The Financial Times reports that the spotlight on Wall Street is bound to affect industry.
(emphasis mine) [my comment]
Spotlight on Wall St bound to affect industry
By Francesco Guerrera and Henny Sender in New York and Patrick Jenkins in London
Published: March 12 2010 19:17 Last updated: March 13 2010 01:07
... it took a year of painstaking research and a door-stopper report by a Chicago-based lawyer to lift the lid on the management failures, destructive internal culture and reckless risk-taking that sent Lehman to its grim fate.
The 2,200-page tome Anton Valukas - the examiner hired by a US court to probe who was responsible for the bank's failure - released on Thursday could have far-reaching implications for former Lehman executives, including its former chief, Dick Fuld, and its auditors Ernst & Young.
But it also sheds a damning light on the inner workings of Wall Street [and regulators] - or at least that part of Wall Street that was hell-bent on juicing profits and hiding losses during the boom that led to the crisis.
The report singles out Lehman as one of the last Wall Street institutions to engage in "repo" deals aimed at moving assets off its balance sheet. But the fact that it was able to find willing counterparties in the US and Europe that would, albeit unwittingly, help Lehman misrepresent its financial position will dishearten many observers, even if regulatory reforms now under way aim to clean up the most egregious pre-crisis practices.
"I almost threw up when I read the report," a senior Wall Street executive said on Friday. "It makes me sick of this industry."
The examiner concludes that, based on different metrics, Lehman and some affiliates were already insolvent at various times in the months of 2008 leading up to its bankruptcy filing. [Wall street has been insolvent for years]
The crux of the report, which is based on the review of 34m pages of documents out of the 350bn pages obtained by Mr Valukas, is its portrayal of Lehman's insatiable risk appetite and its alleged efforts to cover up the extent of its financial woes.
The report also provides a scathing picture of just how weak Lehman's risk-management practices ultimately became - and how they contributed to Lehman's implosion.
For example, the firm, like its peers, was required to stress-test its trading positions and investments. But Lehman excluded its principal investments in real estate, its private equity investments and its leveraged loans backing buyout deals, thereby leaving out its most risky assets from calculations.
In the aftermath of the near-collapse of Bear Stearns in March 2008, Lehman found itself unable to sell some of its most illiquid assets. With ratings agencies and investors demanding a reduction in Lehman's balance sheet, the company ramped the use of an "accounting gimmick" it had been resorting to since 2001, according to the report.
Known internally as "Repo 105" - but never disclosed externally - the mechanism enabled Lehman to move up to $50bn in assets off its balance sheet for just enough days to get through the end of the quarter.
That, in turn, helped the firm to reduce its leverage ratio (the level of indebtedness on its balance sheet), avoid a rating downgrade and appear healthier than it actually was.
"The examiner has investigated Lehman's use of Repo 105 transactions and has concluded that the balance sheet manipulation was intentional, for deceptive appearances, had a material impact on Lehman's net leverage ratio and, because Lehman did not disclose the accounting treatment of these transactions, rendered Lehman's [financial statements] deceptive and misleading," the report says.
The device was so rare that Lehman could not find a US law firm to give a legal opinion on it, using instead UK-based Linklaters, says the report.
As with other corporate scandals, internal e-mails offer a revealing glimpse of how the rank-and-file saw the practice. In one e-mail in February 2008, a senior trader tells a colleague: "We have a desperate situation and I need another $2bn [balance sheet reduction] from you either through Repo 105 or outright sales."
A few months later, the same trader urges a colleague: "Let's max out on the Repo 105 for your stuff."
Counterpunch reports about Geithner and Bernanke's Possibly Criminal Roles.
Geithner and Bernanke's Possibly Criminal Roles
Lehman Brothers Scandal Rocks the Fed
By MIKE WHITNEY
After a year-long investigation, court-appointed bank examiner Anton Valukas has produced a deadly 2,200 page report which details the activities that led to the Lehman Brothers bankruptcy. The report is a keg of dynamite. The question now is whether anyone in government has the nerve to light the fuse. Valukas provides powerful evidence that Lehman executives were involved in "balance sheet manipulation" by implementing an arcane accounting procedure called "Repo 105" which masked the bank's true financial condition from investors and regulators.
According to Valukas, Lehman was "Unable to find a United States law firm that would provide it with an opinion letter permitting the true sale accounting treatment" using Repo 105. So, Lehman executives went outside of the country in an effort to enlist the support of a London law firm that would approve the procedure.
