Posted on 03/12/2010 6:45:38 AM PST by Beave Meister
Presenting a detailed look at "Repo 105" - the next soundbite sure to fill the airwaves over the next weeks and months, as more and more banks are uncovered to be using this borderline criminal accounting gimmick to make their leverage ratios look better. This is the first time we have heard this loophole abuse by a bank, be it defunct (Lehman) or existing (everyone else). There should be an immediate investigation into how many other banks are currently taking advantage of this artificial scheme to manipulate and misrepresent their cap ratio, and just why the New York Fed can claim it had no idea of this very critical component of the Shadow Economy.
(Excerpt) Read more at zerohedge.com ...
Be prepared to be dismayed at the level of attention this doesn’t generate anywhere.
Lehman committed fraud, plain and simple. They knowingly, willfully filed false documents with regulators, and outright lied to their investors.
Fuld & Co. should be in cells right next to Madoff. And of course ALL of their assets should be seized and distributed to the many many victims of the scam.
Yuppers. No doubt in my mind from the skim I had over this info.
Erin Callan might also deserve a cell.
good thing Obama is focused on healthcare /sarc
It would be a very civilized detention center for the Lehman gang, as their friends and families could take the bus:
http://www.mta.info/busco/schedules/q100cur.pdf
This can only be described as the “Ultimate Circle Jerk.”
Ship them overseas to the jihadis. They could test their cutting instruments on their necks. After all they have their economic jackboot on our necks.
Thanks for posting. Great comments at ZH. Thanks to Tyler Durden and the outstanding posters at ZH.
When are people going to realize, the banks own the Fed and tell the Fed what to do, not the other way around.
Lehman Brothers managed Fla public assets, sold securities, underwrote bond deals and handled residential and commercial mortgages. Local Fla governments are stuck with about $556 million in tainted securities that they can't redeem.
Fla counties, cities and school districts face a loss of more than $300 million for roads, sewers and schools. The state has $290 million less to pay for everything from hurricane claims to health care, community colleges and care for infants with disabilities.
The biggest casualty is Florida's giant public pension fund. Fla took a $230 million hit on Lehman stocks and bonds. More than $440 million disappeared from the pension fund that pays benefits for some 1 million retirees and public employees.
The pension fund holds another $53 million in Lehman bonds that have lost most of their value and has $323 million tied up in tarnished mortgage-related securities purchased from Lehman.
If the state sold those securities today, the pension fund would lose about $188 million more.
The direct losses are trivial compared to the collateral damage....everything obama has done to the country is a direct result of the instability that followed the collapse of Lehman.
The idea of sending all to the GITMO is a great one with only a few changes. They can rename the prison for terrorists BANKERS BAY PRISON. Put them in cell with crazed suicidal Jihadist with a pork sandwich in their hands to share with his new cell buddy.
You could even have a new satellite channel for everyone in America to watch called the BANKERS BLUES CHANNEL. Nothing but 24/7 coverage from the all of the security cameras inside the prison walls.
Every night its the BANKER *ITCH SLAPPING HOUR at 6pm
Now, thats some real justice dont you agree?
Further north, 75% of NJ Gov Jon Corzine's appointments to the State Investment Council (invests pension billions) had ties to the bankrupt Lehman Bros.
The New Jersey Economic Development Authority gave Lehman Bros $123 Million tax dollars FOR DOING NOTHING. That's right---FOR DOING NOTHING. The EDA brainiacs unloaded $123 million tax dollars on Lehman Brothers (AND Morgan Stanley) .... simply to cancel an earlier deal.
Corzine once headed Goldman Sachs.
The use of repos received serious interest and has been examined by powerful, if little known FASB (Financial Accounting Standards Board) and they specifically wanted to change the controversial "sales" reporting of repos at the end of 2007, just before the collapse of real-estate bubble caused financial meltdown and panic.
