The Beginning Of The End For Ernst & Young? Auditor Back In Spotlight As Lehman Creditors Seek Probe

With the spate of corruption news out of Wall Street and seismic updates out of Iceland dominating headlines in the past month, everybody forgot about the culprit in the Lehman Repo 105 fraud. Well, almost everybody - the Lehman unsecured creditor committee, or basically the post reorganized equity estate, has decided to seek a probe of Ernst & Young to see "if the estate may have causes of action against the auditor arising out of Lehman's use of a the controversial accounting technique, Repo 105" reports Reuters.

Magnetar Speaks, Defends Itself Preemptively

The hedge fund which was in the Paulson long-equity, short-everything else position with Merrill on many other Abacus comparable CDO transactions speaks out, defends itself from what will likely be a flurry of SEC action in the immediate future: "Our Mortgage CDO investment strategy was based on a market neutral statistical framework which specifically did not incorporate a fundamental view regarding the direction of the housing or subprime mortgage markets." - Magnetar

The Long Craig's List, Short Goldman Pair Trade

From the conference call, according to Lloyd Blankfein, Goldman is just a glorified Craig's List. Seeing how there is a slight valuation mismatch between the two, we believe a Long CL Short GS pair trade is in order.

GOLDMAN'S BLANKFEIN: ROLE JUST TO BRING TOGETHER MKT PARTCPNTS
GOLDMAN'S BLANKFEIN: WOULD NEVER CONDONE INAPPROP BEHAVIOR
GOLDMAN'S BLANKFEIN: WOULD NEVER INTENTIONALLY MISLEAD ANYONE

Also, the firm refuses to disclose if there are other Wells Notices outstanding. We are keeping a close eye on Mr. Jonathan Egol's Finra record: we were amused that the U-4 of Jonathan Tourre was finally updated.

Daily Highlights: 4.20.10

• Asian stocks rebound on SEC's split vote on Goldman, Economy.
• Saudis tightening Chinese energy ties to move away from dependence on US.
• UK inflation rate rises to 3.4%
• Yen falls versus higher-yielding currencies on recovery signs.
• Amylin reported a narrowed Q1 loss of $38.2M as costs dropped. Revs fell 3.5% to $174.1M.
• Arch Coal sees metallurgical-coal sales tripling on demand from steelmakers.
• BofA-Merrill rank first on Credit Suisse's tally for CDO `Litigation Risk'

The Latest Reincarnation Of Repo 105 - With End Of Quarter "Deleveraging" Over, Primary Dealer Repoable Assets Surge

One of the take home lessons from the Lehman Repo 105 scam is that Primary Dealers will do everything in their power to dispose of assets in any way possible at end of quarter time in order to make their leverage ratios palatable to investors and rating agencies. A week ago, taking a hint from the WSJ, we observed how for the week ended March 31, total Primary Dealer assets plunged by $34 billion in just one week: from March 24 to March 31. For this EOQ asset window dressing hypothesis to be confirmed, we needed to see a corresponding spike in asset in the week immediately following March 31. Sure enough, using Treasury data of Primary Dealer holdings, we observe precisely that, and then some. In the week ended April 7, total Primary Dealer assets exploded by $53 billion to the highest level seen in 2010, or $300 billion, a stunning 21% increase in total assets in just one week! This is also the highest total level of PD asset holdings since June 10, 2009. What do primary dealers do with these assets? They either repo them out back to the Fed directly, or via the Tri-Party Repo System, or via some other off balance sheet conduit, using the cash proceeds to go elbow deep in risky assets and purchase every stock imaginable (having given the impression the week before that they are all prudent fiduciaries who don't "gamble" with other people's money). If you were wondering where the surge in buying interest came from in the first few days of April, wonder no more. Furthermore, as PDs would be careful about negative carry on the repo rates, it would be expected that the one security they would buy the most of, would be T-Bills with their next to nothing interest rates... Which is exactly what happened: PD T-Bill holdings surged from a mere $12.6 billion at March 31 to $44.4 billion on April 7. PDs no longer need Repo 105 - they do all their EOQ window dressing directly in the open market.

Quantifying CDO Litigation Risk For The Less-Than-Godly Banks

Now that the attention of the investment community once again turns to regulatory risk, analysts will instead focus on who may be most at risk for comparable CDO-related overtures by the SEC. The table below presents CDO league tables for top CDO underwriters in the 2006 and 2007 period. By and far Merrill Lynch and Citi appear to be most at risk (from Credit Suisse). In a separate report Credit Suisse confirmed that based on deals with "salient" characteristics to Abacus, the firm once again sees Merrill/BofA as the most likely to suffer the wrath of the SEC. The other two firms that fill out the top three list for the 2005-2008 period with "comparable deals" are UBS AG which ranked second with $15.8 billion, and JPMorgan Chase & Co. was third with $9.9 billion, primarily due to its purchase of Bear which despite being one of the biggest underwriters of CDO, passed on the Paulson proposed deal structure citing "ethical concerns", as we reported yesterday.

Daily Oil Market Summary: April 19

Oil prices opened lower on Monday, and they ultimately ended well lower on Monday, as traders continued to sell oil. Equities started the day lower, as well, as selling from Friday held over. But, while oil could not raise itself, equities were able to advance from their early lows to finish the day with gains. The stock market proved, as it has before, that lawsuits and courts are no match for profits, and Monday’s gains in equities came as the result of very strong (better than expected) first quarter profits from Citigroup. After testing levels beneath 11,000 early on Monday, the DJIA finished the day at 11,092.05, up 73.39 points. That took away one source of selling in oil, but it could not negate the other one, which came from the ongoing Icelandic volcano?related grounding of trans?Atlantic air travel. While jet fuel is hardly one of the glamour products processed from crude oil, it does account for 7.37% of the refined barrel. That is enough to make a difference in this market.