Ted Kaufman - United States Senator for Delaware

Kaufman: Report on Lehman Bankruptcy Points to Fraud and Possible Criminal Conduct at Heart of Financial Crisis

Delaware senator says rule of law seriously compromised by 30 years of deregulatory mindset

March 15, 2010

WASHINGTON, D.C. — In a speech prepared for delivery to the Senate, Senator Ted Kaufman (D-DE) says that a report released last week by the bankruptcy examiner for Lehman Brothers Holdings Inc. made clear what many people had long expected: "That fraud and potential criminal conduct were at the heart of the financial crisis."
The 2,200-page report, released on March 11, details accounting tricks and "actionable balance sheet manipulation" by Lehman executives, particularly so-called Repo 105 transactions designed to mislead the public about the state of Lehman's balance sheet.
In his speech, Kaufman notes that Americans could draw at least three lessons from the report: that we must "undo the damage caused by decades of deregulation;" that the United States must "concentrate law enforcement and regulatory resources on restoring the rule of law to Wall Street;" and that Congress must help regulators and other gatekeepers "by providing clear, enforceable 'rules of the road' wherever possible."
Unfortunately, says Kaufman, "I’m concerned that the revelations about Lehman Brothers are just the tip of the iceberg.  We have no reason to believe that the conduct detailed last week is somehow isolated or unique. Indeed, this sort of behavior is hardly novel."
"Enron engaged in similar deceit with some of its assets,” continues Kaufman. “And while we don’t have the benefit of an examiner’s report for other firms with a business model like Lehman’s, law enforcement authorities should be well on their way in conducting investigations of whether others used similar ‘accounting gimmicks’ to hide dangerous risk from investors and the public."
And, Kaufman adds, there's plenty of blame to go around. From the belief that rational “self-interest” was a substitute for regulation, to failures at the Securities and Exchange Commission and other regulatory agencies, to complicit behavior by accountants and lawyers.
“Accountants and lawyers are supposed to help insure that their clients obey the law," says Kaufman. "Indeed, they often claim that simply by giving good advice to their clients, they’re responsible for far more compliance with the law than are government investigators." But, Kaufman notes, "[t]hat claim rings hollow ... when these professionals now seem too often focused on helping their clients get around the law."  
"Mr. President," Kaufman concludes, "last week’s revelations about Lehman Brothers reinforce what I’ve been saying for some time.  The folly of radical deregulation has given us financial institutions that are too big to fail, too big to manage, and too big to regulate," he says. "If we have any hope of returning the rule of law to Wall Street, we need regulatory reform that addresses this central reality."




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