FASB Votes for Quick Repo Change - CFO, 2007 June 14, by Marie Leone
Repurchase financing agreements are used to buy and sell overnight loans of Treasuries (sometimes called repos), as well as other short-term transactions, such as those involving securitizations and mortgage-backed securities. The draft guidance should help companies determine whether a pair of repurchase transactions that involve the same counterparties should be "linked," (treated as one transaction) or "delinked" (treated as two transactions), says FASB. ..... Under FAS 140, companies can garner the more favorable sale accounting treatment if the pair of repurchase transactions transfers risk and can be legitimately delinked. In that case, the transactions would be identified as a sale, plus another transaction, such as a forward contract, and the sale portion is not recognized on the balance sheet. Single linked transactions that don't meet the risk-transfer criteria of a sale are treated as a secured loan and booked on the balance sheet. FAS 140-d would require companies with linked transactions to report the cumulative change on the balance sheet in retained earnings. In addition, companies would have to provide more details in the footnotes about the number of assets and liabilities linked to the repurchase agreements. Changing the way companies account for repurchase financing agreements may generate a sizeable amount of public comment in the coming months. But the Financial Accounting Standards Board's immediate worry is how to get the word out about the proposed changes while operating on a tight schedule. The FASB members voted unanimously on Wednesday to issue an exposure draft that would rework a narrow sliver of FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. .....
Use of repos was hardly criminal under these definitions, especially when valuations and liquidity involved various MBSs / CDOs. Even so, for Repo 105 Lehman couldn't find US-based legal finding and went to London for approval. The City, where Madoff and AIG's Financial Products division set up the operations to do transactions that in US could catch the eye of regulators and watchdogs.
WSJ has several articles on Lehman's use of "Repo 105".
Legal Experts Say Lehman Criminal Case Would Be Difficult - WSJ, 2010 March 13
Lehman Senior VP Warned Auditors About Repo 105 (Matthew Lee) - WSJ, 2010 March 13, by Michael Corkery
Repos Played a Key Role in Lehman's Demise - Report Exposes Lack of Information and Confusing Pacts With Lenders - WSJ, 2010 March 13, by Suzanne Craig and Mike Spector
The report by Lehman's court-appointed bankruptcy examiner, which runs thousands of pages, recounts efforts by the bank to use sleight-of-hand accounting transactions to spiff up its financial picture and sometimes use low-quality collateral to get loans it needed to survive. ..... Lehman's battles show that the repo market, the lifeblood of Wall Street, often isn't as routine as some investors believe. The basic mechanics involve firms raising cash to fund operations by posting high-quality assets, with an obligation to repurchase them within days. But the examiner's report exposes the market's lack of information and the confusing, sometimes contradictory agreements between Lehman and its lenders that help explain why the market seized up in the financial crisis. ..... "The market is extremely opaque and had become very dependent on the value of mortgage-backed securities. As we got into the second half of 2008 it became very unclear what the value was on a lot of those things," Mr. Lubben said. The result was the market froze up as lenders refused to do business with one another, potentially sending other major Wall Street firms into bankruptcy. The market only began to function as the government stepped in to backstop banks. Six weeks before it went bankrupt, Lehman Brothers Holdings Inc. was effectively out of securities that could be used as collateral to back the short-term loans it needed to survive. The bank's subsequent scramble to stay alive exposed the murky but crucial role that short-term lending, done in a corner of Wall Street known as the repo market, plays in the financial world.
Basically, Fed's backstops and injection of liquidity into financial system allowed the "netting" of all the short-term obligations between the lenders and broker-dealers. That unfroze the capital markets and allowed to continue short-term borrowing and financing of non-financial companies through commercial paper.
Lehman's use of this technique goes back to start of the decade when Lehman business units from New York and London met to discuss how the firm could manage its balance sheet using accounting rules that had taken effect in September 2000. Lehman soon created the "Repo 105" maneuver: Because assets the firm moved amounted to 105% or more of the cash it received in return, Lehman could treat the transaction as sales and remove securities inventory that otherwise would have to be kept on its balance sheet. Because no US law firm would bless the transaction, Lehman got the opinion letter from London-based law firm Linklaters. That letter essentially blessed using the maneuver for Lehman's European broker-dealer under English law. If one of Lehman's U.S. entities needed to engage in a Repo 105 transaction, the firm moved the securities to its European arm to conduct the deal on U.S. entity's behalf, the report found. That is why counterparties on the repo transactions were largely a group of seven non-U.S. banks. These included Deutsche Bank AG, Barclays PLC of the U.K. and Japan's Mitsubishi UFJ Financial Group. ..... Yet at the same time, the report says, Lehman was able to double-count some liquid securities by using them in repo transactions and counting them in its internal liquidity pool which would be "monetized at short notice in all market environments." .....
