Rebel Traders – Analysis Without The Hype

Editorial by RebelTraders:

The demise of Lehman Brothers (LEH), which filed for bankruptcy on September 15, 2008, was suicide. And that suicide was for all intents and purposes assisted by the government and the Federal Reserve Bank of New York, then headed by one Tim Geithner.

This week the examiner’s report on Lehman Brothers bankruptcy proceedings was released to the public and it reads like a murder mystery, not all that dissimilar to the board game ‘Clue’.

From my own interpretations of the report thus far, Lehman’s troubles began long before their collapse on September 15 2008. The troubles, heightened by the collapse of the mortgage market and then amplified by a never ending shell game at the hands of upper management, financial officers, and even the independent auditors. Many now claim they had no knowledge of the tricks being played with the books, but, it was their job to know where the money was, and why it was there or not.

Ernst & Young were the independent auditors for Lehman Brothers, they were supposed to be the final check and balance that everything on the books was honest and fairly represented. In that they signed off on the financial statements implicates them by default in my opinion. This reminds me of Arthur Anderson, then auditors for Enron all over again.

What Lehman was doing was hiding bad assets, what otherwise would have impacted their quarterly balance sheets in a negative way by moving them around in a complex shell game called “Repo 105” and Repo 108”. These were essentially conduits to move bad assets off the books, and in turn receive cash for those bad assets. This made the bad stuff disappear for a while so to speak, and the quarterly reports reflected the cash on hand and not the bad assets. Even worse is that Lehman never reported that these were repo operations, instead they recorded these transactions as sales. This alone is fraud, and it should have been known by upper management, including the independent auditors.

Now comes the assisted suicide part. Lehman Brothers was truly sick. As far back as March 2008 the Federal Reserve Bank New York (FRBNY), at the time when Tim Geithner was at the helm, began monitoring Lehman Brothers. The FRBNY devised stress tests for Lehman to gauge the health of the company under adverse conditions.

From page 1488 of the report:

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.

In other words, The Federal Reserve Bank of New York devised three separate stress tests and Lehman failed every one of them. Then, Lehman devised its own stress test and they passed. Lehman then submitted the findings of their own stress test to the FRBNY and the issue was put to rest. No one knew at the time that Lehman had failed the FRBNY stress tests except for Lehman and The Reserve bank of New York.

Is this another case where Tim Geithner will say that he had no direct knowledge of the stress testing being done, like he has claimed with certain AIG emails and transactions concerning material information be withheld from the Securities and Exchange Commission?

Why is it that the biggest decisions always happen to take place under the noses of those in charge. To me it seems to be selective memory.

It is my opinion that the problems at Lehman Brothers was known for many months and the FRBNY knew this but kept it secret. In my view the actions of the regulators, the SEC, and that of the New York Reserve Bank was a coordinated effort to hide the problems taking place from the public, this too is fraud. The act of keeping quiet and not disclosing what was known from the stress tests was, in my opinion, the same thing as the FRBNY acting as Dr. Kevorkian. However in this case the death was not painless and the pain was felt by individual investors.

Lehman, under the daily supervision of the FRBNY, played with the books by constantly moving the bad money out of view, falsely creating a better picture of the liquidity situation within the company. It is my opinion that all of this was conducted in a way to protect the knowledge of how Wall Street operates. The 2,200 page report reads like a murder victims coroner report. In it, is enough information that should have upper management at other large firms scurrying like cockroaches in the night when the lights are turned on. The games that were being played at Lehman were, and are, probably being played at other firms to this day in varying degrees, this I have no doubt.

The collapse of Enron was supposed to serve as a wake up call, and actions taken then were to prevent this kind of stuff from ever happening again. But with any regulation comes new ways to hide things.

What is even worse, what is so scary, and what should have everyone unable to sleep comfortably is that the current financial reform bill being proposed by the Senate has absolutely nothing in it of any substance that will change the normal way of Wall Street business. The tax payers will always be on the hook in the event of another big failure or bailout. The financial reform being proposed is nothing more than an illusion that the Government is on top of things and will prevent it from happening again.

In reality, the government is simply coddling Wall Street as they always have, this time under the illusion that the Government is interested in ‘our’ best interests by presenting a financial reform bill that has no teeth, but sounds good on the surface because it uses the publicly identifiable buzz words like “too big to fail”. Really it is nothing but worthless paper in this authors view.