It is impossible to overstate the significance of Valugas's findings. The report exposes the opaque but central role of the repo market which provides essential short-term loans for financial institutions. (Lehman used repos to conceal the full extent of its collapse, by dint of the amount of leverage it was using, meaning the pitiful asset anchor tethered to a vast zeppelin of debt) More importantly, it shows the cozy and, very probably criminal relationship between the country's main regulatory bodies and the Wall Street behemoths. The activities of the New York Fed (NYFRB), which at the time was headed by Timothy Geithner, is particularly suspect in this regard. The report should trigger an immediate Congressional investigation, probing the whole affair and most importantly the role of the Fed.
Naked Capitalism's Yves Smith, who has apparently sifted through all 2,200 pages of the report, has done some first-rate analysis of the details. Here's an excerpt from her Friday posting:
"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 Fuld (Lehman's CEO) 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 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 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." (Naked Capitalism)
Repeat: "Accounting fraud", "collusion", "aiding and abetting." This is strong language from a woman who spent than 25 years in the financial services industry, alternately working at Goldman Sachs, McKinsey & Co., and Sumitomo Bank. Smith typically chooses her words carefully and is not easily given to hyperbole. Yves Smith again: "Here is the part of the report that discussed how the Fed aided and abetted Lehman misconduct:
"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. [see? Regulators knew about everything and did nothing. They are the ones to blame for this crisis]
"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 (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." (Naked Capitalism)
What did Geithner and Bernanke know, and when did they know it. It appears that they either knew what was going on at Lehman and looked the other way or acted as the "chief enablers" of accounting fraud. (ie--The Repo 105-charade) Here's an excerpt from the New York Times which clarifies the point:
"Newly released report on the collapse of Lehman Brothers ... sheds surprising new light on Lehman's dealings with the New York Fed. Lehman engaged in a series of transactions with the New York Fed that were similar to the ones that drew criticism from the bankruptcy court examiner who investigated its collapse. The examiner, Anton R. Valukas, drew no conclusions about the transactions with the Fed, and focused instead on deals that were known inside Lehman as "Repo 105."
But the report by Mr. Valukas nonetheless raises fresh questions about the role of the New York Fed in supporting Lehman during the frantic months leading up to its collapse. It suggests that Lehman executives believed the Fed would be able to help the bank avert disaster and provide it with a business opportunity.
"Bernanke and Co. may have 'saved the day' " a Lehman executive, Geoffrey Feldkamp, wrote in an e-mail message to a colleague in March 2008, according to the report. Neither Ben Bernanke, the chairman of the Federal Reserve, nor Treasury officials saved Lehman, of course. But it was that month that the Fed started a special lending program open to Wall Street banks like Lehman that could not borrow directly from it. The Fed also lowered its standards for the kinds of collateral that it would accept against such short-term loans.
"Lehman, desperate for financing, seized its chance. It packaged billions of dollars of troubled corporate loans into an investment called Freedom CLO. Then, in a series of transactions, it shifted Freedom back and forth to the New York Fed, in exchange for cash. Those moves helped make Lehman look healthier.
"Essentially, Lehman was able to temporarily warehouse illiquid investments that were worrying its investors at the New York Fed in return for cash. The Fed created this facility immediately after the near collapse of Bear Stearns. Some suspect that other banks engaged in similar maneuvers.
A spokesman for the New York Fed said the loan facility was created to help the entire financial system and prevent the problems at one bank from cascading. The collateral accepted from Lehman met the Fed's standards, he added. A third party valued it, the Fed accepted it and then reduced prices to limit the risk." ("Fed Helped Bank Raise Cash Quickly", Eric Dash, New York Times)
The excerpt from the NY Times deserves a second reading. The so-called lending facility that the Fed set up was called the Primary Dealer Credit Facility or PDCF. It was established to provide short-term lending for financial institutions after the secondary market froze and banks became reluctant to lend to each other. The Fed arbitrarily (and, perhaps, illegally) expanded the rules for "only" accepting the highest rated bonds and securities as collateral, and became (what zero hedge calls) "the enabler of last resort". The Fed's willingness to take any manner of mortgage-backed sludge in exchange for US Treasuries turned out to be the lifeline for underwater banks whose vaults were loaded with the worthless paper. This is why Fed keeps resisting demands for an independent audit, because it would prove that Bernanke "knowingly" paid huge sums of money for dodgy assets.
When the PDCF first opened for business, the Wall Street tycoons could see that their friend at the Fed was riding to the rescue. Lehman boss Dick Fuld, who could not conceal his delight, crowed, "The Federal Reserve's decision to create a lending facility for primary dealers and permit a broad range of investment-grade securities to serve as collateral improves the liquidity picture and, from my perspective, takes the liquidity issue for the entire industry off the table."
