NY Fed Under Geithner Implicated in Lehman Accounting Fraud

[FarCenter]

Quite a few observers, including this blogger, have been stunned and frustrated at the refusal to investigate what was almost certain accounting fraud at Lehman. Despite the bankruptcy administrator’s effort to blame the gaping hole in Lehman’s balance sheet on its disorderly collapse, the idea that the firm, which was by its own accounts solvent, would suddenly spring a roughly $130+ billion hole in its $660 balance sheet, is simply implausible on its face. Indeed, it was such common knowledge in the Lehman flailing about period that Lehman’s accounts were sus that Hank Paulson’s recent book mentions repeatedly that Lehman’s valuations were phony as if it were no big deal.

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.

We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed’s review of Lehman’s solvency. If, as things appear now, Lehman was allowed by the Fed’s inaction to remain in business, when the Fed should have insisted on a wind-down (and the failed Barclay’s said this was not infeasible: even an orderly bankruptcy would have been preferrable, as Harvey Miller, who handled the Lehman BK filing has made clear; a good bank/bad bank structure, with a Fed backstop of the bad bank, would have been an option if the Fed’s justification for inaction was systemic risk), the NY Fed at a minimum helped perpetuate a fraud on investors and counterparties.

<SNIP>http://www.nakedcapitalism.com/2010/03/ny-fed-under-geithner-implicated-in-lehman-accounting-fraud.html

[AllentownJake]

1. Tim Geithner belongs in prison

Not government.

[grasswire]

2. send in the U.S. Marshals. Seize the evidence.

The last sentence of that article at the link:

"And the time is overdue for a full audit of the Fed, and in particular the New York Fed, from the start of the Bear crisis through and including all the retrades of the AIG bailout."

What are we waiting for, Mr. Holder?

Appoint a Special Prosecutor. Let's go.

[FreeJG]

3. And Jeb Bush was a part of that group as well. So....don't tell me Obama is not working with the

Bush's....especially with Giethner in there...

[Nothing Without Hope]

4. United Corporate States of America. Money rules. n/t

[seafan]

10. By all means, let's not forget Jeb Bush's role at Lehman.

Forbes: Jeb Bush involvement with Lehman raises questions in Florida investment fund debacle, December 1, 2007


There are more than a few people who would love to nail this jackal's hide to the wall.

[flyarm]

5. there are no two parties..there is one party with one big money pot in the middle..

and you and I are not included in the money party!

The sooner people understand that, the sooner we will take our country back from the crooks!..all of the crooks!

[slipslidingaway]

6. knr - this was a consolidation of money and power into fewer hands...

not to mention another wealth transfer.

[Subdivisions]

7. Nothing will be done. The second wave of mortgage and CRE defaults is coming. n/t

[seafan]

8. Zerohedge: The "Repo 105" Scam: How Lehman Fooled Everyone; Other Banks Are Likely Doing This Now

The "Repo 105" Scam: How Lehman Fooled Everyone (Including Allegedly Dick Fuld) And How Other Banks Are Likely Doing This Right Now


By Tyler Durden
Created 03/11/2010 - 17:53

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.

From the report:

Lehman employed off-balance sheet devices, known within Lehman as “Repo 105” and “Repo 108” transactions, to temporarily remove securities inventory from its balance sheet, usually for a period of seven to ten days, and to create a materially misleading picture of the firm’s financial condition in late 2007 and 2008. Repo 105 transactions were nearly identical to standard repurchase and resale (“repo”) transactions that Lehman (and other investment banks) used to secure short-term financing, with a critical difference: Lehman accounted for Repo 105 transactions as “sales” as opposed to financing transactions based upon the overcollateralization or higher than normal haircut in a Repo 105 transaction. By recharacterizing the Repo 105 transaction as a “sale,” Lehman removed the inventory from its balance sheet.

Lehman regularly increased its use of Repo 105 transactions in the days prior to reporting periods to reduce its publicly reported net leverage and balance sheet. Lehman’s periodic reports did not disclose the cash borrowing from the Repo 105 transaction – i.e., although Lehman had in effect borrowed tens of billions of dollars in these transactions, Lehman did not disclose the known obligation to repay the debt. Lehman used the cash from the Repo 105 transaction to pay down other liabilities, thereby reducing both the total liabilities and the total assets reported on its balance sheet and lowering its leverage ratios. Thus, Lehman’s Repo 105 practice consisted of a two-step process: (1) undertaking Repo 105 transactions followed by (2) the use of Repo 105 cash borrowings to pay down liabilities, thereby reducing leverage. A few days after the new quarter began, Lehman would borrow the necessary funds to repay the cash borrowing plus interest, repurchase the securities, and restore the assets to its balance sheet.

