Reply #83: Lehman Doomed by Lending to Itself in Financial Alchemy Eluding Dodd-Frank

[Demeter]

http://www.bloomberg.com/news/2011-03-11/lehman-failed-lending-to-itself-in-alchemy-eluding-dodd-frank.html

By the time Lehman Brothers Holdings Inc. (LEHMQ) became the biggest bankruptcy in U.S. history, plunging the economy into the worst financial crisis since the 1930s, the firm had made $3 billion in loans to itself in transactions that even today would elude the Dodd-Frank law designed to prevent such financial alchemy.

Lehman turned souring real estate investments into top- rated securities that the bank’s insiders dubbed “goat poo,” according to court records. The securities, called Fenway commercial paper, helped keep Lehman afloat over the summer of 2008, until a trading partner determined they were “worth practically nothing.” That precipitated Lehman’s demise on Sept. 15, 2008, bankruptcy documents and a May 2010 Lehman lawsuit show.

“It wasn’t a mistake to let Lehman fail, it was a mistake to let it live so long,” said Ann Rutledge, a principal with New York-based R&R Consulting and the co-author of two books on structured finance.

Nothing in the 800-plus pages of the Dodd-Frank regulatory overhaul enacted last year would prevent a bank from using similar techniques to try to make regulators, credit-rating companies and lenders believe it was healthier than it was, said David Skeel, a professor at the University of Pennsylvania Law School in Philadelphia.

“These kinds of transactions had a lot to do with the financial crisis and Dodd-Frank doesn’t target them in any direct way,” he said...