As usual Dylan Ratigan always has a way of explaning things.

Visit msnbc.com for breaking news, world news, and news about the economy

Marc Faber has blunt words for Tim Geithner and the United States. If the nation was a corporation, the credit rating would be junk.

The weekend wrap up video is now available for viewing on the ‘market update videos’ page.

Monday Schedule:

08:30 Dec Personal Income (last 0.4%), Dec Personal Spending (last 0.5%), Dec PCE Deflator y/y (last 1.5%), Dec PCE Core (last m/m 0.0%, y/y 1.4%)

10:00 Dec ISM Manufacturing (last 55.9), Dec ISM Prices Paid (last 61.5), Dec Construction Spending m/m (last -0.6%)

10:00 Treasury Sec Geithner to testify before Senate Finance Committee

15:00 Treasury quarterly funding estimates

Earnings

Before the Open: AMG, ACV, CRNT, CYOU, DEP, EPD, XOM, GCI, HAE, HEW, HUM, MDU, MOG/A, NI, ONB, SOHU, SYY

After the Close: ADVS, APC, CCK, DST, EXTR, HOLX, ICUI, LOCM, MNKD, NOA, OCLR, PMT, PCL, RGA, RCII, RTEC, SIMO, TUP, UNCA

Ahead of tomorrows big show on the Hill, Tim Geithner’s written testimony has been leaked. I do not know if this was intentionally leaked or not. Nor do I know how it came to be on the net ahead of the embargo period, but it is swilling around the net now.

Tim Geithner Written Testimony

Glad to see Dylan Ratigan is still speaking up on what needs to be said.

Visit msnbc.com for breaking news, world news, and news about the economy

Information revealed today regarding Tim Geithner’s activity while at the New York Fed is nothing short of outright fraud and a violation of securities and exchange law.

In late 2008, while AIG was being rescued by the American tax payer the Federal Reserve Bank of New York, then led by Tim Geithner, instructed AIG to withhold material information from regulatory filings. The information that the New York Fed  instructed AIG to withhold was related to the credit default swap payments that ended up being paid at par, even though they were worth significantly less.

At the time, AIG was attempting to follow the law and disclose the details as they were ‘materially important’ as defined by exchange laws.  But the Fed, in email communications released today, show the Fed specifically instructed AIG to withhold material information form the Securities and Exchange Commission and investors.

If the Tresuary Secretary of the United States, while serving at the New York Fed has this little regard for securities law, then how are we as American’s to beleive anything that he currently does or say ?

The evidence revealed today should be enough for an indictment of securities fraud. Tim Geithner’s actions while at the Fed is an aberrant and egregious violation of disclosure laws under the exchange act section 14 (a) and of the Securities and Exchange rule 14(a)-9(a).

The violation of the various disclosure laws is bad enough, but what may be even worse is the violation of the trust to the American people he now serves as the person in charge of the people’s money.

Breaking -

What is the best way to announce news that people may not be too thrilled with? You do it on Christmas Eve, when Wall Street is entering ’sleep mode’ for the Christmas break, and when it is also a time when many Americans are too busy with holiday preparations to be watching the financial press.

This afternoon, Treasury Secretary Tim Geithner (TurboTax Timmy) announced that the Government (tax payers) will essentially backstop any and all losses above the already pledged funds that Fannie Mae and Freddie Mac incur out to December 31, 2012.

SECOND AMENDMENT dated as of December 24,2009, to the AMENDED AND
RESTATED SENIOR PREFERRED STOCK PURCHASE AGREEMENT dated as of
September 26,2008, between the UNITED STATES DEPARTMENT OF THE TREASURY
(“Purchaser”), and FEDERAL HOME LOAN MORTGAGE CORPORATION (“Seller”), acting
through the Federal Housing Finance Agency (the “Agency”) as its duly appointed conservator
(the Agency in such capacity, “Conservator”). [...]

Amendment to Section 1 (Relating to Definition of “Maximum Amount”).

The definition of “Maximum Amount” in Section 1 of the Existing Agreement is hereby
amended to read as follows:

“Maximum Amount” means, as of any date of determination, the greater of
(a) $200,000,000,000 (two hundred billion dollars), or (b) $200,000,000,000 plus
the cumulative total of Deficiency Amounts determined for calendar quarters in
calendar years 2010,2011, and 2012, less any Surplus Amount determined as of
December 31,2012, and in the case of either (a) or (b), less the aggregate amount
of funding under the Commitment prior to such date. [...]