Indeed. Economist and author Michael Hudson summed it up like this for CounterPunch:
"Today, there's only one market for junk: the Federal Reserve, which has lent $1.3 trillion in cash for trash, no questions asked. This a mount exceeds the forecast Obama medical care plan for the next decade. No money for health insurance, but all for the junk-mortgage lenders."
Is there really any doubt that Tim Geithner at the New York Fed, or Bernanke knew that Lehman was trading its junk assets to finance its ongoing operations? Doesn't that in-itself constitute a cover up or "intentionally" misleading investors? And, if Lehman was exchanging garbage to feign solvency, then it seems likely that the other investment giants were engaged in the same type of charade. (Which implies that the ratings agencies were culpable, as well)
Here again is the crucial excerpt from the Valukas report which suggests that--at the very least--the NY Fed (Geithner) was involved in a vast cover-up which eventually ended in the nation's largest bankruptcy followed by a global market crash.
"The Examiner questioned Lehman executives and other witnesses about Lehman's financial health and reporting, 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.......Although various Government agencies had information that raised serious questions about Lehman's reported liquidity and about the sufficiency of its capital and liquidity to withstand stress scenarios, the agencies generally limited their activities to collecting data and monitoring.
"After March 2008 when the SEC and FRBNY BEGAN ONSITE DAILY MONITORING of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress-testing scenarios to test Lehman's ability to withstand a run or potential run on the bank.5753 The FRBNY developed two new stress scenarios: 'Bear Stearns' and 'Bear Stearns Light.' 5754 Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed.5756 However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757 It does not appear that any agency required any action of Lehman in response to the results of the stress testing." (My emphasis.)
This is the huge scandal: collusive government officials who operate as de facto agents for an industry saturated with corruption and conflicts of interest. Connived at the coverup of Lehman's true position because he doesn't work for the 10 million people who are now standing in unemployment lines, or the 35 million people who are now on food stamps, or the 6 million people who have lost their homes to foreclosure, or the hundreds of millions of people who have seen the home equity evaporate, their retirement funds plunge and their hopes for the future dashed so that a handful of insatiable landsharks could fatten their bank accounts in the Cayman Islands.
Michael Hudson, the ex-Wall Street economist and author of Super Imperialism: The Economic Strategy of the American Empire put the Lehman case into perspective with observations he made to me via e mail on Sunday. I think it summarizes the big picture admirably:
"When predators have exhausted the economy, they turn on each other. The result is financial cannibalism. After all, who else is it possible to get money from in today's negative equity environment?
"If the media are missing anything, it's that the game is over. The financial institutions are taking their money and running. They know it's over. And the only source of cashing out is the US Treasury and Fed.
"My solution:There is an easy place to start, that can take only a few weeks. That is to look at the Fed's $1.3 trillion in cash-for-trash swaps. If these prove to be junk mortgages for which the Fed has given good US Treasury bonds, at the proverbial taxpayer expense, then the Fed and Treasury administrators should have criminal charges brought against them, the accounting firms of the companies pledging these junk mortgages and other financial junk should be closed down and RICO charges brought, and the banks themselves should be wiped out. I have urged the appropriate Washington oversight committee to open an investigation along these lines."
Well said, Dr Hudson! If investigators can prove that the Fed exchanged US treasuries for MBS securities and other toxic assets that they knew were worth less than the amount they provided via short-term loans,(repos) then it is reasonable to assume that the Bernanke's quantitative easing (QE) program operated under the same guidelines. That means, that the $1.25 trillion QE program--which was supposed to extend credit to consumers and businesses--was actually a scam designed to transfer a gigantic load of capital to the very people who gamed the system and precipitated the biggest financial meltdown since the Great Depression. Without question, that misallocation of capital has deepened the recession and sent unemployment skyrocketing. We need to get to the bottom of this.
Trueslant.com reports about Another Disturbing Finding in Lehman Bros. Report.
Mar. 15 2010 - 4:45 pm 22 views 0 recommendations 0 comments
Another Disturbing Finding in Lehman Bros. Report
Posted by Keith Epstein@Huffington Post Investigative Fund
The careless if not deceptive antics of Lehman Brothers Holdings Inc. involved more than withholding information from its board and the now- infamous "Repo 105" accounting maneuver, which moved $50 billion in assets off the firm's books to mask the depth of its debt.
Frank Partnoy, a University of San Diego law school finance professor (and former derivatives structurer) points out that Lehman also couldn't reliably and consistently confirm the value of its holdings — revelations buried deep within a blistering 2,209-page report by the U.S. bankruptcy court examiner investigating the collapse. Thus the company lacked any internal check on prices set by its numerous trading desks, each with its own methodology and the incentive to set optimistic prices on securities to be traded or held.
