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http://www.bloomberg.com/apps/news?pid=20601039&sid=a_uR69EhwZFA

Lehman Justice Isn’t Blind, It’s Unconscious:

Commentary by Jonathan Weil

Feb. 11 (Bloomberg) -- It is so widely accepted that Lehman Brothers Holdings Inc.’s balance sheet was bogus that even former Treasury Secretary Hank Paulson can say it in his new memoir. And still, the government hasn’t found anyone who did anything wrong at the failed investment bank.

How could that be, 17 months after Lehman collapsed and sent the global credit crisis into overdrive? While Congress and the White House dither about reforming the U.S. financial system, the wheels of justice are grinding so slowly, if at all, that it seems there’s no appetite in Washington for holding Wall Street executives accountable for anything.

In his new book, “On the Brink,” Paulson doesn’t point fingers at specific Lehman executives for violating any rules. He displays amazing candor, though, in describing how Lehman’s asset values were a gross distortion of the truth. It doesn’t take much imagination to figure out they didn’t get that way all by themselves.

For instance, why couldn’t the Federal Reserve arrange a government-assisted bailout for Lehman in September 2008, as it had done for Bear Stearns Cos.? Paulson tells us that Tim Geithner, then head of the New York Fed, “made clear that the Fed could not lend against Lehman’s dubious assets.” Meanwhile, Paulson said Lehman’s chief executive officer, Dick Fuld, “was still clinging to his belief in the value of his assets, but he was alone there.”

Math Class

Other banks, Paulson wrote, balked at an industry-backed rescue because “they knew that to make the math work, they would have to make a loan secured by assets worth much less than their stated value.” In describing one pile of bad investments, Paulson said these “had been carried by Lehman at $52 billion, but after their analyses the firms estimated their value at closer to $27 billion to $30 billion.”

In short, Paulson said, “the investment bank had been loaded with toxic assets worth far less than the value at which they were carried, creating a capital hole.”

Paulson’s account is as lucid an explanation of why Lehman blew up as anyone has written. It does leave you wondering, though, if it ever occurred to him to tell anyone at the Securities and Exchange Commission or the Justice Department that Lehman’s accounting might need to be investigated. His book provides no indication that he did.

Quite the opposite, Paulson said he felt terrible for Fuld and other Lehman executives: “It was impossible not to sympathize with him. After all, I had run a financial institution; he had been one of my peers.” Maybe a Treasury secretary who hadn’t been the CEO of Goldman Sachs Group Inc. would have viewed their plight less charitably. Paulson declined to comment for this column.

Out the Door

It wasn’t until after Lehman collapsed that the government began issuing grand-jury subpoenas. That explains why, on the eve of Lehman’s bankruptcy, dozens of employees were able to walk out the front door of Lehman’s midtown Manhattan headquarters carrying boxes full of files, on live TV no less. There’s no telling how much evidence was lost because the feds didn’t order the company to preserve documents sooner.

There’s the start of a pattern here, too. By mid-December 2008, after Bank of America Corp. shareholders voted to approve the purchase of Merrill Lynch & Co., Paulson and Federal Reserve Chairman Ben Bernanke had learned of billions of dollars of losses at Merrill that hadn’t been disclosed. This was before the acquisition was completed on Jan. 1, 2009.

Disclosure Issues

Neither Paulson nor Bernanke saw fit to tell the SEC. Nor did they press the companies’ executives to come clean with the public. They also took pains not to put their plans for rescuing Bank of America in writing, for fear that doing so would require the government to disclose the matter itself.

Eventually, the SEC and New York Attorney General Andrew Cuomo’s office did conclude that Bank of America had violated the disclosure rules. However, it’s doubtful the commission would have sued the bank had Cuomo not forced its hand by unveiling his own investigation’s findings last April, including the details about what Paulson and Bernanke knew and when.

The requirement that publicly owned corporations disclose complete and accurate financial reports is part of the bedrock of U.S. securities laws. Just as important is the promise that the government will enforce those laws when they’ve been broken. Undermine the public’s faith in either of those functions, and confidence in the capital markets crumbles.

There’s been much talk the past two years about moral hazard, which is the risk that companies and their investors will behave more recklessly when they believe the government will bail them out. Less has been made of a similar hazard: The danger that powerful companies won’t follow the law when their executives believe the government won’t hold them to it.

The latter risk threatens not only our economy, but our democracy. There’s every reason to believe both kinds are growing.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

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To contact the writer of this column: Jonathan Weil in New York at [e-mail]

Last Updated: February 10, 2010 21:01 EST