Merrill Tattled on Lehman

The FT reports that Merrill officials warned the SEC and the Fed in early 2008 that Lehman was "incorrectly calculating a key measure of its financial health" (or, "cooking the books" as you or I might call it.) The former Merrill officials' intentions were far from humanitarian. They alerted regulators because Lehman was touting its reported liquidity position to investors and counterparties as proof that it was sounder than Merrill. Merrill officials probably said to themselves, "Hey wait a minute. I know we're insolvent, but Lehman is DEFINITELY more insolvent than we are. " We're talking about Wall Street guys here. They're so damn competitive.

The Merrill guys didn't believe Lehman's claims. In fact, they thought that Lehman was including regulatory capital in its liquidity calculations. Big no no. So, they picked up the phone and called the SEC and the New York Fed, both of whom did, well, absolutely nothing about it. But we already knew that because we know how this story ended. The SEC declined to comment beyond saying that the folks who fell asleep at the switch at that particular unit are no longer there. The NY Fed claims it was unable to verify that the conversation with Merrill ever took place.