Lehman Brothers Dies While Getting Away With Murder: Regulatory Capture

 Let's get something straight right off the bat. We all know there is a
certain level of fraud sleight of hand in the financial
industry. I have called many banks insolvent in the past. Some have
pooh-poohed these proclamations, while others have looked in wonder,
saying "How the hell did he know that?"

• Is
  this the Breaking of the Bear?  It wasn't hard to see Bear Stearns
  collapsing 3 month before bankruptcy. Why didn't our regulators see
  what I saw?
• As
  I see it, 32 commercial banks and thrifts may see the feces hit the
  fan blades  It wasn't hard to see that nearly all of these 32 banks
  would be facing the threat of insolvency. Why didn't our regulators
  see what I saw?
• The
  Commercial Real Estate Crash Cometh, and I know who is leading the
  way! It wasn't hard to see that commercial real estate was ready to
  implode and that GGP was about to collapse under its own weight. Why
  didn't our regulators see what I saw?
• Yeah,
  Countrywide is pretty bad, but it ain’t the only one at the subprime
  party… Comparing Countrywide Countrywide and Washington Mutual's
  collapse were visible AT LEAST a year in advance!
•  The
  Next Shoe to Drop: Credit Default Swaps (CDS) and Counterparty Risk -
  Beware what lies beneath! 'Nuff said...
• ... and even Lehman Brothers: Is
  Lehman a Lying Lemming?

The list above is a small, relevant sampling of at least dozens of
similar calls. Trust me, dear reader, what some may see as divine
premonition is nothing of the sort. It is definitely not a sign of
superior ability, insider info, or heavenly intellect. I would love to
consider myself a hyper-intellectual, but alas, it just ain't so and I'm
not going to lie to you. The truth of the matter is I sniffed these
incongruencies out because  2+2 never did equal 46, and it probably
never will either. An objective look at each and every one of these
situations shows that none of them added up. In each case, there was
someone (or a lot of people) trying to get you to believe that
2=2=46.xxx. They justified it with theses that they alleged were too
complicated for the average man to understand (and in business, if that
is true, then it is probably just too complicated to work in the long
run as well). They pronounced bold new eras, stating "This time is
different", "There is a new math" (as if there was something wrong with
the old math), etc. and so on and associated bullshit.

 So, the question remains, why is it that a lowly blogger and small time
individual investor with a skeleton staff of analysts can uncover
systemic risks, frauds and insolvencies at a level that it appears the
SEC hasn't even gleaned as of yet? Two words, "Regulatory Capture". You
see, and as I reluctantly admitted, it is not that I am so smart, it is
that the regulator's goals are not the same as mine. My efforts are
designed to ferret out the truth for enlightenment, profit and gain.
Regulators' goals are to serve a myriad constituency that does not
necessarily have the individual tax payer at the top of the heirachal
pyramid. Before we go on, let me excerpt from a piece that I wrote on
the topic at hand so we are all on the same page: How
Regulatory
Capture Turns Doo Doo Deadly

First off, some definitions:

• The Doo Doo, as in the Doo
  Doo 32: A  list of 32 banks that I created on May 22, 2008 which set the stage for my investment
  thesis of shorting the regional banks. At that time, I was one of the

  very few, if not one of the only, to warn that the regional banks
  would
  hit the fan.

• Regulatory capture (adopted from
  Wikipedia): A
  term used to refer to situations in which a government regulatory
  agency created to act in the public interest instead acts in favor
  of
  the commercial or special interests that dominate in the industry or

  sector it is charged with regulating. Regulatory capture is an
  explicit manifestation of government failure in that it not only
  encourages, but actively promotes the activities of large firms that
  produce negative externalities. For public
  choice theorists, regulatory capture occurs because groups or
  individuals with a high-stakes interest in the outcome of policy or
  regulatory decisions can be expected to focus their resources and
  energies in attempting to gain the policy outcomes they prefer,
  while
  members of the public, each with only a tiny individual stake in the

  outcome, will ignore it altogether. Regulatory capture is when this
  imbalance of focused resources devoted to a particular policy
  outcome
  is successful at "capturing" influence with the staff or commission
  members of the regulatory agency, so that the preferred policy
  outcomes of the special interest are implemented. The risk of
  regulatory capture suggests that regulatory agencies should be
  protected from outside influence as much as possible, or else not
  created at all. A captured regulatory agency that serves the
  interests
  of its invested patrons with the power of the government behind it
  is
  often worse than no regulation whatsoever.

About a year and a half ago, after sounding the alarm on the
regionals, I placed strategic bearish positions in the sector which
paid off extremely well. The only problem is, it really shouldn't
have.
Why? Because the problems of these banks were visible a mile away. I
started warning friends and family as far back as 2004, I announced it

on my blog in 2007, and I even offered a free report in early 2008.

