Lehman Brothers investigation

Law Professor Tamar Frankel, an authority on securities law, corporate governance, and legal ethics, comments on grand juries looking into actions of Lehman Brothers.

“Do not blame Lehman Brothers. The examinations of its actions are unnecessary. Many large financial institutions adopted the same practices and developed the so-called market that we now have.

“Rationally, a market can convert a long-term obligation into a short-term one (auction-based securities); a market can determine the magnitude of risks and offer protection by institutions that do not have the assets to cover the risk they cover; a market can ‘correct’ prices. Market price can be established by three or four rating agencies; a market depends on trusted sales person who deliver sales talk.

“Of course we do not mean the market. We mean the financial intermediaries — those that create and encourage and control and manage the market in other people’s money. And a market can resolve any problems that may arise. And this kind of market administers its ‘corrections.’ It may well be that we had no financial market for quite some time.

“It made good sense for Lehman to avoid investor ‘run.’ The FDIC does it for the banks, but investment bankers did not have an FDIC. They have to calm investors and try to find a solution. Had we had a regular market, the actors’ demise or financial difficulties would not have threatened the system. The rule of immediate disclosure should have applied to them.

“But this is no regular market, and Lehman is no regular intermediary but a huge one among very few. So if Lehman attempted to protect the system by postponing disclosure in the hope of getting help, it tried to serve the system. The fact that it did not succeed is irrelevant. It was the FDIC of itself.

“What is the purpose of the Lehman investigation? Prosecution is not justified, except perhaps to demand the accounting for profits by management. Discovery of the detailed truth is not helpful. In the future, other gimmicks will appear that we cannot predict today and devastate our so-called market.

“Unless we use and revive the antitrust law and forget for just a few year about ‘efficiencies’ and ‘synergies’ and other fine concepts that justify concentration of power which is killing us now, we will achieve little even if Lehman is prosecuted. The prosecutors should apologize for refraining to enforce the law that regulates people (not institutions, but those who control institutions) that hold other people’s money and play with it as if it is their own, while stashing their own safely.”

Contact Tamar Frankel, 617-353-3773, tfrankel@bu.edu

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