FDL Contributor Bill Black scorched everyone with his testimony on the failure of Lehman Brothers when he testified before the House Financial Services Committee today. His prepared remarks can be found here (PDF).

CHAIRMAN KANJORSKI: And now we’ll hear from Mr. William K. Black, Associate Professor of Economics and Law, the University of Missouri, Kansas City School of Law. Mr. Black.

BILL BLACK: Members of the Committee, thank you.

You asked earlier for a stern regulator, you have one now in front of you. And we need to be blunt. You haven’t heard much bluntness in hours of testimony.

We stopped a nonprime crisis before it became a crisis in 1991 by supervisory actions.

We did it so effectively that people forgot that it even existed, even though it caused several hundred million dollars of losses — but none to the taxpayer. We did it by preemptive litigation, and by supervision. We broke a raging epidemic of accounting control fraud without new legislation in the period of 1984 through 1986.

Legislation would’ve been helpful, we sought legislation, but we didn’t get it. And we were able to stop that because we didn’t simply consider business as usual.

Lehman’s failure is a story in large part of fraud. And it is fraud that begins at the absolute latest in 2001, and that is with their subprime and liars’ loan operations.

Lehman was the leading purveyor of liars’ loans in the world. For most of this decade, studies of liars’ loans show incidence of fraud of 90%. Lehmans sold this to the world, with reps and warranties that there were no such frauds. If you want to know why we have a global crisis, in large part it is before you. But it hasn’t been discussed today, amazingly.

Financial institution leaders are not engaged in risk when they engage in liars’ loans — liars’ loans will cause a failure. They lose money. The only way to make money is to deceive others by selling bad paper, and that will eventually lead to liability and failure as well.

When people cheat you cannot as a regulator continue business as usual. They go into a different category and you must act completely differently as a regulator. What we’ve gotten instead are sad excuses.

The SEC: we’re told they’re only 24 people in their comprehensive program. Who decided how many people there would be in their comprehensive program? Who decided the staffing? The SEC did. To say that we only had 24 people is not to create an excuse — it’s to give an admission of criminal negligence. Except it’s not criminal, because you’re a federal employee.

In the context of the FDIC, Secretary Geithner testified today that this pushed the financial system to the brink of collapse But Chariman Bernanke testified we sent two people to be on site at Lehman. We sent fifty credit people to the largest savings and loan in America. It had 30 billion in assets. We had a whole lot less staff than the Fed does.

We forced out the CEO. We replaced the CEO. We did that not through regulation but because of our leverage as creditors. Now I ask you, who had more leverage as creditors in 2008? The Fed, as compared to the Federal Home Loan Bank of San Francisco, 19 years earlier? Incomprehensible greater leverage in the Fed, and it simply was not used.

Let’s start with the repos. We have known since the Enron in 2001 that this is a common scam, in which every major bank that was approached by Enron agreed to help them deceive creditors and investors by doing these kind of transactions.

And so what happened? There was a proposal in 2004 to stop it. And the regulatory heads — there was an interagency effort — killed it. They came out with something pathetic in 2006, and stalled its implication until 2007, but it ’s meaningless.

We have known for decades that these are frauds. We have known for a decade how to stop them. All of the major regulatory agencies were complicit in that statement, in destroying it. We have a self-fulfilling policy of regulatory failure
because of the leadership in this era.

We have the Fed, the Federal Reserve Bank of New York, finding that this is three card monty. Well what would you do, as a regulator, if you knew that one of the largest enterprises in the world, when the nation is on the brink of economic collapse, is engaged in fraud, three card monty? Would you continue business as usual?

That’s what was done. Oh they met a lot — they say “we only had a nuclear stick.” Sounds like a pretty good stick to use, if you’re on the brink of collapse of the system. But that’s not what the Fed has to do. The Fed is a central bank. Central banks for centuries have gotten rid of the heads of financial institutions. The Bank of England does it with a luncheon. The board of directors are invited. They don’t say “no.” They are sat down.

The head of the Bank of England says “we have lost confidence in the head of your enterprise. We believe Mr. Jones would be an effective replacement. And by 4 o’clock that day, Mr. Jones is running the place. And he has a mandate to clean up all the problems.

Instead, every day that Lehman remained under its leadership, the exposure of the American people to loss grew by hundreds of millions of dollars on average. Auroroa was pumping out up to 300 billion dollars a month in liars’ loans. Losses on those are running roughly 50% to 85 cents on the dollar. It is critical not to do business as usual, to change.

We’ve also heard from Secretary Geithner and Chairman Bernanke — we couldn’t deal with these lenders because we had no authority over them. The Fed had unique authority since 1994 under HOEPA to regulate all mortgage lenders. It finally used it in 2008.

They could’ve stopped Aurora. They could’ve stopped the subprime unit of Lehman that was really a liar’s loan place as well as time went by.

Answer: Poor financial planning

AmericanBanker.com reported this week that many National League Football players — who will collectively make $4 billion this season — make poor financial choices.

In fact, statistics show that MORE than 70 PERCENT of professional athletes are financially challenged or bankrupt within three or four years of retirement.

