As if the OTC derivative controversy needed more gasoline, here’s a few more barrels courtesy of the report on Lehman. I’m not going to get into the details, because the report is 2,200 pages long and FT Alphaville does a good job of hitting the highlights of the transaction here.
But let’s put things in perspective for a moment. We’ve seen this song and dance before, albeit in a different form with sovereigns. Greece had entered into swaps that, while legal at the time (phony speechlessness this year notwithstanding), were executed to minimize the external reporting of debt that the country actually had.
If you take these events together along with the crisis we’ve seen in the shadow banking system (off balance sheet structures that borrowed short and lent long, many of which have blown up since), Enron, AIG, and others, we can come away with a few conclusions:
1) SarbOx is a joke. If you have enough money and enough people, you can find loopholes in implementing the rule.
2) Financial regulatory reform is desperately needed. There seems to be even less trust in financial statements now than there was at the .com bust.
3) All of the wrangling and wrestling over the CFPA, jurisdictions of regulators, and other nonsense in the current debate about financial regulatory reform will do absolutely nothing to prevent these events from happening again. None of the debates being held are dealing with the real issues that need to be addressed: rules and regs over off-balance sheet entities, market transparency, and market structure. Notice that none of the things I highlighted are headline grabbers. They deal with the minutiae. They involve people rolling up their sleeves and getting their hands dirty, dealing with some real tricky issues.
And so I keep reminding myself of one axiom: never underestimate a politician’s desire to clean things up over a weekend.