More Lehman, the Press, and Why Timmeh Should Go Now

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A Repo 105 transaction: if it looks confusing, that's because it's intended to confuse

As I noted a few days ago, Lehman used what any normal human being would have called, "accounting fraud."

Well, we have some more details, and it appears that the New York Bank of the Federal Reserve, and its president, current Treasury Secretary Timothy Geithner, knew it, and did nothing about it.

Basically, this was all about what is called "Repo" transactions.

Essentially, it's a way to get short term cash by turning over assets as collateral, which is normal and ordinary. It's a lot like pawning your wedding ring, only the amounts are much larger, and typically the periods of the loan are typically shorter.

So, what is the problem?

Well, ignoring the fact that the assets were in reality absolute crap, which is really a matter of due diligence for the lender, if you remain responsible for any losses in value of these assets, and you structure the transaction so that it does not show up on your balance sheet, because they booked the transaction as a sale of assets, as opposed to borrowing money.

The thing is, that this is illegal, or at least without precedent, in the United States, so they justified the activities, which took place in the United States, by claiming that they operated under UK law:

When Lehman first designed Repo 105 in 2001, however, there was one catch. The firm couldn’t get any American law firms to sign off on the aggressive accounting, namely that these transactions were true sales instead of what amounted to the parking of assets. From the firm’s own Repo 105 accounting policy document, according to the report:

Repos generally cannot be treated as sales in the United States because lawyers cannot provide a true sale opinion under U.S. law.

Enter Linklaters, [a "magic circle" law firm, the US equivalent is a "white shoe" law firm] which grounded its legal brief in English, rather than American, law. The firm explicitly said: “This opinion is limited to English law as applied by the English courts and is given on the basis that it will be governed by and construed in accordance with English law.”

The full legal opinion is after the break.

In any case, other investment banks are denying that they use this accounting gimmick, to which I reply, "Yes, and you will respect me in the morning, the check is in the mail, and you won't cum in my mouth."

It's no wonder that the bankruptcy examiner described the behavior as, "grossly negligent."

Let me make this clear, I have not read the report, it's 1053 pages long not counting appendices, but Yves Smith did, and she finds that the NY Fed did not exercise due diligence, and cites the footnotes:

Liquidity was an important factor in the stress testing that Lehman was required to run under the CSE Program. 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.

(emphasis mine)

So it appears that little Timmy Geithner allowed Lehman to game the stress tests so as to pass, which makes one wonder about the stress tests of the remaining financial institutions last year?

Geithner is either incompetent, or completely captured by the finance industry, or corrupt.

In any of these cases, he should have been given the boot long ago.

You know the one where Geithner negotiated the results with the banks?

A final note on all this, for some reason, the blogs are doing a good job of covering all of this, but the papers are burying the story on inside pages, with the WSJ placing it on page C7, and the NYT placing it on B2.

Legal opinion after the break:

The Forensic Acountants Have Been Through Lehman's Books

And Maybe Some Water Boarding

And their analysis is that Lehman Brothers were insolvent for months, if not years before they finally collapsed, and that the firm use unethical, and possibly illegal tricks to conceal the amount of their debt:

But the examiner, Anton R. Valukas, also for the first time, laid out what the report characterized as “materially misleading” accounting gimmicks that Lehman used to mask the perilous state of its finances. The bank’s bankruptcy, the largest in American history, shook the financial world. Fears that other banks might topple in a cascade of failures eventually led Washington to arrange a sweeping rescue for the nation’s financial system.

That sounds like fraud to me, and I think that it warrants a criminal investigation.

What is even more interesting is that the Federal Reserve Bank of New York was aware of the accounting activities, and that they appear to be in violation of regulations.

Yves Smith, reading the 2200 page report so that yiours's truly does not have to, makes this clear, and makes it clear that regulators were complicit:

Well, it is folks, as a newly-released examiner’s report by Anton Valukas in connection with the Lehman bankruptcy makes clear. The unraveling isn’t merely implicating 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 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.

…………

But here is the part of the report that discussed how the Fed aided and abetted Lehman misconduct:

[T]he 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.

