In my post yesterday I pointed out that the Repo 105 deals did not bring Lehman down. In fact, we have no evidence that criminality was involved in the collapse of Lehman at all. Instead, it seems that a series of tremendous failures of business judgment brought down Lehman.
Chittum seems confused about why I made this point. I was not saying that deceiving the market by using the Rep 105s to conceal the true state of Lehman’s financial condition did not harm anyone. It almost certainly did harm investors, creditors, and clients of Lehman, some of whom were persuaded to stick with the company much longer than they might have if they had known the truth.
The question is whether or not this harm should be punished criminally. In my earlier post, I gave some practical reasons not to bring this into the criminal justice system. I could also add concerns about abusive prosecutorial tactics, judges biased against the wealthy, and the inability of juries to grasp complex accounting cases.
Following each big crisis in financial markets, regulators and prosecutors target high profile Wall Streeters in an attempt to restore investor confidence. This isn’t justice so much as politics.
But the core of the matter is a deeper question: are the alleged misdeeds by Lehman Brother executive to manipulate the company’s balance sheets best addressed through the criminal process?
My argument is that they are not. The Lehman executives who were authorizing these transactions were not engaged in anything that resembles traditionally criminal actions. Specifically, the evidence indicates that they were not hiding the Repo 105 deals from government inspectors. They were not undertaking the deals in order to embezzle shareholder funds. They lacked an evil motive or any awareness that they were doing something wrong.
It seems clear to me that Lehman’s executives believed they were taking a rationale approach to dealing with a market that they were convinced was irrational. They were trying to save the company from what they viewed as a temporary financial panic. And they apparently believed that in order to get that accomplished, they needed to deceive the outsiders they thought had become irrational.
Now—to be perfectly clear—I think the Lehman executives were terribly wrong at every stage of this process. The market was not irrational in 2008. It was actually reacting rationally to the reality of the housing downturn, which was itself a rational reckoning of home values with the preferences and wealth of the American people. Lehman’s executives should not have decided that investors were too dumb to know the truth. In fact, this hubris—this unwillingness to admit that outsiders might have things right—is part of what doomed Lehman.
The SEC probably should bring a civil action against the executives for Repo 105. The accountants and lawyers who enabled the transactions should be investigated. Without a doubt, huge class action suits will be filed on the part of deceived investors.
But, as far as I can tell, Lehman’s executives did not do anything that rises to the level of criminality. So far no one—even Ryan Chittum—has offered a satifactory explanation about why the Repo 105 transaction should be considered criminal. Which leaves me to suspect that much of the desire to see the likes of Dick Fuld go to jail is rooted in a desire to punish him for the failure of Lehman.