Lehman never publicly disclosed its use of Repo 105 transactions, its accounting treatment for these transactions, the considerable escalation of its total Repo 105 usage in late 2007 and into 2008, or the material impact these transactions had on the firm’s publicly reported net leverage ratio. According to former Global Financial Controller Martin Kelly, a careful review of Lehman’s Forms 10?K and 10?Q would not reveal Lehman’s use of Repo 105 transactions. Lehman failed to disclose its Repo 105 practice even though Kelly believed “that the only purpose or motive for the transactions was reduction in balance sheet;” felt that “there was no substance to the transactions;” and expressed concerns with Lehman’s Repo 105 program to two consecutive Lehman Chief Financial Officers – Erin Callan and Ian Lowitt – advising them that the lack of economic substance to Repo 105 transactions meant “reputational risk” to Lehman if the firm’s use of the transactions became known to the public. In addition to its material omissions, Lehman affirmatively misrepresented in its financial statements that the firm treated all repo transactions as financing transactions – i.e., not sales – for financial reporting purposes.

And here is the Fed punchline, as it once again implicates Tim Geithner:

From 2003 to 2009, Treasury Secretary Timothy Geithner served as President of the Federal Reserve Bank of New York (“FRBNY”). The Examiner described to Secretary Geithner how Lehman used Repo 105 transactions to remove approximately $50 billion of liquid assets from the balance sheet at quarter-end in 2008 and explained that this practice reduced Lehman’s net leverage. Secretary Geithner “did not recall being aware of” Lehman’s Repo 105 program, but stated: “If this had been a bank we were supervising, that would have been a huge issue for the New York Fed.”

And even though the Fed should have been fully aware of any shadow transaction be they "matched book" repos or the "105 variety, nobody had any clue. Just who the hell was regulating banks???

Jan Voigts, who was an Examining Officer in FRBNY’s Bank Supervision Department, had no knowledge of Lehman removing assets from its balance sheet at or near quarter-end via a repo trade treated as a true sale under a United Kingdom opinion letter.

Arthur Angulo, who was a Senior Vice President in FRBNY’s Bank Supervision department, likewise was unaware that Lehman engaged in repo transactions at quarter-end, under a United Kingdom true sale opinion letter, where the assets would be returned to Lehman’s balance sheet following the end of the reporting period. Angulo said that the described repo transactions appeared to go “beyond other types of balance sheet management." Angulo also said that he would have wanted to know about off-market transactions where Lehman accepted a higher haircutthan a repo seller normally would accept for a certain type of collateral.

Thomas Baxter, FRBNY General Counsel, had no knowledge of Repo 105 transactions, either by name or design. Baxter was generally aware of firms using quarter-end and month-end “balance sheet window-dressing,” but did not recall this being an issue linked to Lehman specifically.

Stunningly, nobody at the SEC was aware of Lehman's Repo 105 program. And guess what: NEITHER DID DICK FULD. This is unbelievable - the criminality reaches to the very top, yet the very top denies all knowledge.

.....

(much more at link, including charts, legal documents)

Where is the accountability?????


Holder? Obama?


Anyone?

[FarCenter]

9. "under a United Kingdom true sale opinion letter,"

Somehow it always comes back to some skullduggery in the City of London.

---

From "Lehman report faults executives"

Mr Valukas alleges the use of the accounting mechanism – called “Repo 105” – was for the sole purpose of lowering the level of leverage on Lehman’s balance sheet, thus making the bank appear healthier than it was.

The transaction was designed to maintain favourable ratings from the credit ratings agencies and maintain investors’ confidence in Lehman’s finances.

When Lehman first began engaging in such window dressing in approximately 2001, the firm could not get a US law firm to sign off on the transactions, which led Lehman to conduct these repo transactions out of its London unit, with the blessing of a UK law firm, the report said.

<SNIP>http://www.ft.com/cms/s/0/2e412d50-2d6e-11df-a262-00144feabdc0.html

[upi402]

11. off the table, dry powder, bigger things to do

humummma hlumbanm hmmm mblhpht move along

[Wilms]

12. .