We are on a collision course with a meteor and it's not from outer space.
Almost 10 years after 9/11 and the Enron off-balance sheet accounting
scandal, what have we learned? The answer is categorically nothing.
"I was disturbed to learn after 9/11 that various intelligence
agencies did not always share information with one another. I thought
we learned something from that, but apparently not." said Anton R.
Valukas, Examiner, Lehman Brothers Bankruptcy before the Committee on
Financial Services, United States House of Representatives.
Personally, I have been saying for months on my global lecture tour
from Beijing to San Mateo, we have a deadly, dysfunctional government
when it comes to regulating our financial institutions. I had done
some research on our financial regulatory structure while writing, "A
Colossal Failure of Common Sense - the Inside Story of the Collapse of
Lehman Brothers." I thought it was bad, but not this bad. This is
At the top of the bubble in 2007, the Securities and Exchange
Commission employed 3,798 people, and Chairman Mary Shapiro humbly
admitted in a testimony Tuesday that only 24 people were assigned to
look over the four largest investment banks. That's 24 people to
protect the public from $3.5 trillion of balance sheet risk. Bear
Stearns, Lehman Brothers, Merrill Lynch and Goldman Sachs. And
nobody's counting the $41 trillion in credit derivatives at those
investment banks. These are alarming statistics.
But it becomes more alarming if we look at 1995, when the combined
assets of the six biggest banks in the USA totaled 17% of GDP. By
2007, this figure was greater than 60%. The bank risks are growing
like Jack's beanstalk, and the SEC is back in the Stone Age.
The dominoes are now larger and closer together than ever before. Years
ago when banks failed they didn't obliterate the global economy and
require trillions of public funds to bail them out.
The lack of coordination between the SEC, the New York Federal Reserve
and the FDIC was breath-taking. Mr. Valukas's testimony on the Lehman
liquidity pool shone a bright light on massive deficiencies. Simply
put, a liquidity pool at an investment bank is the amount of liquid
investments that can be pledged for cash in a very short period of
time. In June 2008, Lehman Brothers claimed their liquidity pool was
$45 billion, and on September 10, 2008, just five days before the
bankruptcy, the same pool was purported to be $41 billion. What
Lehman didn't tell the investing world was some 20% of this number was
encumbered or pledged to banks like Citibank and JP Morgan. Billions
of dollars of Lehman shares traded on bogus information.
What's worse, the SEC knew of a $2 billion encumbered pledge to
Citibank in June 2008 that Lehman was counting as part of their liquidity
pool, and the NY Fed knew about a $5 billion pledge to JP Morgan in
August. Neither regulator shared this information with each other,
according to Mr. Valukas's testimony. The SEC did not regulate. They
did nothing to stop Lehman from putting tax payers at risk even though
for months they knew Lehman was maxed-out, way above their committed
I am still amazed by Lehman's former CEO and his commendation for
short sellers, based on the facts that have finally come to light. The
short sellers were right. Most times they are. Trust me. I was one.
The regulators are so out-manned and out-gunned, it's not even close
to a fair fight. People working up on the 31st floor executive suite
at Lehman Brothers were making between $10 and $30 million a year,
every dollar putting them a thousand steps ahead of the regulators at
the SEC. I'm at a loss as to why the SEC doesn't poach some of Wall
Street's brightest guys, and pay them $10 million a year. Can we
institute a military style draft and force Goldman Sach's CFO David
Vinear to work for the SEC for 3 years?! For the good of the country,
it's almost at this point.
From the Continental Illinois Bank failure in 1984, to the spectacular
collapse of Long Term Capital Management (LTCM) in 1998 to the largest
bankruptcy in the history of the US in Lehman Brothers, these
financial disasters are going from big to bigger to exponentially more
deadly. The bailout as a result of Lehman's failure is 77x the price
of Continental Illinois and LTCM combined. If we don't do something
right now to fix our regulatory framework, the next crisis will most
certainly bankrupt our nation.