Tuesday, Mar 16, 2010
The Fed: Grossly negligent or criminal?
Counterpunch: Lehman Brothers scandal rocks the Fed
An official, 2,200-page report on the demise of Lehman has been published, showing the cosy and, probably, criminal relationship between US regulators and Wall Street banks. The activities of the New York Fed (Geithner, Bernanke), Ernst&Young and Fuld are deeply suspect. At a minimum the NY Fed (charter: promote the safety and soundness of the banking system) helped Lehman to defraud markets, investors, counterparties and the public. One of Lehman's games, played with the Fed's apparent knowledge, was to exchange Lehman collateral for cash just before each set of quarterly accounts (to produce lower leverage and much better capital and risk ratios) and reverse the swap soon afterwards, fraudulently classifying this as a "Permanent Sale".
Posted by icarus @ 11:21 AM (1294 views) Add Comment
14 Comments
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1. icarus said...
The "Permanent Sale" (last line of intro) was the original exchange (Lehman collateral for the cash).
A few snippets:
Lehman apparently quickly sprang a £130+ billion leak, a sudden, massive hole in its balance sheet. Now we know this hole had been slowly getting bigger over the years under the noses of the regulators.
Paulson's book keeps referring to Lehman's 'phony valuations' as if this was (prior) common knowledge on The Street.
Note that no US law firm would give Lehman cover via an opinion letter for their fraudulent repo (repurchse) transactions (the ones summarised in my intro). Lehman therefore found a London whore to give them such a letter. Lehman then shifted the assets via the UK for these transactions. Hence the comparison that has been made between London and Guantanamo - places where the US conducts its dirty buasiness abroad. Another of the Blair/Brown achievements.
The Fed could have insisted way back on an orderly wind-down for Lehman or a bankruptcy with a good/bad bank structure with the Fed as a backstop for the bad bank. There's a good chance though that the Fed knew the problems weren't confined to Lehman.
There are graphs showing the spikes in Lehman's repo transactions as Quarter's end approaches, plus graphs showing how repo usage grew as a proportion of tangible common equity over time until it reached 1.6 times that equity - see
http://thealphaninja.com/2010/03/lehmans-quarter-end-repo-105.html
2. icarus said...
Sorry that last link is http://www.thealphaninja.com/2010/03/lehmans-quarter-end-repo-105.html
3. 51ck-6-51x said...
From the Sunday FT article:
"""
In his report, Mr Valukas claimed that Lehman’s financial plight “was exacerbated by Lehman executives, whose conduct ranged from serious but non-culpable errors of business judgement to actionable balance sheet manipulation; by the investment bank business model, which rewarded excessive risk taking and leverage; and by government agencies, who by their own admission might better have anticipated or mitigated the outcome.”
"""
4. icarus said...
666 - that FT report goes on to quote Dick Fuld's lawyer regarding the fraudulent repo transactions "Mr Fuld did not know what those transactions were – he didn’t structure or negotiate them, nor was he aware of their accounting treatment". It's possible to summarise the scam, involving very large sums, in two lines - so how could the CEO not know? The statement refers to the fact that the transactions were "supported by legal opinons" - yeah, after the first dozen law firms refused to give the required opinion because they didn't like the smell.
5. mountain goat said...
Thought Fuld already got punished - Richard Fuld punched in face in Lehman Brothers gym
Another day another banker in trouble. The former president of New York's privately held Park Avenue Bank was arrested on Monday on fraud charges, the first person accused of attempting to steal US government bail-out funds in the financial crisis.
6. mountain goat said...
UK bankers not being left behind FSA charges top banker and wife with insider dealing.
I clearly get all my news from the Torygraph
7. icarus said...
It's not just bankers though. It's a question of how deeply the Fed is implicated.
8. mountain goat said...
Icarus - But was Bernanke pocketing any money or doing anything for personal gain? If not then hard to implicate the Fed.
Central bankers are monetizing bad debts, that is their crime.
9. 51ck-6-51x said...
Icarus said, "so how could the CEO not know?"
- I agree with your implication - sure he /could/ have not known, but if he didn't it is bad enough because he should have!
Ignorance does not imply innocence.
10. icarus said...
mg @8. I think it's Geithner more than Bernanke who's in the frame. Question is, what is 'pocketing money'? Blair didn't necessarily pocket money directly by being Bush's buddy but he's well looked after now - consultancies, JP Morgan job etc. In his case it's a fairly general reward for 'doing the right thing by your mates' over a period - no brown envelopes, please.
There's enough in the article to suggest that the Fed was implicated in enabling Lehman to hoodwink investors (e.g 'Lehman gave full and complete financial information to the Fed', which therefore knew what was going on). And look at the para on stress tests - when Lehman failed the Fed's tests the latter allowed Lehman to test itself - and pass. A simple stress test analysis shows that for the biggest four banks alone, on their second-mortgage portfolios alone, stress tests were too permissive last year to the tune of $150 billion. An article demonstrating this also shows how easy it is to evaluate these tests and see them as a sham, and the extent to which bank balance sheets are fabricated: http://www.newdeal20.org/?p=8835
See also http://www.nakedcapitalism.com/2010/03/wray-timmy-gate-did-geithner-help-hide-lehman-fraud.html
11. icarus said...
666 @9. It's not even worth contemplating the possibility that Fuld was ignorant of the repo 105 scam. It was big, it was regularly done and it was the main prop in the appearance of solvency.
12. braindeed said...
....trouble is, all the money we would hope to claw back would be spent on lawyers, as is 'the man who is innocent until proven guilty's perogative. Anyone ever see 'The Devil's Advocate'?
I hear Barrack is taking violin lessons.
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