Theoretically, Lehman's "Product Control Group" was supposed to do this job of managing the firm's risk. But the staff couldn't keep up with the volume. They often failed to rigorously test the prices set by Lehman traders, signing off with a simple "OK" notation. And even when they did check, they often understated the value, in some instances by one-thirtieth — perhaps for lack of access to the same sophisticated mathematical tools used by the geniuses sometimes called quants who manned trading desks. But they missed basics, too: Where risk seemed higher, the product controllers neglected to factor that into their prices.
"For a leveraged trading firm, to not understand your economic position is to sign your own death warrant," notes Partnoy, who says his students could do a better job.
In all it takes some 500 pages for the bankruptcy examiner to recount Lehman's valuation troubles, and to describe results of the examiner's own struggles to unravel and value those complicated assets and liabilities. To many, the financial crisis has highlighted the perils of believing in fantasy balance sheets. But that problem consumes a little more than 300 pages in the report.
"This is much bigger than Repo 105," Partnoy tells the Huffington Post Investigative Fund. "It raises questions about whether anyone on Wall Street is accurately valuing complex financial products. Do we really think Lehman was so different from the other major banks?"
Will Disclosure In Lehman Bankruptcy Case Lead To Lawsuit Against Federal Reserve?
Submitted by Tyler Durden on 10/01/2009 23:39 -0500
Reporters at the WSJ have uncovered something very intriguing while they were combing through the billing records of Jenner and Block, whose chairman, Anton Valukas is currently moonlighting as the examiner of the Lehman Bankruptcy Case. In J&B;'s August fee statement, the firm discloses information that as part of its estate recoupment process, it has been contemplating suing none other than the Federal Reserve.
During its final days Lehman was a revolving door for Fed cash coming in (and promptly leaving) as the situation demanded. Whether borrowing at the Fed's discount window against garbage collateral (no doubt consisting of worthless toxic commercial real estate - yet, we will never know: the Fed has just appealed the decision to disclose who/what/why got access to its processing of taxpayer bailout funding, which likely means that unless some Second Circuit/SCOTUS judge finds it deep in his/her soul that representing the American public is more important than siding with Wall Street as always, that information will never see the light of day), using the TAF program, or otherwise, Lehman ended up gobbling an ungodly amount of cash from the Fed which was subsequently imporperly yanked by the Chairman, instead of being used to satisfy pari passu creditor claims. According to the WSJ:
The New York Fed lent Lehman $46.2 billion in cash and Treasury securities for $50.6 billion in collateral, according to Federal Reserve affidavits filed in bankruptcy court. As a result of Lehman's sale to Barclays PLC following its bankruptcy, the New York Fed was later paid back in cash, with the Treasury securities returned. Lehman's broker-dealer also borrowed tens of billions of dollars from the Fed in the period from Sept. 11 through Sept. 15 last year.
This is all fine and great, however where the issue lies is whether there was an improper superposition of the Fed relative to all other creditors of the firm. If, in fact, the Fed recouped any money at a point after the bankruptcy process was initiated (and potentially even before the instant of filing), Jenner can file a preference claim against the Federal Reserve. The suit would, in theory imply that there was an action of "avoidance" by the Fed to be considered a preferred creditor without legal justification or reason.
It is obvious why the Fed would have wanted to avoid this: General Unsecured Claims and unsecured Notes issued by Lehman Brothers traded down from 90 cents on the dollar in the days prior to September 15 all the way to 10 cents on the dollar in the week following. Had the Fed's assets become commingled in the GUC pool, it would have seen a loss of nearly $40 billion of taxpayer money. However, the Fed's gain is other creditors' loss.
Which is why the revelations observed going thru J&B;'s billing statement are quite stunning, as they highlight that while Valukas has as yet not started any actual legal proceedings, which would claim there was a preference action by the Fed impairing other Lehman creditors, it is surely contemplating such.
Scribd gives us more info on the Federal Reserve's Lehman repo.
1. The Federal Reserve Requested The Repo Transaction, Not Barclays.
118. On September 16, shortly after Barclays and Lehman agreed upon a Sale, the New York Fed informed Barclays that if the New York Fed was to support Barclays' acquisition of the LBI broker-dealer business, it "needed to take out the New York Fed's exposure to LBI prior to the closing of its transaction." BCI Ex. 30 [Leventhal Decl.] at ¶ 7. As Ms. Leventhal, the Assistant General Counsel to the New York Fed, explained, "LBI was to provide Barclays with approximately $49.7 billion in securities in return for the $45 billion in cash funded by Barclays." Id. at ¶ 12.
