Another Disturbing Finding in Lehman Bros. Report
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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?”
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FALSE foreclosure proceedings filed under Lehman Brothers’ name, additional way to COOK BOOKS, see:
http://www.lawgrace.org/2008/09/14/lehman-brothers%E2%80%99-mortgage-troubles-nationally-evidence-of-foreclosure-fraud-deception-and-conspiracy-with-wells-fargo-deceptive-judicial-filings/
http://www.lawgrace.org/2008/08/08/my-august-8-2008-statement-to-the-louisiana-secretary-of-state-office-of-financial-institutions-concerning-wells-fargo-irs-and-mortgage-frauds-sham-foreclosures-and-judicial-collusion-and-national-app/
Lehman is indicative of Lehmen only and doesn’t represent other investment banks. Remember Lehmen stock was being sold short long before their September failing. If the US government had understood the message of short sales, instead of complaining about short selling, Lehman could have been sold to another firm and the financial chaos it caused would not have developed. And the problem that brought Lehman down and also caused the financial crisis was short term borrowing. It wasn’t Wall Street or bankers. The US government had no idea of the size of that market.
And unless the government knows what caused a problem, they cannot make a proper reform, but they will make a political reform loaded with unintended consequences that will impede economic growth.
Everyone has to stop apologizing for the Wall Street Crowd. Indeed, at a certain point we need to realize they are what they are. It reminds of the story of The Scorpion and the Frog. So my anger is directed at our Attorney General for not doing his job.
Are you Now, or Have You Ever Been a Wall Street Banker?
If you watch CNBC or read the Wall Street Journal, you would think that criticizing the financial industry or wanting an investigation into potential crimes committed by those involved in the 2008 Financial Crisis is a witch-hunt on par with the 1950’s McCarthy Hearings on Communism. Channeling my inner Richie Cunningham (yes, that is a “Happy Days” reference), “that’s just cow dung, Fonzie.” There’s nothing anti-business about expecting the laws of our nation to be equally applied and enforced. Indeed, this is the very political ideology that led to our founding and separation from England.
These same Wall Street talking heads have even coined the phrase “anti-business populism” in an effort to combat any real criticism. The point that they have missed is that it’s more like anti-theft populism. Think of it as Lojack for our money. The real truth is that we regular folks are just sick and tired of the game being rigged and the Wall Street con man that seem to live without the same consequences that apply to us. Let’s face it when you make millions even when your clients lose money, the system is rigged. That’s why ordinary Americans had such a negative reaction to huge bonuses being paid to people who failed. It really is just insult to injury.
So I guess if I am anything, I am anti-crime and let’s not confuse being anti-crime with being anti-business as the two are far different concepts. It’s not anti-business to state the fact that some Wall Street bankers committed fraud, both on the ride up in the bubble but also in the aftermath when the Fed was doling out cash like Pez candy. Emphasis on the word some, not all. It would seem to me that the honest Wall Street bankers would want the bad guys outed as much as anyone.
While I do not advocate hearings, especially McCarthy style hearings, we must have the decency to enforce the laws already on our books. This is the real problem with the fallout of the Financial Crisis. I am not sure anyone, other than the T.V. stars from “Law & Order,” are even interested in investigating and prosecuting crime. Yes, our Attorney General, Eric Holder, started the Financial Fraud Enforcement Task Force (FFETF) but these guys are about as effective as the SEC in discovering ponzi schemes. In fact, Holder’s own numbers demonstrate that these guys are basically the Three Stooges with badges. 2800 criminal investigations into mortgage fraud when there were millions of mortgages under water is the proverbial drop in the bucket.
It would seem to anyone with a functioning brain stem that if you investigated the root cause of the 2008 Financial Crisis, you would have more suspected incidents of mortgage fraud, perjury, securities fraud, etc, then you could shake a stick at. And, I am not solely focusing on Wall Street bankers. I want everyone, each and every person in the chain to be investigated, and where appropriate, to be prosecuted.