UK's Barclays PLC ended up buying most of Lehman's assets, but only after Lehman's bankruptcy sent the market into another tailspin on September 15th, 2008.
http://www.freerepublic.com/focus/f-news/2440456/posts?page=22#22 - Paulson Says He Was Prepared to Guarantee Lehman, 2010 January 29
“The British screwed us,” Paulson, a former chairman of Goldman Sachs, said he told the U.S. bankers the next day. ..... The U.K. government, however, refused to waive a requirement that Barclays submit the deal to a shareholder vote, in spite of a personal plea by Paulson to Chancellor of the Exchequer Alistair Darling. Darling, Paulson wrote, was concerned that if Lehman’s bad assets hurt Barclays, it might affect the entire U.K. banking system.
In 45 states, taxes and fees are bringing in less than they did in the previous fiscal year. In 41 states, revenues are lower than projected a year ago. Most states are describing their fiscal situations as crises, and 24 states made budget cuts greater than 5% of total projected spending to get through the current fiscal year. (A budget cut is not the same as a spending cut -- most budget cuts were reductions in planned growth, not reductions in outlays.) ..... The averages are just the beginning of the story. All states have not created equal crises. The Pew Center on the States tallied budget projections as of last July 31. There was gloom almost everywhere, led, of course, by California, which was projecting revenues 49% lower than the spending necessary to continue all services and give expected salary and benefit increases. Other big budget gaps: Illinois, 47%; Arizona, 41%; Nevada, 37%; New York, 32%; Alaska, 30%; New Jersey, 29%. ..... The difference is in the relatively invisible benefits accrued to government workers. Health benefits cost state and local government an average $4.43 an hour, compared with $2.01 for private employers. State and local governments award their workers an average $3.23 an hour for pensions and savings plans, compared with 94 cents an hour in the private sector. .....
Governors and legislatures are facing the consequences of years of misplaced optimism. Democrats and Republicans seem equally unable to deal with taxes and spending. For years, the spending party was in charge; revenues took care of themselves until recently.
Another problem is that states' pension funds kept "chasing yields" and forgot the equasion between return and risk. Governments and their pension funds' financial managers (an oxymoron?) don't feel they need caution or insurance for their portfolios, because they could always count on taxpayers to bail them out.
One of the less-noticed causes of the worldwide financial crisis was a desperate search for yield that was led by pension funds and, in turn, by state and local government pension funds. Many maintained unrealistically high expectations of future investment earnings, rushing into high-yield securities and high-risk investments in hedge funds and private equity and real estate just in time to take a big hit. The disparity between private- and public-sector funds is so serious because a large part of state pension benefits are unfunded and uninsured. Consequently, states, most of which also run their localities' retirement plans, have played fast and loose with their pension promises.
One example of states' financial mismanagement (New Jersey):
Goldman Sachs Still Paid for Swaps on Redeemed Bonds - BL, 2009 October 23, by Dunstan McNichol
The most-densely populated U.S. state is making the payments under an agreement made during the administration of former Governor James E. McGreevey in 2003, when New Jersey’s Transportation Trust Fund Authority sold $345 million in auction-rate bonds whose yields fluctuated with short-term interest costs. The agency finances road and rail projects. “This vividly shows the risk of entering into interest- rate swap agreements,” said Christopher Taylor, former executive director of the Municipal Securities Rulemaking Board in Alexandria, Virginia. “The world’s got to see what stupidity even the sophisticated investors like the transportation fund can get into.” While New Jersey replaced the debt with fixed-rate securities in 2008 after the $330 billion auction-rate bond market froze, the swap - in which two parties typically exchange fixed payments for ones based on floating interest rates - isn’t scheduled to expire until 2019. ..... New Jersey taxpayers are sending almost $1 million a month to a partnership run by Goldman Sachs Group Inc. for protection against rising interest costs on bonds that the state redeemed more than a year ago.
