So THAT'S Where The Money Went!

Back when Lehman went under I wrote a couple of Tickers in which I referenced short-term lines that the NY Fed had open at the time of the collapse, and was wondering what the devil happened to them.

It appears that there was more than just what was "announced" out, however, and that some of that money might have been subject to improper "preference" as Lehman entered bankruptcy:

Billing records filed with the court show the examiner is investigating an issue that has angered many of Lehman's creditors: how the Federal Reserve and the New York Fed -- which lent Lehman $46 billion in cash and securities before its bankruptcy filing last September -- were paid promptly and in full, while tens of billions of dollars in other debts were left to be sorted out in court. It remains unclear when and how much Lehman creditors will be repaid.

Ah.  Now that's a problem, but from my view there are two issues here - the bankruptcy law issue and a potentially-illegal "preference" payment, and then there is the part that the WSJ isn't talking about:

Why didn't the NY Fed and Federal Reserve simply seize the collateral they had posted from Lehman for those "loans" and liquidate it?

Remember folks, we are repeatedly told by The Fed that all loans they make are backed by sufficient collateral to prevent loss and are "haircut" to provide them with a margin against potential loss.

If this is in fact true then there was no reason for The NY Fed or Federal Reserve to receive any sort of "preference" payment (unlawful though such a payment would be), as the proper and expected thing to do is simply to seize the collateral they have possession of and sell it!

As such there are only two reasonable explanations for The NY Fed's behavior:

• They didn't actually have collateral for those loans, in which case Bernanke is a damned liar, The Fed has been handing out money in violation of the law requiring proper collateral and haircuts, and the next question becomes "how many other times has The Fed done this and are they still doing it?"

or

• The collateral they took was insufficient to cover the loan(s) balance, in which case Bernanke is also a damned liar, in that The Fed, contrary to The Federal Reserve Act and thus the law was effectively issuing unsecured loans.  (Was that "collateral" worthless CDOs, as just one possibility?)

Of course there is another possibility: The Fed simply doesn't give a damn about what the law says when it comes to preference and established US legal procedure, and neither did the people running Lehman at the time - that is, they believed they could simply do whatever they wanted, preference rules be damned.

But that latter explanation doesn't make a lot of sense.  If you have sufficient security in the form of posted collateral and have actual possession of it (electronic or otherwise) in accordance with the law requiring same there is no reason to play this sort of game - simply sell the collateral and recover your money.

Whatever the truth this is just one more reason why we need a full and complete audit of The Federal Reserve.

Given this little disclosure yesterday my curiosity related to the circumstances surrounding Bear Stearns credit line with the NY Fed is heightened considerably.  As I have noted on multiple occasions that line was unexpectedly yanked as we went into the weekend where Bear ultimately failed.  This act was the proximate cause of their forced merger and near-total destruction of the value held by Bear Stearns' shareholders, and we have never had a cogent explanation for that action; indeed, any such line of inquiry has been met with stony silence.

If, as required by Section 13 of The Federal Reserve Act, the loans made to Bear were properly secured by collateral, there was no reason for The NY Fed to yank those lines on what amounted to essentially zero notice, as had Bear defaulted they could have (once again) simply seized and sold the collateral.

But that line was yanked, which leads to the same two questions that I have related to Lehman's credit line in relationship to Bear Stearns.

Lawlessness, or even the appearance of lawlessness, is unacceptable in any government-linked agency, and we the people have a right to know what is happening with our money.

Audit The Fed!