While it is no surprise that the day after Lehman failed, every single bank scrambled to the Fed to soak up any and all available liquidity after confidence in the entire ponzi collapsed, what is a little surprising is that of the 6 banks that came running to papa Ben, and specifically his Primary Dealer Credit Facility, recently upgraded, or rather, downgraded to accept collateral of any type, two banks (in addition to Lehman of course which at this point was bankrupt and was forced to hand over everything to triparty clearer JPM), had the temerity to pledge bonds that had defaulted (i.e. had a rating of D). As in bankrupt, and pretty much worthless. Now that the Fed would accept Defaulted bonds as collateral: or "assets" that have no value whatsoever is a different story. What is notable is that the two banks that did so were not the crappy banks such as Citi or Morgan Stanley, but the two defined as best of breed: Goldman Sachs and JP Morgan. It is probably best left to the now defunct FCIC to determine if this disclosure is something that should also be pursued in addition to recent disclosure that Gary Cohn may have perjured himself by not disclosing truthfully his bank's discount window participation. However, we can't help but be amused by the fact that of all banks, the ironclad Goldman and JPM would be the only ones in addition to bankrupt Lehman to resort to something so low.

PDCF collateral as of September 15, 2008.

And further analysis indicates that a few weeks later, this practice became pervasive, with virtually every banker pledging defaulted bonds in exchange for money good cash with which to pretend these banks were doing just fine (not to mention that $71.7 billion in collapsing equities represented nearly half the total collateral of $164.3 billion pledged to receive $155 billion in cash.)

At some point people will inquire, perhaps not in the most peaceful of terms, just why this travesty of fiduciary responsibility was happening when it happened. But not yet. And certainly not while the Chairman continues to successfully levitate the market singlehandedly.