The report, filed by bankruptcy examiner Anton Valukas in Manhattan federal court on March 11, describes off-balance-sheet transactions Lehman used to hide debt in late 2007 and 2008, deceiving shareholders about its ability to withstand losses. The firm, which collapsed in September 2008, filed the biggest bankruptcy in U.S. history and helped trigger the financial crisis and resulting $700 billion government bailout. ..... A 2,200-page bankruptcy report a year in the making may point the way for plaintiffs looking to sue former Lehman Brothers Holdings Inc. officials, lawyers said, rather than grand juries probing possible crimes.
Lehman’s Hidden Leverage ‘Shenanigans’ May Haunt Fuld - BL, 2010 March 13, by Joshua Gallu and David Scheer
“I am the one who ultimately signs off and I’m comfortable with our valuations at the end of our second quarter,” then- Chief Executive Officer Fuld said on the conference call. “We have always had a rigorous internal process.” The rigor was based on a shaky foundation, according to a 2,200-page report about the firm’s demise by Anton Valukas, the examiner for the bankrupt firm. Lehman Brothers “reverse- engineered” a key measure of stability, masking the firm’s true financial condition, Valukas said. Some asset valuations were also “unreasonable,” he said. ..... “Repos were just one of many ways to hide losses,” said Janet Tavakoli, president of Chicago-based financial consulting firm Tavakoli Structured Finance Inc. “All of the former investment banks used those techniques. All of them borrowed too much money and were overleveraged.” ..... In its final year, Lehman overvalued real-estate holdings, including a stake in U.S. apartment developer Archstone-Smith Trust, Valukas said. Lehman and Tishman Speyer Properties LP completed a joint acquisition of Archstone for $22 billion, including debt, in October 2007. Lehman presented “unreasonable” valuations of its Archstone stake in the first three quarters of 2008, overvaluing the holding by as much as $450 million in the second quarter, the examiner wrote. Lehman Brothers Holdings Inc.’s Richard Fuld exuded confidence as he briefed analysts on June 16, 2008, four days after demoting his firm’s finance chief in the wake of a $2.8 billion quarterly loss.
Buying an apartment developer just as real-estate bubble was going bust could not be helpful to Lehman's liquidity, leverage or credit rating.
The report, filed by bankruptcy examiner Anton Valukas in Manhattan federal court on March 11, describes off-balance-sheet transactions Lehman used to hide debt in late 2007 and 2008, deceiving shareholders about its ability to withstand losses. The firm, which collapsed in September 2008, filed the biggest bankruptcy in U.S. history and helped trigger the financial crisis and resulting $700 billion government bailout. ..... A 2,200-page bankruptcy report a year in the making may point the way for plaintiffs looking to sue former Lehman Brothers Holdings Inc. officials, lawyers said, rather than grand juries probing possible crimes.
Lehman’s Hidden Leverage ‘Shenanigans’ May Haunt Fuld - BL, 2010 March 13, by Joshua Gallu and David Scheer
“I am the one who ultimately signs off and I’m comfortable with our valuations at the end of our second quarter,” then- Chief Executive Officer Fuld said on the conference call. “We have always had a rigorous internal process.” The rigor was based on a shaky foundation, according to a 2,200-page report about the firm’s demise by Anton Valukas, the examiner for the bankrupt firm. Lehman Brothers “reverse- engineered” a key measure of stability, masking the firm’s true financial condition, Valukas said. Some asset valuations were also “unreasonable,” he said. ..... “Repos were just one of many ways to hide losses,” said Janet Tavakoli, president of Chicago-based financial consulting firm Tavakoli Structured Finance Inc. “All of the former investment banks used those techniques. All of them borrowed too much money and were overleveraged.” ..... In its final year, Lehman overvalued real-estate holdings, including a stake in U.S. apartment developer Archstone-Smith Trust, Valukas said. Lehman and Tishman Speyer Properties LP completed a joint acquisition of Archstone for $22 billion, including debt, in October 2007. Lehman presented “unreasonable” valuations of its Archstone stake in the first three quarters of 2008, overvaluing the holding by as much as $450 million in the second quarter, the examiner wrote. Lehman Brothers Holdings Inc.’s Richard Fuld exuded confidence as he briefed analysts on June 16, 2008, four days after demoting his firm’s finance chief in the wake of a $2.8 billion quarterly loss.