From the homeowners who falsified their mortgage application, to the mortgage broker who conspired to do so, to the mortgage clearing houses who didn’t verify the validity of the underlying asset, to the appraiser who faked the comps, to the Rating Agency folks who gave ratings without any due diligence at all, to the Wall Street bankers who took bundled mortgages sold them to unsuspecting investors who thought they were buying AAA/AA mortgages, to the AIG’s who sold credit default swaps without any assets or ability to pay, to the CEO’s and Board of Directors who approved of the schemes and paid bonuses to managers accordingly; and finally, to the politicians that took campaign donations to vote a certain way.
Ask yourself why the State of New York brought a securities fraud case against Bank of America and Ken Lewis and the Department of Justice did not. Clearly, Attorney General Cuomo believes that misleading your shareholders about the massive losses mounting at Merrill Lynch so that shareholders would vote to approve the deal is wrong, while the DOJ thinks it’s just boys being boys. Cuomo also believed that B of A’s management (Lewis et al) manipulated the Fed into rescuing the Merrill deal with billions in taxpayer funds by falsely claiming that they intended to back out of the deal, when they had been advised by their own lawyers, they could not, while DOJ believed that Lewis was just taking a “tough” negotiating position.
Perhaps the federal government is willing to look the other way because they’re afraid that if we make too much of a fuss, the stock market will take another nose dive and more Americans will lose their savings. But, of course, this logic is flawed and short-term thinking. Take the bad guys out of the system and it will be stronger and more robust in the long term. But instead all we get is the FFETF – really? Even the acronym is lame. In reality, the FFETF is just like the TSA – all smoke and mirrors designed to give the general public the appearance of safety and security. Do you really think you’re safer by removing your belts and shoes? Ask any airline security expert, the TSA’s policies are not effective. Both the shoe and underwear bomber had no trouble getting on a plane with explosives.
Unfortunately, the FFETF is no different. Adding FBI Agents and Prosecutors from the same cast of characters who couldn’t even discover the Madoff fraud (when told about it in 2003) will not change anything. We need to approach financial crimes in a whole new way if we want to effectuate change. Simply put, would you put the same security guard in charge of your new store if the old store he was guarding just got cleaned out?
But that’s exactly what Eric Holder is doing here instead of investigating and prosecuting those that were responsible for the greatest generational theft in the history of the world. I mean seriously, if you cannot catch a crook now, when can you? Just follow any single mortgage that is under water through the system and it will be like following a drug mule with balloons of cocaine – eventually, you will go right to the top: Wall Street.
If the 2008 Financial Crisis taught us anything, it is that Wall Street bankers are nothing special, far removed from the Gods that they pretended to be. The truth is that the curtain has come crashing down just like on the Wizard of Oz; the only difference is that our wizards are pathetic bald men, hyped up on Viagra and lattes. They are not smarter than any of us; rather they’re just more cutthroat and more willing to do anything necessary to keep their luxury lifestyle afloat. Personally, I could not take the life savings from a blue-haired Grandma and plow it into a Porsche or an African Safari without even giving it a second thought. But that’s the thing about criminals – they just don’t think like you and I. These Wall Street bankers are really just common street thugs and it’s about time that we treat them as such.
Prof. Partnoy may be outraged at Lehman’s lack of internal controls, but this is story that is hardly unique: One of the major themes of the market crack-up of 2007-08 was Wall Street’s complete if not willful ignorance of the correct valuation of its securities portfolios. Merrill Lynch was clueless as was Bank of America when it came in to rescue the floundering firm. Stories were rampant back then about how Stan O’Neal blocked experienced mortgage guys from valuing the portfolio. AIG was clueless and ignored warning signals. Oh, then there was Bear Stearns. Even the so-called experts got caught flat-footed. It may be true that Lehman was more inept at evaluating its portfolio or more avaricious. And Dick Fuld was certainly less skillful at handling the run on the bank, fumbling every opportunity to sell. Everything about the story is a study in how to over-value worth. But mispricing securities, poor controls (except, perhaps at Goldman Sachs)? Those were business-wide diseases and no secret.
Further, the 105 transactions were not “careless” — they were carefully thought through, more carefully thought through than any other aspect of the business, it appears. Indeed, careful enough to go shopping all over North America and Europe for legal opinions that would approve them.