That’s right, a blank check has now been handed to Freddie and Fannie, and the routing number on the bottom of the check reads  :TAX PAYER:

Perhaps this decision was necessary due to the still rising delinquencies that I reported on earlier today. Delinquencies across all income classes are still rising, and this trend is expected to continue. So as more and more homes are foreclosed and banks must then acknowledge the actual value (mark to market) which will result in significant losses from the make believe value they currently sit at on the books (thanks to mark to make believe accounting rule changes last year).

It could also be that the housing market has not yet reached bottom. A scenario that I still see as very real. Some have said the worst has passed with regards to the housing market, I say there is still more pain ahead for this sector, much more.

Everyone should feel like Santa Clause on this Christmas Eve because we just gave Fannie and Freddie a free ride, and we will pay for it all.

Sphere: Related Content

Treasury Secretary Tim (Turbo Tax) Geithner has come under a lot of fire in recent months, and with just cause I might add.

Today Tim Geithner came under heavy fire on Capital Hill for his failed policies, bailouts, and the growing deficit. The pivotal moment for me was when Tim Geithner said the following:

{I do not believe that the removal of Glass-Steagall had any impact on the current crisis}

That my friends is an outright admission that he does not work for the good of America or its citizens, but instead works for the good of Wall Street, even if it means placing the taxpayers at great risk.

It was the elimination of Glass-Steagall in 1999 that allowed banks to cross the line into non banking endeavors such as mortgage backed securities. The Glass-Steagall Act was originally enacted following the Great Depression to prevent banks from putting the financial system at risk. How Mr. Geithner thinks that this had nothing to do with the current financial disaster is simply beyond words.

Recall that before becoming Treasury Secretary he was the President of the Federal Reserve Bank of New York. The very Federal Reserve bank that was instrumental in aiding and abetting the bailouts of the insolvent banks, participated in the meetings and doings of the Bear Stearns collapse, Merrill Lynch, Lehman, and many other “investments” that we as taxpayers were forced to pay. He also allowed non-banks to acquire bank holding company status so they may be able to draw upon the Fed’s (tax payer) funds via the discount window. Something that was until this crisis only available to ‘real’ banks.

Recall that earlier this year Tim Geithner was speaking to a group of university students in China and stated that China’s investments in the United States were safe. This was followed by an outburst of laughter from the audience (some people don’t fall for lies).

Recall that Tim Geithner was instrumental in the behind the scenes arrangement that allowed Goldman Sachs to receive full payment for credit default swaps  that were tied to AIG. Those credit default swaps would normally have paid between 25 and 55 cents on the dollar in this situation. Instead Tim Geithner allowed Goldman Sachs and even some foreign banks to receive par on the default swaps and worst of all it was essentially laundered money. The money went from the tax payer to AIG, from AIG it went directly to Goldman Sachs. Everybody has to save Goldman Sachs… right? This all took place when Geithner was running the show at the New York Federal Reserve and former Goldman Sachs chairman Steve Friedman was on the board of directors of the New York fed when the money laundering operation was devised.

Mr. Tim Geithner – RESIGN NOW

Sphere: Related Content

Jon Stewart does what he does best…

Treasury Secretary Tim Geithner and economic adviser penned an op ed piece for the Washington Post today. This is something that should be released by Government press statements (public domain), not to one specific news agency in my view.

—–

A New Financial Foundation
By Timothy Geithner and Lawrence Summers
Monday, June 15, 2009

Over the past two years, we have faced the most severe financial crisis since the Great Depression. The financial system failed to perform its function as a reducer and distributor of risk. Instead, it magnified risks, precipitating an economic contraction that has hurt families and businesses around the world.

We have taken extraordinary measures to help put America on a path to recovery. But it is not enough to simply repair the damage. The economic pain felt by ordinary Americans is a daily reminder that, even as we labor toward recovery, we must begin today to build the foundation for a stronger and safer system.

This current financial crisis had many causes. It had its roots in the global imbalance in saving and consumption, in the widespread use of poorly understood financial instruments, in shortsightedness and excessive leverage at financial institutions. But it was also the product of basic failures in financial supervision and regulation.