Buying an apartment developer just as real-estate bubble was going bust could not be helpful to Lehman's liquidity, leverage or credit rating.
The examiner said that while some of Lehman's management's decisions "can be questioned in retrospect" and the firm's valuation procedures for its assets "may have been wanting," those responsible for the firm had used their business judgment and were largely not liable for the firm's collapse. However, he said that Lehman, which is now liquidating for the benefit of creditors, could have claims against former Lehman chief executive Dick Fuld and chief financial officers Chris O'Meara, Erin Callan and Ian Lowitt for negligence or breach of fiduciary duty. ..... He did not find that Lehman's directors had explicitly violated their fiduciary duty, but said that Wall Street paid a large role in causing an acute liquidity crisis at Lehman in its final days. ..... The long-awaited report contains explosive allegations about a gimmick, known as "Repo 105," that was used for the sole purpose of manipulating Lehman's books, contributing to the firm's demise. The examiner concluded that the gimmick, which dated back to 2001 and was used without telling investors or regulators, gave the appearance that Lehman was reducing its overall leverage levels in 2008 when in reality it was not. Lehman used the gimmick to temporarily remove $50 billion of assets from its balance sheet in 2008, according to the report. ..... On Sept. 11, for example, J.P. Morgan executives met and decided that the collateral Lehman had posted "was not worth nearly what Lehman claimed it was worth," the report says. The next day, J.P. Morgan asked for an additional $5 billion in collateral. About that time, J.P. Morgan discovered that one of the securities posted by Lehman, an asset-backed security known as Fenway, was "worth practically nothing as collateral." In the report, the examiner raised questions about whether JPMorgan had acted "in good faith" but also detailed an interview in which Dimon said he told Fuld in every conversation "that he did not want to harm Lehman." "Lehman's available liquidity is central to the question of why Lehman failed," Valukas wrote in the report. The report described how Bank of America executives backed away from a deal to buy Lehman, lacking U.S. government aid. Bank of America's due diligence team concluded Lehman's commercial real estate valuations were too high, and identified $65 billion to $67 billion in assets the bank "would not have wanted at any price," the examiner's report states. Many of Lehman's assets could not even eligible to be used as collateral by a Central Bank, according to the report. Valukas found that Lehman could make claims on assets held by Lehman affiliates that were transferred to Barclays when the British bank ultimately bought Lehman's core U.S. brokerage after it filed for bankruptcy. ..... Lehman had over $600 billion in assets when it filed for bankruptcy.
Lehman Brothers used accounting gimmicks and had been insolvent for weeks before it filed for bankruptcy in September 2008, but there was not extensive wrongdoing, a court-appointed examiner has found. .....
- CNBC Assignment Desk Manager Ryan Ruggiero contributed to this report.
Now suppose I sell for $100 each, 10,000 tickets which will pay out $1,500,000 if the printed number comes up in next Friday's Illinois Pick-4. All tickets are printed with number 1984. Now what's the expected payout for me? How about the ticket holders?
In the former case, I will collect $1,000,000 and pay out one winning ticket worth $750,000. I thus net $250,000; the expected value per ticket is $75.
In the latter case, I will connect $1,000,000 and 99.99% of the time I will keep all of it. If the Illinois drawing comes up 1984, I will owe $15,000,000,000 but of course I'm not going to actually pay that. Leaving the country would be a nuisance, but if I've managed to run my lottery for a few weeks before number 1984 hits I should have enough money stashed away to survive in exile.
The correlation of risk on the credit default swaps wasn't accidental. It was part of what made them lucrative. Long-shot bets are a very attractive proposition if one can afford to welsh on them.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.