I would note that at the time of the Lehman collapse, and for some time before it, the President of the Federal Reserve Bank of New York was one Timothy Geithner.

I'm beginning to think that this is more than incompetence, I'm beginning to think that a criminal investigation should include our current Treasury Secretary.

Barack Obama, you need to fire Timothy Geithner. If the 'Phants filibuster, then you recess appoint his successor.

Saroff's Rule, Once Again

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Saroff's rule: If a financial transaction is complex enough to require that a news organization use a cartoon to explain it, its purpose is to deceive

The New York Times has a description of how Lehman Brothers used a front company to obtain credit and conceal debt:

It was like a hidden passage on Wall Street, a secret channel that enabled billions of dollars to flow through Lehman Brothers.

In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books.

The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.

While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.

None of this was disclosed by Lehman, however.

Not surprised about their doing this, though I am surprised that this is, at least nominally, legal.

Fire Timothy Geithner Now

We have a couple new developments, first was that Merrill Lynch told both the SEC and the Federal Reserve Bank of New York that Lehman was cooking the books:

Securities and Exchange Commission and Federal Reserve officials were warned by a leading Wall Street rival that Lehman Brothers was incorrectly calculating a key measure of its financial health months before its collapse in 2008, people familiar with the matter say.

Former Merrill Lynch officials said they contacted regulators about the way Lehman measured its liquidity position for competitive reasons.

…

he findings raise questions over what federal regulators knew about Lehman’s accounting and when they knew it. In the account given by the Merrill officials, the SEC, the lead regulator, and the New York Federal Reserve were given warnings about Lehman’s balance sheet calculations as far back as March 2008.

Former and current Fed officials say even in the competitive world of Wall Street, it is un­usual for rival bankers to relay such concerns to the Fed.

It takes an awful lot to get one investment bank to rat out another, the first rule of Wall Street is never tell the regulators, and and the Federal Reserve Bank of New York, president Timothy "Eddie Haskell" Geithner, as well as the SEC, which was largely deferring to the NY Fed, decided to ignore it.

Actually, it's more. Not only did Geithner's Bank ignore the reports, it bought junk grade debt from Lehman in violation of the law:

As Lehman Brothers careened toward bankruptcy in 2008, the New York Federal Reserve Bank came to its rescue, sopping up junk loans that the investment bank couldn't sell in the market, according to a report from court-appointed examiner Anton R. Valukas.

The New York Fed, under the direction of now-Treasury Secretary Tim Geithner, knowingly allowed itself to be used as a "warehouse" for junk loans, the report says, even though Fed guidelines say it can only accept investment grade bonds.

Meanwhile, the Fed and Geithner both strongly oppose a congressional measure to authorize an independent audit of the central bank and its lending facilities. The provision passed the House but is under attack in the Senate, where Banking Committee Chairman Chris Dodd (D-Conn.) says he hopes to stop it.

Without an audit, the Fed is able to conceal the specifics of what it holds on its balance sheet. If the Lehman deal is any indication, the Fed is hiding billions of dollars in toxic loans on its books.

"The Fed legally is forbidden from taking such assets. There's a legal requirement that the Fed's assets be investment grade," Rep. Alan Grayson (D-Fla.) told HuffPost. Grayson, who is the cosponsor of the Grayson-Paul Audit the Fed measure that passed the House, said the Lehman scandal shows precisely why such an audit is needed.

Seriously, he cheated on his taxes, he's aided and abetted the pervasive accounting fraud at Lehman, and he's still in the bank's pocket.

I understand that his successor will face a filibuster, but please, fire him, and go with a recess appointment.

It doesn't matter that he knows where the bodies are buried if he's a part of the gang what murdered the economy, and he's still working flashing gang symbols to Dimon and Blankfien.

Ha Ha!

Lehman and its its creditors have subpoenaed Timothy Geithner over his discussions with JPMorgan Chase over the time when the investment bank collapsed:

Lehman Brothers‘ bankruptcy estate and its official committee of unsecured creditors asked a court late on Thursday to compel Treasury Secretary Timothy F. Geithner to testify about the investment bank’s collapse.

