Over the past few months, we have learned about extraordinary levels of excessively bad corporate behavior.
As bad as the Bailouts were from an economic, wealth transfer, and moral hazard perspectives, it turns out that the grim reality was an order of magnitude worse than previously believed.
We have since learned that many TARP recipients, bailed out banks and other ne’er-do-wells were actively engaged in cooking their books. I don’t mean various FASB 157 permission to lie, and other legal but nefarious activities. I am referring to the 2002-2007 era of scams, frauds, and outright theft.
The public’s righteous indignation over the lack of just desserts for the perpetrators of these frauds has morphed since September 2008 into an unresolved, unfocused anger. When this all plays out, we might very well see bonus clawbacks, fines and penalties, disgorgement of ill gotten gains, and criminal arrests for some of the major names at the biggest brokerage houses.
Why do I think that 2 years later, some justice might be done? The truth is slowly coming out, as insiders provide testimony, release papers, and even offer up recordings of conversations to various investigators and prosecutors.
• Lehman Brothers: used “Repo 105 transactions” to remove $50 billion of liquid assets from the balance sheet at quarter-end in 2008 in order to mislead investors as to Lehman’s net leverage. It also hid from view billions of dollars worth of troubled assets. The latest reveal is that Lehman CEO Dick Fuld was aware of this accounting technique. Do not be surprised to see some form of indictment of Dick Fuld over the next 12 months;
• Merrill Lynch: Engaged in a different but just as nefarious technique to hide leverage and losses , thereby to misleading public investors, the NYT reported yesterday:
“Pyxis was created at the height of the mortgage mania as a sink for subprime securities. Intended for one purpose and operated off the books, this entity and others like it at Merrill helped the bank obscure the outsize risks it was taking.”
This took place during the riegn of Stan O’Neal, who left Mother Merrill with an egregious $161.5 million in severance.
• Citigroup: Similarly shifted CDO risks and leverage off its books, failing to disclose them to investors and regulators during the era of Citi with Chuck Prince as CEO (who walked away with over $40 million in severance).
• Morgan Stanley, Bear Stearns, Wells Fargo, Wachovia, Wamu, B of A: What of the rest of the major banks and investment houses? I recently asked a very savvy credit analyst about who else engaged in these SIVs, swaps, off balance transactions, and other fraud with the intent to deceive investors and regulators.
“Pretty much all of them. The only exceptions are probably Goldman Sachs and JP Morgan (I have no evidence they did this). The rest of the Street either are known to, or are unknown but likely to have engaged in the same behavior. Morgan Stanley, Bear Stearns, Wells Fargo, Wachovia, Wamu, B of A, all of them.”
Lacking evidentiary proof, I was not permitted to quote him by name.
I have long believed that the general anger of the public about the bailouts were about the inherent injustice in bailing out incompetent bankers who made tidy profits and huge bonuses through their own incompetence.
It turns out that this was more than mere incompetence, this was a malicious fraud, a full on intent to deceive the investing public in order to grab huge bonuses, economic consequences tot he nation be damned.
But the noose is slowly tightening. The FCIC has undercovered documented illegal behavior, while a newly revitalized SEC opens more cases.
In the post Sarbanes-Oxeley era, where CEOs signed off on their accounting statements and quarter earnings release, that calls for investigation, prosecution, confiscation — and jail time. As much as the public has been frustrated, they may very well see some justice soon . . .