The liar's punishment is not in the least that he is not believed but that he cannot believe anyone else. - George Bernard Shaw

Quite a few observers ... have been stunned and frustrated at the refusal to investigate what was almost certain accounting fraud at Lehman ... The unraveling isn't merely implicating [Lehman chief executive officer Richard] Fuld and his recent succession of CFOs, or its accounting firm, Ernst & Young, as might be expected. It also emerges that the NY Fed, and thus [formerly New York Federal Reserve president, now US Treasury Secretary] Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox [Sarbanes-Oxley Act, covering public company accounting regulations] violations ...

We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed's review of Lehman's solvency. If, as things appear now, Lehman was allowed by the Fed's inaction to remain in business, when the Fed should have insisted on a wind-down …..

... at a minimum, the NY Fed helped perpetuate a fraud on investors and counterparties. This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.

And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets. If so, he is not fit to be Treasury secretary or hold any office related to financial supervision and should resign immediately.

The Examiner [that's Valukas] questioned Lehman executives and other witnesses about Lehman's financial health and reporting, [and] a recurrent theme in their responses was that Lehman gave full and complete financial information to Government agencies, and that the Government never raised significant objections or directed that Lehman take any corrective action.

So get this: even though Lehman dressed up its accounts for the great unwashed public, it did not try to fool the authorities. Its games playing was in full view to those charted with protecting investors and the financial system.

So what transpired? The SEC [Securities and Exchange Commission] (which has never had much expertise in credit markets - a major regulatory problem) handed assessing Lehman over to the Fed, which bent over backwards to give it a clean bill of health.

Indeed, it now appears that the federal government itself either didn't appreciate the significance of what it saw (we've seen that movie before with regulators waving off tips about Bernard L Madoff). Or perhaps they did appreciate the significance and blessed the now-suspect accounting anyway.

Oddly, when the bankruptcy examiner asked Matthew Eichner of the SEC, who was involved with supervising firms like Lehman, whether the agency focused on leverage levels, he answered that "knowledge of the volumes of Repo 105 transactions would not have signaled to them ‘that something was terribly wrong,' " according to the examiner's report. [Repo 105 is an accounting term relating to transactions of the sort Lehman used to remove about US$50 billion from its assets in 2008.]

There's a lot riding on the government's oversight of these accounting shenanigans. If Lehman Brothers executives are sued civilly or prosecuted criminally, they may actually have a powerful defense: a raft of government officials from the SEC and Fed vetted virtually everything they did.

On top of that, Lehman's outside auditor, Ernst & Young, and a law firm, Linklaters, signed off on the transactions. The problems at Lehman raise even larger questions about the vigilance of the SEC and Fed in overseeing the other Wall Street banks as well.

Perhaps tellingly, there is no evidence that Lehman kept two sets of books or somehow tried to hide what it was doing from regulators. The bankruptcy examiner spent over a year searching through virtually every e-mail message at the firm and didn't say he found any evidence of a cover-up.

That may explain why so few at the firm seemed to think that what they were doing was wrong, based on the e-mail traffic reviewed by the examiner. They talked openly about Repo 105. And while some apparently felt queasy about it, they also repeatedly said that it was legal.