Lehman Used Lehman As Collateral – What?, page 1

From my personal blog Fascist Soup:

The level of audacious fraud on Wall Street should not be underestimated.

Zero Hedge brings us some insight into the latest investigative findings of the Lehman Bros. failure.

Tyler speaks to the portion of the report that shows how Lehman was backing their loan obligations:

At this point anyone who has even half a brain is feeling their front lobe liquefy. And in case one’s brain is still semi-solid, lets simplify – Lehman was pledging as collateral "assets" whose explicit worth was contingent on Lehman’s viability! Surely someone at Lehman brothers must have known about this. And the fact that they were so brazen as to suggest something that, as JPM rightfully concluded, was worthless in a catch 22 valuation, highlights the level of criminality and stupidity that serves at the backbone of what people assume is a sound and credible $3 trillion + shadow economy. This also means that should anyone ever delve into the collateral that banks hand off to each other in exchange for the tens of trillions in daily liquidity to gun the SPYs higher, they will find very little of actual value.

The report goes on to disclose that Lehman was also lying to its to its investors and creditors to the tune of 11.8 billion dollars.

Lehman told its creditors and investors it actually had a liquid asset pool (assets that could be quickly sold for hard cash) of 42 billion, but in actuality, 11.8 billion of that 42 billion were assets that were not liquid. Most of that 11.8 billion was pledged as collateral on existing loans.

This is essentially accounting fraud. A criminal misrepresentation of assets to investors and creditors. It would be like taking out a home loan for a million, then turning around the next day and taking out another loan claiming the house as collateral. Since the house is collateral on the existing loan, I would be criminally misrepresenting myself if I claimed I could use the house as collateral on a new loan.

This kind of nonsense goes on everyday in the criminal banking syndicates of Wall Street.

As Tyler points out:

Little did we know just how far the stench went, and that worthless assets (and we do mean worthless) are very likely the norm.

But of course, the criminality of the whole situation only gets more insane when the report goes on to disclose:

Although JPMorgan remained concerned that the CDOs were not acceptable collateral, Lehman informed JPMorgan that it had no other collateral to pledge.

Tyler writes:

So scratch what we said above. Lehman’s real liquidity pool was not $42 – $11.5 = $30.5 billion in Q3, it was bloody zero!

HAHAHA yeah boyeee!

Totally insolvent, no real assets, nothing but fake worthless derivatives paper.

BUT WAIT, THERE IS MORE!

The SEC is charged with ensuring banks “liquidity pools” are not a pile of fraudulent nonsense, as was the case with Lehman. The report continues:

Eichner said that the SEC only “sampled” the CSE’s liquidity pools to ensure that the firms’ representations were accurate. Eichner stated that this sampling was not statistically significant, and that he never received any report indicating that Lehman did not pass these sampling tests. Eichner said that the SEC never had the opportunity to implement fully the steps set forth in the Liquidity Inspections Scope Memorandum because of the chaos surrounding Bear Stearns’ near collapse. The SEC was aware in June 2008 that Lehman’s liquidity pool included a $2 billion “comfort” deposit at Citigroup. The SEC staff viewed Lehman’s inclusion of that deposit in its liquidity pool as problematic, and discounted the value of the pool accordingly. Nevertheless, there is no evidence that the SEC directed Lehman to remove the comfort deposit from its calculation of reported liquidity. Eichner told the Examiner that “we applied a much different standard [for including assets in the liquidity pool] than anyone else,” and that the SEC “was very comfortable living with a world where the numbers in the public were the ones the firms worked out with their accountants.

Tyler writes:

In other words, the SEC was well aware that Lehman was materially misrepresenting the one most critical part of its financial situation to the entire world, and did nothing about it! The SEC should be disbanded for this gross, criminal negligence, and all of its senior executives sent into exile.

BUT LETS NOT LEAVE OUT THE CRIMINALLY NEGLIGENT FEDERAL RESERVE!

Report continues:

Bernanke said a “fundamental impediment” existed for Lehman: By mid-September, Lehman lacked not just “standard” collateral, but “any” collateral.

Tyler comments:

So the Fed was factually certain of Lehman’s insolvency in advance of the firm’s bankruptcy, and yet it did nothing to notify the SEC, or to remove Lehman from the tri-party repo system, where the firm was stuck for weeks after its bankruptcy, leaving JPM and Barclays to fight over the CCC-rated scraps of paper that were fundamentally collateralized with taxpayer money. What a sh*tshow.

Totally outrageous!

Not one federal agency did its job. The SEC is criminally incompetent. The Fed is criminally negligent. And the mega-banks didn’t give a flying crap because they knew that ultimately people like you and me would be paying for Lehman’s fraud with our tax dollars.

Praise Mao

I love this response to Tyler written by GW.

He goes on to explain the moral hazard that lead to Lehman getting so deep into its fraud before finally having to be declared bankrupt:

Hold up! Lehman was pledging as collateral allegedly "investment grade", "credit enhanced" securities that were enhanced by Lehman, who was insolvent and in need of liquidity, itself. For anybody who is not following me, how much is life insurance on yourself worth if it is backed up by YOU paying out the proceeds after you die bankrupt? Lehman was allowed to get away with such nonsense because it was allowed to value its OWN securities. Think about this for a second. You are in big financial trouble, you have only a $10 bill to your name, but your favorite congressman (whom you have given $10 bills to in the past) has given you the okay to erase that number 10 on the $bills and put whatever number on it you feel is "reasonable". So, when your creditors come a callin' , looking for $20 in collateral, what number would you deem reasonable to put on that $10 bill.