The request for a subpoena comes as part of the estate’s lawsuit against JPMorgan Chase, which asserts that the bank illegally took $8.6 billion in collateral from Lehman, precipitating that firm’s demise.

The lawsuit’s main argument is that JPMorgan, apprised of Lehman’s fragile condition, improperly profited from making its collateral demands — and also pushed Lehman into bankruptcy.

Lawyers for Lehman’s creditors wrote in a court filing that they and the estate served Mr. Geithner with a subpoena last August, ordering him to testify about conversations he had held with both JPMorgan and Lehman over the former’s calls for collateral in early September 2008.

Mr. Geithner, then president of the Federal Reserve Bank of New York, spoke with JPMorgan’s chief executive, Jamie Dimon, 10 times in the week before Lehman fell, according to the filing. Many of those conversations, the lawyers contend, must have been about JPMorgan’s collateral demands.

Basically, Lehman is asserting that Jamie Dimon's bully boys stole from them in order to push them over into bankruptcy.

The implication is that they did so because they knew that, in the event of a collapse, they would get to keep the money.

Note that they are not asking about deliberations at the NY Fed, but the content of his discussions with Jamie Dimon.

Still, I relish the though of Geithner in the dock forced to answer questions about his dealings with the big banks.

Cuomo Files Suit Against Ernst and Young Over Lehman Collapse

Matt Taibbi is all over this, and while the suit is civil and not criminal, and so a loss would not put the accounting firm in the same position as Arthur Anderson, which was shut down as a result of a criminal conviction stemming from the collapse of Enron. (Since reversed, but they are still dead)

Basically, it comes down to a way that Lehman used an arcane financial instrument called a "Repo 105" to conceal its debt, and his example is spot on"

These Repo 105 transactions are just loans that Ernst and Young and Lehman Brothers conspired to book as revenue from sales. If I go to you and I ask you to lend me a hundred bucks to pay for Knicks tickets, that’s a loan, and you and I and the SEC and every investor on Wall Street all know I’m in debt to you, that I owe you a hundred bucks.

Here’s how Lehman Brothers paid for their Knicks tickets: a week before the game, they went to you and offered to you “sell” you their worthless puke-stained lava lamp for a hundred bucks, with the understanding that two days after the Knicks game, it would come back and “buy” the lamp back for the same $100 (plus a small commission for your trouble). And when Lehman pocketed that $100 from the initial transaction, they decided to call that not borrowing but a true sale, i.e. they booked that hundred bucks as revenue from an honest sale of a worthless piece-of-sh%$ lava lamp.

In 2007 and 2008 Lehman would do this before the end of every quarter. They would "sell" billions of dollars of assets, typically bonds, to various companies, and use that money to pay down debt before the quarter’s end, so that they didn’t look so flat-ass broke to investors. Then, a week or so after the end of the quarter, they would go out and borrow more money, and then "buy" the assets back. The reasons they did this were myriad, but in most cases the assets they were "selling" were depressed in value at the time and could not have been sold at anything like face value had they really gone out on the market and tried. So instead of really "selling" these items on their balance sheet, they worked together with other companies to jury-rig these “repurchase” agreements that looked like sales but were actually loans.

(%$ mine)

There are two possibilities here for Ernst & Young:  Either they were negligent, and hence they owe damages, or they complicit, in which case they are criminally liable, and could suffer the same fate as Anderson .

My hope is that the accounting firm will turn on former Lehman executives, most notably Dick Fuld, to get out from under, and we may see our first big banker criminal case as a result.

My fear is that this will be another 8 figure fine with no criminal prosecutions.

Not Enough Bullets

Just who do you think that the World Bank would hire as their treasurer? Why it would be the chief risk officer for Lehman when it collapsed:

The World Bank has appointed Madelyn Antoncic as its new vice president and treasurer.

Ms Antoncic served as Lehman Brothers’ chief risk officer from 2002 to 2007 and following the collapse of the bank, stayed on for a year as managing director and senior advisor at the Lehman Estate, helping to maximise value for creditors.

Having begun her career as an economist at the Federal Reserve Bank of New York, she has worked for Goldman Sachs in various posts (including head of market risk management), and for Barclays Capital, before joining Lehman Brothers in 1999.