Our framework for financial regulation is riddled with gaps, weaknesses and jurisdictional overlaps, and suffers from an outdated conception of financial risk. In recent years, the pace of innovation in the financial sector has outstripped the pace of regulatory modernization, leaving entire markets and market participants largely unregulated.

That is why, this week — at the president’s direction, and after months of consultation with Congress, regulators, business and consumer groups, academics and experts — the administration will put forward a plan to modernize financial regulation and supervision. The goal is to create a more stable regulatory regime that is flexible and effective; that is able to secure the benefits of financial innovation while guarding the system against its own excess.

In developing its proposals, the administration has focused on five key problems in our existing regulatory regime — problems that, we believe, played a direct role in producing or magnifying the current crisis.

First, existing regulation focuses on the safety and soundness of individual institutions but not the stability of the system as a whole. As a result, institutions were not required to maintain sufficient capital or liquidity to keep them safe in times of system-wide stress. In a world in which the troubles of a few large firms can put the entire system at risk, that approach is insufficient.

The administration’s proposal will address that problem by raising capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms. In addition, all large, interconnected firms whose failure could threaten the stability of the system will be subject to consolidated supervision by the Federal Reserve, and we will establish a council of regulators with broader coordinating responsibility across the financial system.

Second, the structure of the financial system has shifted, with dramatic growth in financial activity outside the traditional banking system, such as in the market for asset-backed securities. In theory, securitization should serve to reduce credit risk by spreading it more widely. But by breaking the direct link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure that fed the housing boom and deepened the housing bust.

The administration’s plan will impose robust reporting requirements on the issuers of asset-backed securities; reduce investors’ and regulators’ reliance on credit-rating agencies; and, perhaps most significant, require the originator, sponsor or broker of a securitization to retain a financial interest in its performance.

The plan also calls for harmonizing the regulation of futures and securities, and for more robust safeguards of payment and settlement systems and strong oversight of “over the counter” derivatives. All derivatives contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse.

Third, our current regulatory regime does not offer adequate protections to consumers and investors. Weak consumer protections against subprime mortgage lending bear significant responsibility for the financial crisis. The crisis, in turn, revealed the inadequacy of consumer protections across a wide range of financial products — from credit cards to annuities.

Building on the recent measures taken to fight predatory lending and unfair practices in the credit card industry, the administration will offer a stronger framework for consumer and investor protection across the board.

Fourth, the federal government does not have the tools it needs to contain and manage financial crises. Relying on the Federal Reserve’s lending authority to avert the disorderly failure of nonbank financial firms, while essential in this crisis, is not an appropriate or effective solution in the long term.

To address this problem, we will establish a resolution mechanism that allows for the orderly resolution of any financial holding company whose failure might threaten the stability of the financial system. This authority will be available only in extraordinary circumstances, but it will help ensure that the government is no longer forced to choose between bailouts and financial collapse.

Fifth, and finally, we live in a globalized world, and the actions we take here at home — no matter how smart and sound — will have little effect if we fail to raise international standards along with our own. We will lead the effort to improve regulation and supervision around the world.

The discussion here presents only a brief preview of the administration’s forthcoming proposals. Some people will say that this is not the time to debate the future of financial regulation, that this debate should wait until the crisis is fully behind us. Such critics misunderstand the nature of the challenges we face. Like all financial crises, the current crisis is a crisis of confidence and trust. Reassuring the American people that our financial system will be better controlled is critical to our economic recovery.

By restoring the public’s trust in our financial system, the administration’s reforms will allow the financial system to play its most important function: transforming the earnings and savings of workers into the loans that help families buy homes and cars, help parents send kids to college, and help entrepreneurs build their businesses. Now is the time to act.

Timothy Geithner is secretary of the Treasury. Lawrence Summers is director of the National Economic Council.

Former Treasury Secretary Hank Paulson has probably done more to ‘help’ his banking industry friends while at the same time done the most damage to the tax payers than any other Treasury Secretary in history in my opinion.

Oh, and current Treasury Secretary Timmy Geithner is probably going to go beyond Hank Paulson’s tricks and create even more questionable actions as the financial crisis continues to unfold.

Saturday Night Live’s opening salvo pokes fun once again at Treasury Secretary Timmy Geithner. This time the subject is the recently released bank stress test results..

Another SNL classic!