Well, here comes another warning. One of the Doo Doo 32 looks to be
ready to collapse some time soon. Most investors and pundits won't
realize it because a) they don't read BoomBustblog, and b) due to
regulatory capture, the bank has been given the OK by its regulators to

hide the fact that it is getting its insides gutted out by CDOs and
losses on loans and loan derivative products. Alas, I am getting ahead

of myself. Let's take a quick glance at regulatory capture, graphically

encapsulated, then move on to look at the recipients of the Doo Doo
Award as they stand now...

A picture is worth a thousand words...

 So, how does this play into today's big headlines in the alternative,
grass roots media? Well, on the front page of the Huffington
Post and ZeroHedge, we have a damning expose of Lehman
Brothers (we told you this in the first quarter of 2008, though),
detailing their use of REPO 105 financing to basically lie about their
liquidity positions and solvency. The most damning and most interesting
tidbit lies within a more obscure ZeroHedge article that details
findings from the recently released Lehman papers, though:

 On September 11, JPMorgan executives met to discuss significant
valuation problems with securities that Lehman had posted as collateral

over the summer. JPMorgan concluded that the collateral was not worth
nearly what Lehman had claimed it was worth, and decided to request an
additional $5 billion in cash collateral from Lehman that day. The
request was communicated in an executive?level phone call, and Lehman
posted $5 billion in cash to JPMorgan by the afternoon of Friday,
September 12. Around the same time, JPMorgan learned that a security
known as Fenway,which

Lehman had posted to JPMorgan at a stated value of $3 billion, was actually asset?backed
commercial paper credit?enhanced by Lehman (that is, it was Lehman,
rather than a third party, that effectively guaranteed principal and
interest payments). JPMorgan concluded that Fenway was worth
practically nothing as collateral.

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. Let's delve
farther into the ZH article:

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

Hmmm!!! Three day old fish has a fresher scent, does it not? So where
was the SEC, the NY Fed, or anybody the hell else who's supposed to
safeguard us against this malfeasance? Even bloggers picked up on this
months before it collapsed. The answer, dear readers: REGULATORY
CAPTURE!

Again, from ZH:

The SEC was not aware of any significant issues with Lehman’s liquidity
pool until September 12, 2008, when officials learned that a large
portion of Lehman’s liquidity pool had been allocated to its clearing
banks to induce them to continue providing essential clearing services.

In a September 12, 2008 e?mail, one
SEC analyst
wrote: Key point:
Lehman’s
liquidity pool is almost totally locked up with clearing banks to cover
intraday credit ($15bnjpm, $10bn with others like citi and bofa). withThis is a
really big
problem.

 BoomBustBlog featured several warnings starting January of 2008!

 One would think that after all of this, the problem would have been
rectified. To the contrary, it has been made worse. Congress has
pressured FASB to institutionalize and make acceptable the lies that
Lehman told its investors, counterparties and regulators. That's right,
not only will no one get in trouble for this blatant lying, the practice
is now actually endorsed by the government - that is until somebody
blows up again. At that point there will be a bunch of finger pointing
and allegations and claims such as "But who could have seen this
coming".  

Do you not believe me, dear reader. Reference

About the Politically Malleable FASB, Paid for Politicians,
and Mark to Myth Accounting Rules: the nonsense is unfolding and
collapsing right now, even as I type this sentence.

The next place to look??? Who knows? Maybe someone should take an An
Independent
Look into JP Morgan .. or maybe even an unbiased
gander at Wells Fargo (see

The Wells Fargo 4th Quarter Review is Available, and Its a
Doozy!). After all, If
a
Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear
It?       

Comments

[Anonymous]

"Dr." Byrne is a fraud who has been saying that Lehman was smashed by nekkid shorting, not his fellow fraudster Fuld. He's been running interference for Fuld.

[harveywalbinger]

Wall St's woes are multi-faceted.  It's complicated.  By design...  Perhaps Fuld told a stories about ANSS abuse as subterfuge... I don't think we'll ever know what really went on-just a revisionist version... Regardless of the Lehman web of lies & deceit, ANSS is fraud.  ANSS is the process of selling what one does not own & then failing to deliver it (kind of reminds me of another scam called fractional reserve banking, but I digress).  In the real world we call that FRAUD.  On Wall St, they call it financial innovation & reward the perps with $multi-million bonuses.  

BTW, Byrne's theory hasn't been disproved.  We still don't know what's on the books in the financial clearance & delivery system.  Even if he wasn't able to produce a perfect explanation for the shenanigans going on in the world of finance, that's only because the data is still largely not available.  but he's absolutely right in the gist of his theory that there is a cabal of rich pricks that are defrauding the world.  

The sad excuse formerly known as the fourth estate has been complicit (either by intent or out of ignorance) in raping the middle class over the last dozen or so years by allowing Wall St (lets call them the Genovese) to operate carte blanche.   