In her new role, Ms Antoncic will be responsible for maintaining the World Bank’s standing in financial markets and for managing an extensive client advisory, transaction, and asset management business.

Seriously, in the self dealing nepotistic and moronic world in which they live, there is literally nothing that a bankster can do,^* that can prevent them from being given high profile high prestige jobs.

There are indications that she was opposed to Lehman's high risk strategy, but she chose to stay, and get a do-nothing government relations position.

If she, as chief risk officer, was unwilling to leave when she saw what was going on, and she was frozen out, any organization that hires her as treasurer has absolutely no credibility at all.

It's like putting Charlie Sheen in charge of your chastity and sobriety department.

This is why not prosecuting was such a bad idea. Like bad pennies, people like this keep coming back to do even more harm.

H/t Naked Capitalism.

^*As long as you are white anyway. See the fall of Raj Raj Rajaratnam as an illustration.

Still???

The SEC still hasn't finished its investigation of Lehman?

It's been 4 years, and we've not seen anything:

The U.S. Securities and Exchange Commission is still probing Lehman Brothers more than three years after the investment bank collapsed during the global financial crisis, agency chairman Mary Schapiro said on Wednesday.

Schapiro told lawmakers it would be inappropriate to comment on a matter that "remains under investigation," but assured lawmakers that the SEC has conducted interviews with management at the highest levels and has reviewed millions of pages of documents.

"It is still under review," she said at an SEC oversight hearing before a House Financial Services subcommittee.

Schapiro's comments come after "60 Minutes" on Sunday aired a segment revisiting the March 2010 findings by Lehman Brothers Holdings Inc's court-appointed examiner, Anton Valukas.

Valukas' report said that Lehman used accounting gimmicks and had been insolvent for weeks before it filed for bankruptcy in September 2008.

But we haven't even seen administrative actions.

Nobody has been banned from the securities industry, no prosecutions, no fines, no nothing.

The fix is in.

The Lehman Accounting Fraud Scandal Widens

Because it now appears that J. P. Morgan Chase booked repurchase trades as sales as well:

JPMorgan Chase recorded some repurchase trades as sales, the same accounting gimmick that spawned Lehman Brothers’ now-infamous “Repo 105s”, suggesting that the failed bank was not alone in its interpretation of a new accounting rule.

Unlike Lehman, which never disclosed the effects of its repo deals on the firm’s balance sheet, JPMorgan detailed the year-end values of its repo sales and purchases in annual reports beginning in 2001, after a new accounting rule was introduced.

The practice ended in 2005 when the company merged with Bank One. “The transactions were done in very small amounts and were fully disclosed,” a spokesman said.

Yeah, we believe you.

More seriously, it should be made illegal to engage in activities that have the effect of removing liabilities from the balance sheet a part of their purpose.

Lehman background, I recommend the Stewart video.

Partying Like It's 2009

In both Finland and Canada investors, many of them small investors are suddenly discovering that the real estate investment funds that they had their savings in will not let them withdraw money.

It ain't exactly a money market breaking the buck, as happened at the start of the Great Recession, but it seems to me that it might be the tide going out as the tsunami comes in.

Real estate funds have long been sold as low-risk investments, but that has not turned out to be the case as Finland's housing market started dropping.

Today, ten real estate funds in Finland have restricted investors' ability to withdraw their money.

Two years ago, many small-time investors had a rude awakening when they realised that they could not redeem their holdings in almost a dozen real estate funds.

As the housing market slowed, many investors began wanting to sell their fund shares. But with few buyers for the underlying properties, the funds lacked the cash to honour redemptions.

The lockup began in September 2023, when Ålandsbanken's housing fund — with over 6,000 owners and assets exceeding 700 million euros — became the first to postpone redemptions.

………

Ålandsbanken told Yle it is protecting the fund's value by not selling properties at a loss. 

Let me translate, "Protecting the fund's value by not selling properties at a loss," from the original Finnish.  It translates to, "We are insolvent, but we hope to keep the game of musical chairs going until things work out."

And, oh! Canada:

Andre El-Baba never imagined an investment fund could trap him.

