Lehman Died as Regulators Lied (?)

Is it fair to say "regulators lied?"  We find that soundbite to be too harsh.  True, maybe, but too harsh. Two recent news/opinion articles (New Light on Regulators and Fed Fretted ... Demise of Lehman) push the ideas that:

(1) Paulson, Bernanke, Geithner, and other regulators didn't know what they were doing in 2008;

(2) Some or all of these celebrity regulators were less than candid, shall we say, in their public remarks; and

(3) The U.S. gov't should have bailed out Lehman.


We say "YES" to (1), "YES" to (2) - but understandable given (1), and "NO" to (3).


Instead of a deep-dive analysis, we'll content ourselves here with a few pithy observations:

*    As Treasury Secretary, Paulson had no right - in our opinion - to dictate an initial equity bid of $2 per share to Bear Stearns in March 2008.  Where did he get the idea that was legal?!

*    JP Morgan messed up the "Bear Stearns debt guarantee" in March-April 2008.  This same issue arguably killed the Barclays rescue of Lehman in September of that year.  Nobody seems to understand this point - and it still matters!

*    The New York Fed bent (broke?) the law in its participation in the Bear Stearns bail-out.  To make this dubious deal work, the Fed encouraged and condoned the mis-marking of "Maiden Lane" collateral.

*    In the bail-out of AIG, Bernanke didn't understand AIG insurance entities were not at risk from the failure of AIG Financial Products (the part of AIG with all the losses).

As references for the observations, see:

   House of Cards by William Cohan - the excellent book (not the movie!)

   In Fed We Trust by David Wessel

   Too Big to Fail by Andrew Ross-Sorkin

   Lehman Chapter 11 Proceedings Examiner Report

Rather than dwell on what is fast becoming ancient history, our goal is to make a simpler point.  The financial markets are complicated!!  Regulators don't know how it all works.  Neither do the people who run the banks.  Let's not be surprised when we learn 5 years after the fact that the Fed and the government didn't see failures at Lehman, Fannie, Freddie, AIG FP, and WaMu until the very end.  The executives of all these firms were just as surprised!

Advisors Beware: Investors Can Sue Third Parties for Aiding Fraud

WSJ reports on a recent 7-2 Supreme Court decision allows investors of R. Allen Stanford's Ponzi Scheme to sue advisors for allegedly aiding and abetting the fraudulent scheme. This is an important decision that will give investors additional pockets for recovering their losses. 

ICAP to lose role of ISDAfix Benchmark Administrator

Bloomberg reports that ISDA is "seeking offers from companies wanting to become the benchmark administrator for ISDAfix, a measure used in the $426 trillion swaps market."  I can imagine what the job qualifications should probably say: applicant must not have any positions in the swaps market; must not have employees who are friendly with banks' swaps traders; must be immune to all types of material and spiritual temptations. NOTE: we don't know if there have been any past wrongdoings and we're not saying that there has been. But, just changing the administrator is insufficient to prevent potential future wrongdoing. ISDA needs to make sure the administrator is a party that has no trading interests that could be impacted by the ISDAfix.  

NYT DealBook: Facebook Stock Not So Different Than Bitcoin

The title of Rob Cox's post says it all, except perhaps for the money laundering angle.  Easier to launder money using Bitcoin or put it differently, I'm not aware of any federal criminal cases where prosecutors are alleging money laundering through the use of Facebook stock. 

UBS Said to Cooperate in FX Investigations in a Bid for Immunity

Bloomberg today reports that people familiar with the investigations say that UBS is cooperating with regulators in the US and the EU into the benchmark FX allegations and will disclose any wrongdoings.  As we have reported in prior posts, there is a huge incentive for all banks to consider this course of action, and we would be surprised if other banks are not doing/planning to do so.  The biggest benefits go the first movers and so there should be a rush to the investigators, as many banks have mounted internal investigations to uncover wrongdoing.  In addition, it has been previously reported that LIBOR settlements require many of the banks to cooperate in any benchmark rate investigations.

EURIBOR Benchmark Reforms

The EURIBOR European Banking Federation (EURIBOR-EBF) manages short term interbank interest rate benchmarks within the EU.  The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) released a report reviewing changes made by the EURIBOR-EBF, noting the progress made in "raising the transparency of the benchmark setting process, enhancing the governance and control mechanisms of the benchmark, thereby improving the quality and reliability of the resulting index".

Just as interest rate benchmark process changes have been and continue to be made, changes in FX benchmarks are on the way as well.  We reported earlier this week that Singapore has stopped publishing FX benchmarks for certain SE Asian currencies used for non-deliverable forwards (Singapore Ends FX Benchmark for Indonesian Currency).  It is unlikely that WM Reuters or other benchmark setters will wait for the results of investigations before changing their processes as press reports have raised market concerns which will need to be addressed as soon as practical.

EURIBOR-EBF

How Soon They Forget!! (Or Did They Never Learn?)

Hard to believe - we learned today that the EU is troubled by new Fed rules for foreign banks operating in the U.S.

Michel Barnier, one of those innumerable European commissioners nobody really keeps track of, is worried.  He's fretting about the potential impact on the global level playing field since we must always ensure competition on an equal footing.

Where's the substance??!!

Why isn't M. Barnier making the strongest case he possibly can that European banks have plenty of capital now?!  Prove - or at least argue - that the banks on his side of the Atlantic are highly immune to insolvency risk and that they no longer have assets much longer in maturity than their liabilities.  In other words, make the argument that your banks are strong and NOT just that you want regulation to be "fair!"

These concepts of "fairness" and "level playing field" are not new!  Putting such amorphous and non-essential concerns ahead of true substantive analysis of banking risk is one of the many enablers of the disarray of the past 7 years.

See here the text of a conference presentation we made in Sydney in 2001.  Here's an excerpt:

"Why are the BIS rules so bad?  Well, the portfolio credit risk puzzle is quite difficult.  More importantly, BIS regulation is unavoidably a political process.  That means the end result must be simple and comprehensible to all, everybody - worldwide! - must agree, and all banks and countries must be treated “fairly” (where “fairness” is generally in the eye of the allegedly offended).  That can’t work.  We end up with rules that are wrong but for which there is universal agreement."

(If we had it to do over again, we'd certainly leave out the idea that rating agencies could do a better job than the BIS.  Live and learn!)