Hmm. You know, Alex, I think I'll go with Door No. 2: The Fed knew it was buying weak assets and tried to hide it! Now, what do I win?

Federal Reserve Chairman Ben S. Bernanke and then-New York Fed President Timothy Geithner told senators on April 3, 2008, that the tens of billions of dollars in “assets” the government agreed to purchase in the rescue of Bear Stearns Cos. were “investment-grade.” They didn’t share everything the Fed knew about the money.

The so-called assets included collateralized debt obligations and mortgage-backed bonds with names like HG-Coll Ltd. 2007-1A that were so distressed, more than $40 million already had been reduced to less than investment-grade by the time the central bankers testified. The government also became the owner of $16 billion of credit-default swaps, and taxpayers wound up guaranteeing high-yield, high-risk junk bonds.

By using its balance sheet to protect an investment bank against failure, the Fed took on the most credit risk in its 96-year history and increased the chance that Americans would be on the hook for billions of dollars as the central bank began insuring Wall Street firms against collapse. The Fed’s secrecy spurred legislation that will require government audits of the Fed bailouts and force the central bank to reveal recipients of emergency credit.

“Either the Fed did not understand the distressed state of some of the assets that it was purchasing from banks and is only now discovering their true value, or it understood that it was buying weak assets and attempted to obscure that fact,” Senator Sherrod Brown, an Ohio Democrat and member of the Senate Banking Committee, said in an e-mail when informed about the credit quality of holdings in the Maiden Lane LLC portfolio. The committee held the April 3 hearing.

Let me tell you a story about a story that isn't a story but became a story because it was broadcast from major news sources with an air of breathless indignation, laced with a tiny bit of naughtiness intended to disguise the true story because the Republicans aren't thrilled with the SEC right now.

Here's the juicy tidbit:

Senior staffers at the Securities and Exchange Commission spent hours surfing pornographic websites on government-issued computers while they were being paid to police the financial system, an agency watchdog says.

Rep. Darrell Issa (R-CA) is shocked -- SHOCKED -- that such a thing would happen while the market is in meltdown mode.

Rep. Darrell Issa (R-Calif.), ranking Republican on the House Oversight and Government Reform Committee, said it was “nothing short of disturbing that high-ranking officials within the SEC were spending more time looking at pornography than taking action to help stave off the events that brought our nation's economy to the brink of collapse."

"This stunning report should make everyone question the wisdom of moving forward with plans to give regulators like the SEC even more widespread authority," Issa said in a subtle jab at ongoing financial reform efforts.

In the clip at the top of this post, Rep. Barney Frank patiently explains the "culture of the SEC" in response to Andrea Mitchell's question about whether the Madoff scandal might have been caught sooner if SEC officials weren't surfing porn instead of doing their jobs. He walks Mrs. Greenspan through the fallacies of her husband's philosophy of "let markets be king" and resulting underregulation that led to rampant fraud in the system.

Everything old is new again

The only problem with all this fuss? This story is all about a story already reported in November, 2008. ProPublica gave us the full scoop on it in November, 2008. November, 2008. That would be when the SEC was run by a Republican administration with George Dubya Bush as its leader, wouldn't it?

You can read the entire Inspector General's 94-page report for yourself, right here. The pornography allegations are only a very small part of a much more disturbing picture, actually. It's interesting to me to see the fuss around pornography when other, more serious and chilling allegations are contained within it. Here are a few of the interesting ones:

• Investigation of Conflict of Interest, Improper Solicitation and

  Receipt of Gifts from a Prohibited Source, and Misuse of Official Position

• Follow-up Investigation of Disruptive and Intimidating Behavior by a Senior Manager
• Investigation of Failure to Maintain Active Bar Status

The report also has details about the investigation into reasons for Bear Stearns' collapse. The conclusions there are far more interesting than anything to do with SEC employees accessing pornography.

On a weekend where negotiations are moving ahead to get to a vote on financial regulation Monday, Issa's latest effort to manufacture scandal is just a cynical ploy to manipulate public opinion. It's a little like the "death panel" controversy, or the "Goldman Sachs gave more money to Obama than anyone else" controversy. The goal is to turn public opinion away from efforts to rein in what is completely out of control, water it down more than it is already, and pay off the Republican paymasters of Wall Street.

Nothing to see here, move along.

