Geithner says: Failure is inevitable in financial systems. The challenge for government is to design a system in which failures of private firms cannot cause catastrophic damage to the economy.Complete Story »