Ladies and gentlemen, in the short paragraph above, we have just encapsulated the majority of the mark to market argument.

Self-mark to market is completely out of control. Its such a huge conflict of interest I don't even know where to begin.

But where the real underlying moral hazard comes from is the Fed itself.

The banks know they can get away with this because when things go belly up, the Fed will be there to bailout their fraudulent Ponzi scheme with tax payer dollars.

Even if you removed the mark to market process right now, substantial moral hazard still remains by the very fact the Fed still exists as the lender of last resort to the criminal cartel of commercial banks.



[edit on 12-3-2010 by mnemeth1]

I almost made a thread on this last night. Denninger over at the Market Ticker has opined twice on it since Zero Hedge broke it last night.

EXPLOSIVE: Lehman - Where Are The Cops?

IF - and I stress IF - these fictions are also present in our large banking institutions, and there is NO REASON TO BELIEVE THEY ARE NOT, it is simply a matter of time before one or more of them detonates in a similar if not identical fashion. Since these firms are all much larger than Lehman and neither the FDIC or Treasury has a spare $500 billion laying around for the potential payout to depositors that might be necessary in such an instance, we cannot reasonably assume that the risk of financial Armageddon has in fact passed until we know for a fact that all fictional balance sheets are excised and all off-sheet exposures accounted for.

and

What The Lehman Report Proves: Financial Insolvency

The conclusions I am forced to reach, after much reflection and sleeping on this article overnight, are not pretty.
They compel me to advise that, in my opinion, the market is now trading both technically and on a fundamental basis, exactly as the Nasdaq was in 1999.

The second ticker is pretty good with charts comparing today's market and the Nas in '99.

Throughout the day today I've noticed a couple of MSM pieces (on bloomy and CNBC) doing some damage control on this story.

Ernst and Young, Lehman's auditor, at this moment seems to be the only entity that could suffer from this.There hasn't been a single important prosecution or indictment from any of the failed Wall Street firms (except for the couple of Bear Sterns sub-prime guys). Where the hell are the RICO prosecutions? Oh, I forgot anyone who has the balls to stand up to these banksters suddenly turns out to have a thing for 19 year old hookers.

reply to post by mnemeth1

---

I'm kind of confused about how one of your earlier posts on this thread is referring to mark-to-market. In a mark to market, if an asset you hold or something really similar to it is traded you must mark your asset to what you could get for it if you sold right now.

The FASB (organazation that sets financial accounting standards) last year was going to force mark-to-market on all institutions, CONgress basically pressuered them into not going through with the forced mark to market, and as far as I know most financial institutions are still using the mark to model ( also known as mark to make believe and mark to myth) to value assets like HELOCs, Second Mortgages, and other non-performing assets that when actual put on the market are getting anywhere from 40-80% of what they had them marked at. Just look at any failed banks most recent financial statement and compare it to what the FDIC or other bank closing entity marks it at during closure.

reply to post by jefwane

---

mark to model is a form of marking to market.

From the report:

By early August 2008, JPMorgan had learned that Lehman had pledged self-priced CDOs as collateral over the course of the summer. By August 9, to meet JPMorgan’s margin requirements, Lehman had pledged $9.7 billion of collateral, $5.8 billion of which were CDOs priced by Lehman, mostly at face value. JPMorgan expressed concern as to the quality of the assets that Lehman had pledged and, consequently, Lehman offered to review its valuations. Although JPMorgan remained concerned that the CDOs were not acceptable collateral, Lehman informed JPMorgan that it had no other collateral to pledge. The fact that Lehman did not have other assets to pledge raised some concerns at JPMorgan about Lehman’s liquidity

Whether they were marking to model or marking to market price of the CDOs is fairly immaterial, its the fact that THEY set the valuation of those products.

Since those CDOs weren't traded on an open market to determine price, Lehman just set what they felt was the market price on the products.




[edit on 12-3-2010 by mnemeth1]

Front page news today on FT.com

www.theglobeandmail.com...

Lehman report rocks Wall Street

Francesco Guerrera, Henny Sender and Patrick Jenkins
New York and London — FT.com
Published on Friday, Mar. 12, 2010 3:39PM EST
Last updated on Friday, Mar. 12, 2010 5:39PM EST
The fallout from the report into the collapse of Lehman Brothers shook Wall Street and London on Friday as U.S. officials grilled banks about off balance-sheet trades and questions were raised over the City’s role in the company's attempts to cover up its problems.

The 2,200-page report by Anton Valukas, appointed by a U.S. court to probe the reasons for Lehman’s failure in September 2008, paints a damning picture of the bank’s top management, including former chief executive Dick Fuld, three of its chief financial officers and auditors Ernst & Young.

Its allegations – that there is credible evidence against Mr. Fuld and others for breach of their fiduciary duties and against E&Y for professional malpractice – are also a further blow to the battered credibility of the entire banking industry.

Mr Fuld, Ian Lowitt, one of Lehman’s CFOs mentioned in the report, and E&Y have denied wrongdoing. Erin Callan and Christopher O’Meara, the other two CFOs, could not be reached for comment.

Senior U.S. financial executives said they had received worried calls from U.S .regulators early on Friday asking about the use of transactions like “Repo 105” – a device that helped Lehman flatter its financial health.

The trades, which were never disclosed to investors, rating agencies or regulators, are described as “window-dressing” and “an accounting gimmick” in the report released on Thursday by Mr. Valukas.

...

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