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  • No Punishment for Bankruptcy?

    NICHOLAS ROBERTS/AFP/Getty Images/Newscom

    NICHOLAS ROBERTS/AFP/Getty Images/Newscom

    As Congress continues to deal with the “too big to fail” issue, it would do well to recognize that bankruptcy does not automatically equate with criminal behavior.

    Sunday’s New York Times ran a story detailing how Wall Street regulators have essentially “thrown in the towel” (at least for now) on prosecuting Lehman Brothers executives. They didn’t give up easily.

    September 15, of course, marks the fifth anniversary of the Lehman bankruptcy filing, a day of prosecutorial bliss. According to the Times, “The decision not to bring charges…came despite early hope among investigators whose careers likely would have benefited from bringing such a prominent case.”

    Despite the comfort that such hope may have brought to vast numbers of young attorneys, it turns out investigators have found very little evidence of wrongdoing. It seems that running a risky business into bankruptcy is not illegal, and following an incredibly complex set of accounting rules does offer a degree of criminal (and civil) protection.

    Any hope for a case, according to the Times, hinged on the arcane “Repo 105,” a financial instrument that allowed Lehman to temporarily shift $49 billion of debt off its balance sheet. Of course, the Repo 105 did nothing to hide the additional $650 billion in debt Lehman carried. And Lehman did disclose its reduction in debt.

    But why let little facts like these get in the way of a good prosecution? Take away the $49 billion and surely investors thought Lehman’s 30-to-1 leverage ratio was super safe, right?

    For now, it appears investigators did a very thorough investigation and concluded they did not have a case against Lehman’s executives. Perhaps investigators should look more closely into the role that Members of Congress played in worsening the financial crisis. The Wall Street Journal has already compiled a short list along with a few quotes.

    Posted in Capitol Hill, Economics [slideshow_deploy]

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