Municipal bonds are where a lot of the political kickbacks and corrupt deals are typically hidden, so I can't say I'm surprised. In fact, it's sort of funny that the governments dealing with these guys apparently thought they could trust them, considering how crooked the business is. Lie down with dogs, rise up with fleas, as the nuns used to say:

March 26 (Bloomberg) -- JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and UBS AG were among more than a dozen Wall Street firms involved in a conspiracy to pay below-market interest rates to U.S. state and local governments on investments, according to documents filed in a U.S. Justice Department criminal antitrust case.

A government list of previously unidentified “co-conspirators” contains more than two dozen bankers at firms also including Bank of America Corp., Bear Stearns Cos., Societe Generale, two of General Electric Co.’s financial businesses and Salomon Smith Barney, the former unit of Citigroup Inc., according to documents filed in U.S. District Court in Manhattan on March 24.

Gee, look how many were firms that were already taking money from us on the front end. They wanted the back end, too?

The papers were filed by attorneys for a former employee of CDR Financial Products Inc., an advisory firm indicted in October. The attorneys, as part of their legal filing, identified the roster as being provided by the government. The document is labeled “list of co-conspirators.”

None of the firms or individuals named on the list has been charged with wrongdoing. The court records mark the first time these companies have been identified as co-conspirators. They provide the broadest look yet at alleged collusion in the $2.8 trillion municipal securities market that the government says delivered profits to Wall Street at taxpayers’ expense.

Excuse me while I rush to my fainting couch. I'm a little dizzy from the shock.

“If the government is saying they are co-conspirators, the government believes they have sufficient evidence that they can show they were part of the conspiracy,” said Richard Donovan, a partner at New York-based law firm Kelley Drye & Warren LLP and co-chair of its antitrust practice. Donovan isn’t involved in the case.

The government’s case centers on investments known as guaranteed investment contracts that cities, states and school districts buy with the money they receive through municipal bond sales. Some $400 billion of municipal bonds are issued each year, and localities use the contracts to earn a return on some of the money until they need it for construction or other projects.

The Internal Revenue Service sometimes collects earnings on those investments and requires that they be awarded by competitive bidding to ensure that governments receive a fair return. The government charges that CDR ran sham auctions that allowed the banks to pay below-market interest rates to local governments.

[...] Banks may choose to cooperate with prosecutors because in light of the government bailout funds they’ve received “a guilty plea would just be an absolute disaster for some of these companies,” said Nathan Muyskens, a partner at Shook, Hardy & Bacon in Washington and former trial attorney with the Federal Trade Commission’s Bureau of Competition.

“There have been antitrust investigations where there have been companies involved that were just never indicted,” he said in a phone interview.

Yes, this is what's now known as "too big to jail." Why, they're too big for just about anything!

At the same time, the government will probably focus on seeking to convict individual bankers, he said.

“When someone goes to jail for five years, that resonates,” he said. “When a company pays $200 million, it’s simply a balance sheet issue. Jail time is what captures corporate America’s attention.”

Via Raw Story. You know, I not only want the money back, I want these people put in jail. They took the money and ran from their own culpability:

The CEOs of Bear Stearns and Lehman Brothers, the two investment banks that collapsed during last year's financial meltdown, walked away with hundreds of millions of dollars in compensation even as the company's shareholders lost everything, says a new report from Harvard Law School.

The top five executives at Bear Stearns made a total of $1.4 billion from bonuses and equity sales between 2000 and 2008, while the top five executives at Lehman Brothers made around $1 billion during that same period -- the period during which the companies ran up the bad investments that would see them collapse in 2008, according to "The Wages of Failure" (PDF), a report from Harvard Law School's Program on Corporate Governance.

"The people who invested in these companies should feel betrayed," Nell Minow, a compensation expert at the Corporate Library, told NBC's Lisa Myers. "The whole idea of capitalism is that the people provide the capital and the executives take care of it for us. In this case, the people provided the capital, and the executives took it."

Bear Stearns CEO James Cayne personally made $388 million in the eight-year period leading up to the bank's collapse, while Lehman Brothers CEO Richard Fuld made $541 million. Bloomberg news service notes that "shareholders who held their shares throughout the period analyzed in the report lost most of their initial investment."

Senate Guru: Senate Republicans call our troops unpatriotic.

David Seaton's News Links: Eric Stone's story: "Me and Obama's Mama"

Comments from Left Field: On the outs with his former neocon buddies for the past seven years, Francis Fukuyama endorses Obama.

No More Mister Nice Blog: ZOMG! He said "Auschwitz" instead of "Buchenwald"!!! More molehill politics from wingnut bloggers who want to make sure the Red Army gets their props.

The G Spot: The last days of Bear Stearns.

MediaBloodhound: Why is it verboten in mainstream Memorial Day coverage to acknowledge relevant realities?