119. As Harvey Miller recognized in his deposition, and understood at the time, that ratio of cash to securities reflected the customary "haircut" that is a normal part of any repo agreement, and is designed to reflect the risk the lending party takes that it will not be able to liquidate the collateral at its stated value. BCI Ex. 87 [Miller Dep. Tr.] at 37:15-25, 103:22- 104:9.63 As Ms. Leventhal further explained, the ratio of collateral to cash that was intended for the Barclays replacement of the New York Fed's position "was consistent with the ratio of cash to securities used in the New York Fed's repurchase agreement with LBI on the nigh t of September 17th." BCI Ex. 30 [Leventhal Decl.] at ¶ 12.
120. As its insistence that Barclays replace its repo suggests, the New York Fed believed itself to be at risk of loss in an LBI default, despite the multi-billion dollar haircut intended to safeguard its position, because there was no guarantee the collateral could in fact be liquidated at anything close to its stated value. See BCI Ex. 87 [Miller Dep. Tr.] at 37:15-39:4; see also BCI Ex. 32 [Moore Decl.] at ¶¶ 4-5. If the New York Fed had believed itself fully secured by the assets pledged to it, it would have had no reason to pressure Barclays to take over its position and subject the parties and the financial system to an exercise that, in Ms. Leventhal's words, "push[ed] the operational components of the financial system nearly to their limits." BCI Ex. 30 [Leventhal Decl.] at ¶ 13. But the New York Fed was understandably nervous about what would happen in an LBI liquidation — and so was Barclays. Had the Fed not insisted that Barclays assume the risk of an LBI liquidation as part of its overall acquisition of the Business, Barclays would never have agreed to advance $45 billion in cash to an entity (LBI) that was about to be placed into SIPC liquidation. BCI Ex. 77 [King Dep. Tr.] at 75:8- 76:6.
121. Under pressure, Barclays reluctantly agreed to replace the New York Fed's repo lending position by transferring $45 billion in cash to LBI.64
122. On September 17, Barclays was shown a list of the assets securing the New York Fed's repurchase agreement. Id. at 70:7-72:13. Barclays understood that these would be the assets it would receive in exchange for the $45 billion cash advance it was about to make. Id. at 69:25-70:6. That understanding proved wrong.
2. In A Transaction That Was Fraught With Financial And Operational Risk And Uncertainty, Barclays Received "Repo Collateral" That Was Different From What It Had Been Promised.
My reaction: The 2,200 page Lehman report released this month shows the cozy and very probably criminal relationship between the country's main regulatory bodies and the Wall Street behemoths.
1) Lehman had been using "accounting gimmick" (Known internally as "Repo 105") since 2001 to move assets off its balance sheet for just enough days to get through the end of the quarter.
2) Even though Lehman dressed up its accounts for the great unwashed public, it did not try to fool the authorities. Lehman gave full and complete financial information to Government agencies who never raised significant objections or directed that Lehman take any corrective action.
3) The NY Fed, Ben Bernanke, and Timothy Geithner were at a minimum massively derelict in the performance of their duties, and are most probably culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations. the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets.
"...at a minimum, the NY Fed helped perpetuate a fraud on investors and counterparties."
4) Quite a few observers have been stunned and frustrated at the refusal to investigate what was almost certain accounting fraud at Lehman.
5) Lehman also couldn't reliably and consistently confirm the value of its holdings. the company lacked any internal check on prices set by its numerous trading desks.
"For a leveraged trading firm, to not understand your economic position is to sign your own death warrant,"
6) Lehman was able to temporarily warehouse illiquid (toxic) investments at the New York Fed in return for cash. The New York Fed lent Lehman $46.2 billion in cash and Treasury securities for $50.6 billion in illiquid (toxic) collateral.
7) To get rid of Lehman's illiquid (toxic) investments warehoused at the New York Fed, Barclays was pressured to replace the New York Fed's repo lending position by transferring $45 billion in cash to LBI. As its insistence that Barclays replace its repo suggests, the New York Fed believed itself to be at risk of loss in an LBI default. Had the Fed's assets become commingled in the GUC pool, it would have seen a loss of nearly $40 billion of taxpayer money.
8) Unwinding the New York Fed's Lehman repo did not go smoothly. Barclays received "repo collateral" that was different in quantity and value from what it had been promised. This suggest that the Fed's repo to Lehman was under collateralized and filled with toxic securities.
Conclusion: The behavior of US "regulators" continues to prove far more criminal and damaging to the financial system than anything done on Wall Street.