A lifelong property manager from Vancouver, he’d spent decades navigating real estate markets and thought he understood risk. So when he put money into Romspen Mortgage Investment Fund in 2022, it felt like a safe, sensible choice. Such private real estate funds had become a popular way for Canadians to invest in developing new houses and condominiums, riding a construction boom that had lasted two decades. They offered solid returns, regular payments and the ability to cash out at will.

Then the gate slammed shut.

Not long after he and his father invested a combined C$2 million ($1.5 million), Romspen announced it was blocking withdrawals — a last-resort tactic that lets funds avoid selling assets when too many clients want to pull out their money. The principal Andre assumed would always be within reach was suddenly sealed off, with no timeline for release. He’s getting only a thin, 2% stream of monthly income in return — far less than expected. Every month, Andre’s account statements tell the same story: The cash is still there, but he can’t move it.

………

To be sure, this is not Canada’s Lehman Brothers moment. The development industry has other sources of capital, including C$13 billion of government money Carney plans to inject into a new agency to build affordable homes. But the gating crisis is a harsh reckoning for everyday Canadian investors, who for decades treated real estate as a safe bet.

Let me translate THIS from the original Canadian, "This is not Canada’s Lehman Brothers moment," translates to, "This is not Canada’s Lehman Brothers moment……… SO FAR." (Ce n'est pas encore le moment Lehman Brothers pour le Canada... JUSQU'À PRÉSENT. for the Quebecois out there)

This is going to get ugly fast.   

Diving Deeper in the Financial Mess: Lehman and Bankruptcy Laws

Well, it appears that while Lehman technically filed for chapter 11 reorg, because of changes to the laws the effect is much closer to that of a Chapter 7 liquidation, particularly with the 2005 changes to the bankruptcy laws.

The bullet points:

• The holding company has filed for BK, but , its subsidiaries, "its brokerage-dealer subsidiaries, asset management unit, and investment management division", continue to function."
• Lehman will try to sell off the good bits.
• Under normal BK procedures, there is a stay on collecting debts, but, "most financial contracts — including securities contracts, swaps, repurchase agreements, commodities contracts, and forward trades — are unaffected by automatic stays."
• By declaring bankruptcies, it means the creditors can file to collect immediately.

So have this problem:

Now comes the downside potential. The risk is that lots of these commercial counterparties will choose to terminate their financial contracts with Lehman — say, for instance, credit default swaps — all at once, and then try to rehedge themselves all at once, causing the market to seize up.

But the market is already seized up.

The US financial system is in a pit of ugly, and no know knows which way is out.

What Matt Said

Mr. Yglesias is a wise man:

Unlike the guy who runs Lehman Brothers, the guys who clean the bathrooms in the Lehman Brothers office have, as best one can tell, been doing an excellent job. And yet if the company going under results in everyone involved losing their jobs, the guy who runs Lehman will wind up being better off than the guys who clean the bathrooms. This is because in the United States of America, hard work is the way to get ahead.

Madame Guillotine is beginning to look remarkably attractive.

He'll ask for a recount

The count is now official, and Democrat John Lehman had defeated Van Wanggaard in the race for Wisconsin state senate, flipping the chamber to the Democrats:

Wisconsin Democrats moved a step closer to winning a recall challenge in the state Senate on Tuesday after a vote canvass in Racine County padded their candidate's lead over state Sen. Van Wanggaard by 55 votes.

If the state elections board certifies the results, Democrats will have salvaged a single win after suffering bruising losses in the other five recall elections last week.

The canvass found that Democrat John Lehman had 36,351 votes, or 50.6 percent, while Wanggaard received 35,517 votes, or 49.4 percent. The margin of victory was 834 votes, surpassing the 779-vote difference that stood before the canvass was conducted.

Lehman's victory isn't official until the state Government Accountability Board certifies the results. That's expected to happen next week.

800 votes might not sound like a not, but it's more than 1% which means that there is not an automatic recount, but I'm sure that Wanggaard will ask for one.

It's a long shot, but it also serves to forestall the Dems taking control of the Senate.

Think Norm Coleman/Al Franken writ small.

I'm sure that Wanggaard will be well rewarded for his efforts by the Koch brothers.

