Wall Street's "Money Princes" harrumph and raise eyebrows when one of their own is caught eating from the cat box

There's a breed of Wall Street "money princes" who are particularly revered by our capitalist society. They're the ones who wear tassel loafers, travel in limousines and private jets, live in royal splendor in rarefied gated enclaves away from the noise and stench of the rest of society, and make the huge deals that keep money moving in our economy. They finance skyscrapers and wars and oil refineries and the propping up of friendly governments. They are understood to be scrupulously honest and hard working, and for their exemplary service they are paid tens of millions of dollars per year-- and some significantly more than that. They're our American royalty, these princes of money.


Well, as everyone knows it's been a bad couple of years for our money royalty. The last two years of the last Republican administration saw the collapse of two huge investment banks, Bear-Stearns and Lehman Brothers, an emergency ransom of 750 billion dollars negotiated by Henry Paulson (incidentally, also one of the money princes) and paid by American taxpayers to keep the system afloat, and the general collapse of the economy for the "little people," causing massive home foreclosures, asset shrinkage, and job loss throughout the country. Some of our princes have even had to retire on their meager savings. One, Bernie Madoff, was sent to prison for the rest of his life! Annus mirabilis indeed!

So finally, after all that, the results of a private investigation of the collapse of Lehman Brothers were released this week, and it shows conclusively that at least some of the money princes were acting very badly.

Picture if you will a mortgage-- a piece of paper representing a legally binding agreement from a homeowner to pay the holder a lot of money every month for the next twenty or thirty years for the privilege of owning their home. Banks buy and sell these pieces of paper among themselves all the time because they represent value. If I still owe $100,000 on my home, the mortgage paper would then be worth $100,000 eventually, because it compels me to pay that amount or forfeit the property, which is presumably worth even more.

Lehman owned a lot of that kind of paper-- truckloads of it! But it had become clear by 2007 that some bad mortgages had slipped into the lot along with the good ones. People had been issuing mortgages to people who weren't able to pay them back, and then immediately selling the paper to bigger banks. And it was pretty hard to tell the good paper from the bad paper when they were all stuffed into the back of the same dump truck. No banker was going to niggle with another banker over the value of a specific mortgage paper, because after all they're backed by the value of the real estate and, even more importantly, bankers (our "money princes") don't treat each other that way.

OK, so now there's a dump truck full of paper, with a nominal value of say 10 billion dollars-- meaning once everyone has paid up, the owner of the dump truck will have received 10 billion dollars. This is a 10 billion dollar truck! Bankers made millions selling the truck(s) to one another, taking a few percent of the value of the sale in cash each time the truck changed hands.

Now any accountant will tell you, this truck isn't really worth $10 billion. And sometime around the early 2000's, it was clear it was worth much less than that. The difference between the face value and the "actual" value, computed by accountants and actuaries, is called "leverage." And banks like Lehman were constrained by some pesky regulations to limit the amount of leverage they could carry on their books, because it put at risk the actual "real" money their depositors placed with the banks. And they had a whole garage full of dump trucks!

At this point, with a lot of "value" in jeopardy, Lehman found a sweet solution. It's called a "Repo 105" which in a nutshell means selling the dump truck to another bank with the promise to buy it back after a period of time passes. This gets rid of the pesky "leverage" at the end of the fiscal quarter so it's not there to bother the regulators, and they can also count it as a "sale" to indicate they're productive (they probably paid a small commission on the trade to one of their salesmen), and reinforce the stated value of the dump truck at the same time. Two weeks later the books have closed and the truck is back in their garage.

Suffice it to say, after a couple of years of these shenanigans-- err, I mean equity exchange transactions-- as the mortgage and real estate crises loomed, the "value" of the "assets" had dwindled toward zero, and Lehman Brothers was caught with their pockets turned out and deemed to be insolvent. Doors were chained shut, windows boarded up, and any remaining assets were sold in a fire sale. The dump trucks turned out to be garbage trucks.

The whole debacle of Lehman's collapse was investigated by an independent outside firm, and the resulting 2200 page report was made public on Thursday. "How could they have gotten away with it?", you might wonder. The Repo 105's didn't seem legal to Lehman's US lawyers, so they had to go to London to find a law firm, Linklaters, to approve them, and then only if the temporary transfers occurred out of the United States and were gussied up to look like legitimate sales (maybe the commission increased!). There also appears to have been some collusion with their accounting firm, Ernst & Young, who were supposed to find evidence of improper or irregular transactions. And finally there was obvious help (whether collusive or innocent) from the foreign banks, mostly Asian but others as well, who participated in the transfers.

The glaring lesson to note here is no one, even people in high places who are supposed to be keeping an eye on things, questions the actions of the money princes-- not the boards of directors, the auditors, the regulators, the lawyers, the middle management-- no one questions the all powerful royal ones. That's how Bernie Madoff could survive for decades under the scrutiny of the SEC. It's how UBS could harbor (in numbered Swiss accounts) billions in cash from tax evaders in the US and elsewhere. It's how AIG could pretend to carry enough reserves to cover catastrophic investment losses by others, and then get the US government to cover those losses when due. And it's how the greedy elite-- or money princes as I'm calling them-- could sell all the value out of their corporations, and the entire American real estate market as well-- and then get off scott free, to live "miserably" on their golden parachutes and meager savings.

And, according to the New York Times, while all this scuttlebut on a fallen prince is revealed, the other princes raise their eyebrows, shrug their shoulders, and deny using that questionable tactic themselves.

Executives at other Wall Street banks professed surprise at Lehman’s accounting maneuvers. Goldman Sachs, Barclays Capital and other banks said on Friday they did not use repos to hide liabilities on their balance sheets.

And the Republicans are fighting the imposition of banking regulations! Arrrgh! They're not princes! They're rapacious greed-capitalists at best, and crooks at heart. They sucked a huge amount of home equity out of the American homeowner, out of our stocks and bonds and 401K's, out of the job market, and out of dozens of formerly flourishing US banks, and took all that money for themselves. They sleep on mattresses stuffed with ten-thousand dollar bills. The Republicans are blaming the Democrats and big government and the poor. The Democrats are blaming the Republicans and their repeal of regulations. And the money princes stroke their chins and watch with disdain and noblesse oblige from behind their security barriers, knowing they're immune.