Amazingly, perhaps the Main Street retiree is better off — but only marginally so.  Research Institute (ERBI) conducted a retirement survey in conjunction with the American Savings Education Council and Mathew Greenwald & Associates.  The report found that 45 percent of all U.S. households have less than $25,000 in assets excluding their home), yet two-thirds of all workers expect to live as comfortably in retirement as they did when they worked. The reality is that the average person would use up that $25,000 in two or three years – even with their Social Security benefits.

What to Do?

Given their celebrity status and affluence, the football players are working on solving the problem.  In 2007 the pro football union started a program to help players evaluate financial advisors — helping them find advisors with adequate training, knowledge and prudence.

But what about the Main Street retiree?  NewRetirement.com has many tools to help the average investor assess their own retirement plans.  The Retirement Action Planner will identify products and strategies to extend your retirement finances and also offers a service to match you to a prescreened Financial Advisor.

But what is the ultimate financial advice for the NFL player and the average retiree?  Go long*!

* Plan for living a long time and providing adequate resources for that long life.

While planning for retirement it is always important to set goals for your future, and the article brings up some clairvoyant questions you must ask yourself.  “The first question assumes you have all the money you need –how would you live your life today? In the second, you are told that you have five years to live: what would you do with that time? And the final question aims right at the heart.  You have 24 hours left on earth –what did you miss? Whom did you not get to be?” These questions allow you to step back for a minute and decide what is vital to your future, which in many cases does not have to do with financial concerns.  Once you can decide what you truly want out of life, then you can set out the course for a retirement plan that will help you meet your goals.

Mr. Hebeler’s advice is also very insightful because retirees rarely budget for wear and tear items.  If you put in the expenses for replacing or repairing cars, air conditioners, and your home, then you will have a much clearer picture of your necessary retirement finances.

The IRS also declared it was keeping many of last year’s tax deductions, some of which also are determined by inflation figures.

Several deductions for 2010 are unchanged and others change slightly. They include:

• The value of each personal and dependency exemption available to most taxpayers is $3,650, unchanged from 2009.

• The new standard deduction for heads of household is $8,400, up from $8,350 in 2009. For other taxpayers, the standard deduction remains unchanged at $11,400 for married couples filing a joint return and $5,700 for singles and married individuals filing separately. Nearly two out of three taxpayers take the standard deduction rather than itemizing deductions, such as mortgage interest, charitable contributions, and state and local taxes.

• Various tax bracket thresholds will see minor adjustments. For example, for a married couple filing a joint return the taxable income threshold separating the 15 percent bracket from the 25 percent bracket is $68,000, up from $67,900 in 2009.

• The annual gift tax exclusion remains unchanged at $13,000.

Here are some noteworthy findings from the report:

–  Only 41 percent of Hispanic workers say they have saved money for retirement.
–  Only 25.6 percent of Hispanics are covered by employer-sponsored retirement plans, compared to 42.5 percent of whites and 40 percent of
African-Americans.
–  Of the Hispanics receiving Social Security benefits, almost 80 percent rely on these benefits for at least 50 percent of their retirement
earnings.
–  Among people 65 and older receiving Social Security, on average Hispanics receive about $2,124 less in earnings than non-Hispanics.
– Between 1979 and 1999, middle-class Hispanics households increased nearly 80 percent. In the same period, the group of Hispanic households earnings between $40,000 to $140,000 grew to include about one-third of the total Hispanic households nationwide.

In other news, a new Charles Schwab report states that nearly half (44%) of retirees claim to be supporting at least another individual financially.  While this exhibits the generosity of retirees it is also evidence that retirees are not practicing proper retirement planning.  Everyone, of course wants to help their family in whatever way they can, but it is paramount to worry about your own finances instead of your family’s.  Helping them in the short term is fine, but imagine once you are gone then how are they going to figure out their finances in the future.  Setting the right example through debt consolidation and reducing expenses, is the most prudent decision to ensure your family’s financial future. 

And finally, to add to the launching of the socialsecurity.gov site to which I mentioned in the post “Apply For Social Security Benefits Online.” It appears that Patty Duke has brought back her role as Cathy Lane from the 1960’s sitcom The Patty Duke Show to get baby boomers online to apply for Social Security benefits. While the characters she plays in the Public Service Announcements are signing up for social security, Patty, aged 62, says she will be waiting a few more years to start receiving benefits.  This is especially a good call if you are healthy and believe you will live a long life.  In fact there is s great article from the Center for retirement Research at Boston college entitled, “How Much Do Households Really Lose By Claiming Social Security at Age 62?”  Don’t fret if you have started collecting Social Security at 62 and have since changer your mind because you have the ability to restart your Social Security benefits. Here is a nifty little Social Security calculator that will help you decide when the best time to start receiving benefits.  Oh and if you would like to see the ads please visit socialsecurity.gov/pattyduke

In other news, in regards to a USA Today posting on 401(k)’s it seems that the IRS may just reduce the amount you are allowd to contribute to your 401(k) in 2010 to $16,000.  This is truly upsetting news considering now is the time that people are going to have to put as much as they can back into their savings because they had to delve into during the recession. Let your Congressmen know that this should not happen, now is the time to save away for the future!