Call Your Congress Critter

The SHIELD act has been proposed to to rein in patent trolls:

Shell companies that threaten legal action over patent infringement without actually producing anything themselves could be driven out of business if the newly proposed and risibly backronymed Saving High-tech Innovators from Egregious Legal Disputes (SHIELD) Act becomes law.

In an all-too-rare display of US congressional bipartisanship, representatives Peter DeFazio (D-OR) and Jason Chaffetz (R-UT) announced the legislation, which would make the infringement accuser liable for both sides' legal fees should they lose. Universities and companies that actually produce an end-product to sue about are exempt.

"These trolls are hampering innovation, slowing companies down and locking them up in lawsuits," said Chaffetz at a press conference.

Basically, it requires the trolls to cover the other side's court costs unless they can show that their suit had a reasonable chance of success, which means that fighting the trolls becomes a lot cheaper.

BTW, much like the banking system, much of the dysfunction in the banking system goes back to the Clinton administration"

In 1994, Bill Clinton broke the long-standing and utterly sensible tradition that an actual patent lawyer should be Commissioner of the United States Patent and Trademark Office, and instead appointed Bruce Lehman, who was at the time the chief lobbyist for the Software Publishing Industry.

Under Lehman's leadership, the USPTO changed the rules to allow much broader patents to be issued, often spanning completely different technological areas. These types of patents are the troll's weapon of choice, with some so broad they could cover pretty much anything on the internet, for example. At the same time the amount of patents issued by the office began to increase.

Lehman was also one of the main authors of the widely reviled Digital Millennium Copyright Act, and helped negotiate the Trade-Related Aspects of Intellectual Property Rights trade agreement. In 2006, he was inducted into the first International IP Hall of Fame by Intellectual Asset Management (IAM) magazine.

One of the distressing characteristics of the Clinton administration was its embrace of rent seeking as an economic model, whether it be banksters or patent trolls.

Unbelievably F&%$ing Bad Ideas: London Stock Exchange Edition

So it appears the bright young (but evil) men from Lehman have been talking to the bright young (but evil) men from the London Stock Exchange, and they will be working together to make our world a worse place:

London Stock Exchange Group said Thursday that it would create a pan-European trading system in partnership with Lehman Brothers, as the exchange sought to regain its leading role in the region.

The deal creates a system for so-called dark liquidity pool trading. The exchange, known as the LSE, said the trading facility, to be named Baikal, would be open to other investors and was expected to begin operating in the first quarter of 2009. Lehman, based in New York, operates its own dark pool network. It is bringing sophisticated trading technology and an established customer base to the table.

........

Dark liquidity pools are off-market trading networks where large orders can be executed anonymously, without divulging prices to public exchanges. Off-market trading has always existed in the form of over-the-counter transactions, but the technology now exists to bring investors together electronically in anonymity. Dark liquidity in European equities is growing rapidly, according to the LSE, and currently accounts for around €12 billion, or nearly $19 billion, in daily trading value.

.......

.....

David Shrimpton, head of equity market development at the London Stock Exchange, said that the LSE was hoping to bring other investors aboard as partners, and the response to the announcement had been "very positive."

He said it might be possible for a quite a few trading systems to co-exist. "You've got 50 broker dark pools in the U.S.," he added, "and they share about 10 percent of the market."

.....

Yep. There's a recommendation. Let's get into a new anonymous and unregulated type of exchange pioneered by the Americans, whose toxic financial products currently threaten to poison the world financial systems.

Evil, unregulated, dangerous, and will likely be disasterous.

Headline of the Day

Will "Goldman Penis Envy" Crash the Economy Again?

—Matt Taibbi

The point of his article is that there are a lot of actors in Wall Street like Lehman, who are small enough that they feel that they have to massively over-leverage to compete with the Vampire Squid, but large enough to crash the system.

“We called it ‘Goldman Penis Envy,’” says Lawrence McDonald, former Lehman trader and author of A Colossal Failure of Common Sense. In telling the Gelband story, he explains that Fuld and Gregory were so desperate to beat out Goldman and become the richest men on Wall Street, they chased every bad deal at the peak of the speculative bubble.

“These tertiary financial institutions, in order to win business away from the big players, they have to continually juice their offerings, offer more leverage, more goodies,” says McDonald. “Dick and Joe, they wanted to do these banking deals, to steal Goldman’s business by offering more.”

He's suggesting that the collapse of Archegos Capital Management is a taste of things to come.

He's probably right.

Wall Street Investment Banks to Create System to Hide Insider Trades

Seriously. Notwithstanding protestations to the contrary, this is what a private bourse like this is for.

Banks to start trading platform
Citigroup, Lehman Brothers, Merrill Lynch and others are setting up a private system to trade stocks of companies looking to avoid public scrutiny.
August 14 2007: 1:34 PM EDT

NEW YORK (Reuters) -- Five of Wall Street's biggest banks, including Citigroup, Lehman Brothers, and Merrill Lynch, said on Tuesday they were setting up a private system to trade stocks of companies eager to avoid the scrutiny of public markets.

The group, which also includes underwriter Morgan Stanley and Bank of New York Mellon, said the new platform is designed to ease trading for privately sold securities. It will target companies looking to raise capital while avoiding the rules imposed on publicly listed shares.

...

If the SEC were really concerned about healthy markets, it would take steps to prevent secret transactions by actors who are likely to have inside information.

Economics Update

Things have seemed pretty hectic today.

Normally I don't mention this, I think that it is just noise, but all three major stock indices are down 3%+, so while it's not yet raining Katz and Lehmans, it's pretty ugly.

Note that this is my economic update post, so I'm not going to claim that a certain VP pick's speech caused anything, and instead point at jobless claims spiking unexpectedly by 15,000, though truth be told, it should not cause that sort of reaction: the weekly data is simply too noisy for any rational investor to act upon the basis of those numbers.

But this isn't "rational investors" this be Wall Street, so it could have been the Lehman CEO's choice of shoes today.

The rest of the financial news is no where near as definitive, and even Federal Reserve officials are publicly disagreeing on whether the concern is recession or inflation.

Meanwhile, even though the Bank of England and the ECB kept rates steady, the cost of money in Europe went up, because the ECB has significantly tightened requirements to lend to banks.

In any case, the lack of rate hikes strengthened the dollar.

Mortgage rates are down this week, which would ordinarily be good news, but I think that "the markets" (and I) see this as a sign of a weakening economy, just as "the markets" (and I) see declining oil prices and declining gas prices as signs of a weakening economy.

Even so, the numbers for the service sector were good, so the blood on the street today is a bit odd.

Of course, it sucks to be a bank right now, with Community National Bank of Sarasota looking to be on the FDIC's Friday afternoon press releases, and Lehman floating the idea of creating a "bad bank" to shift bad assets to.

Someone needs to explain the concept to me, because it seems to suffer from the, "We've run out of gullible idiots," problem.

In any case, it appears that insurance giant AIG is considering something similar.

I'm not sure how piling crap in a separate pile really helps anything.

Why Save Bear Stearns, and not LEhman

Buried in a very good post by the Angry Bear is this little gem:

But the effect of LEH going out of business would not be so severe as the effect of BS going out of business for one reason that Roubini, for some reason, appears not to have mentioned.

Lehmann has no clearing business.

Had Bear gone out of business, about 30% of the hedge funds in the country would not have been able to execute virtually any transaction for the following thirty days. Not a payment. Not a redemption. Not a trade on a listed exchange. Not a receipt. Not a de-leveraging. Not a swap payment, not a CDS payment, not fulfilling an option exercised against them.

There's not just a "maybe" about financial collapse in such a scenario; P probably well in excess of 0.9944. $30 billion is a "bargain" in such a situation.

(emphasis mine)

Bear Stearns was a surprise. Lehman was not. This has been bubbling up for months, and the firms have been able to create contingencies to allow for trading in the departure of the firm from the market.

Not Enough Bullets, Part 3

NY Magazine writes about the heart rending adjustments that have to be made by the until recently overpaid traders at Lehman.

The janitors, receptionists, etc., maybe I have some pity for them.

As for one of the examples, a woman engaged to a Lehman trader who dumped him once he was no longer a millionaire, he's better off.