Dr. Byrne's fight began several years ago & perhaps he was not entirely on the mark, but he was pretty fucking close.  Unless you're a sleazy hedge fund operator who has for the past decade enjoyed exercising the access afforded by your ethically challenged broker's market maker privileges, you should be thanking Byrne for taking up the fight on your behalf.  

Byrne has an interesting story of the how & why he came to be at odds with Wall St. Byrne's troubles with Wall St came about when he brought his company (OSTK) public by dutch auction instead of the "traditional" IPO process.  The big investment banks & brokerages (lets call them the Gambinos) love the "traditional" IPO process in  which they are given opportunity to buy up the entire initial offering at low-ball prices & immediately turn around & sell into the larger secondary market to stooges like myself for massive gains.  Byrne correctly determined these middlemen (lets call them the Lucchese) added no value to the process, nor was this process fair to everyone else.  So he opted to do a dutch auction (ala Google) & cut out the middle men mobsters.  He's been persona non grata on Wall St ever since.  So you see, your hostility is completely understood, Wall Street Fucktard.  

http://www.pubcowhitepapers.com/whitepapers/paper/the-realities-of-the-google-ipo

http://www.forbes.com/2004/05/10/cx_aw_0510mondaymatchup.html

http://seekingalpha.com/article/35138-why-amazon-will-never-really-be-profitable

If we ever do audit the Fed & it's affiliates, and we are able to fully examine the scope of outstanding delivery failures, which are no doubt in the $$$Trillions (perhaps a low estimate by an order of magnitude), a system reset is inevitable.  Your revisionist bullshit doesn't play here.  The impending financial Armageddon is not a result of what Byrne has done.  He's just the guy who called the cops to report the murder. Wall St killed Uncle Sam. 

[harveywalbinger]

"Regulatory Capture"

Hasn't crazy old Patrick Byrne been ranting on about this particular subject for the last several years ?  Well, the Lehman autopsy report is just more proof to add to the mountain of evidence proving him right.  Dr. Byrne has for the most part limited his venom to the SEC (& it's affiliates), but it seems likely the "capture" phenomenon has its tentacles wrapped around many (if not all) US gubmint agencies...

I challenge anybody to name one US gubmint agency that is NOT captured by special interests...  perhaps with the exception of the GAO...  perhaps...

Speaking of gubmint agencies... have a look at the size of our grotesquely, morbidly obese gubmint:  

BATF, BIA, CBO, CDC, CENTCOM, CIA, DARPA, DIA, DISA, DEA, DHS, DLA, DOC, DOD, DOE, DOJ, DOL, DOS, DOT, DSS, DTRA, ED, EEOC, EPA, FBI, FDA, FDIC, FHA, HHS, HUD, INS, IRS, ITA, ITC, NIST, NSA, OSHA, OMB, ONDCP, SEC, SBA, SSA, TSA, USDA, VA, ...  

For purposes of brevity, I just hit the main ones I recognized.  I assure you there are many many more gubmint acronyms err.. agencies.  See for yourself...

http://www.usa.gov/Agencies/Federal/All_Agencies/index.shtml

Is this un-f-ing believable or what???  Many of these agencies have budgets larger than the GDP of entire countries.  Is anybody having trouble figuring out why our ship is sinking???   To deal with the current sad state of systemic regulatory capture, we must find a way to shrink the size of government.  This can only be possible by eliminating the unnecessary monopoly the Federal Reserve has as interest collector on taxpayer debt.  Then we must restore the power of credit/money creation to the Treasury where it rightfully belongs. And somehow we've got to figure out how to get rid of gubmint obesity. The government has to get a LOT smaller to the point it can be sustained without putting undue burden on the taxpayer. We're staring in the eye of a multi-decade recession/depression thanks to the mother of all bubbles (that the Fed is still attempting to re-inflate at continued taxpayer expense).  And it ain't gonna work.  The entire USA is going to have to learn to get by on a lot less.  There's just no getting around it.  

BTW, great article Reggie.

[swamp]

Thanks for this outstanding diligence.

[Anonymous]

"Regulatory capture"? You're being too kind to our lawmakers and regulators.

The reason why the majority of Congress turned a blind eye to this entire nonsense was because itself is heavily invested in those toxic assets. It's in their best interest to maintain mark-to-myth until, hopefully, their investments somehow regain value.

Ever wonder why no top Congress member is going after that famous AIG bailout dispersement to select banks, where AIG paid them whole.
And so the question is: Who were the individual investors that those banks, in turn, made whole?

[rubearish10]

Remember they all passed the stress test last year so, come on man, what is this shit? Everything's cool just hang out and don't be caught short because the smart people lose.

[iamrefreshed]

Another Reggiemmercial!

[Anonymous]

Sick of the Reggie commercials already! Reg, buy some airtime next to the "I've fallen and can't get up" chick!!!

[Anonymous]

People act like the revolving door between "industry" and "regulation" would imply different responsibilities.

*sucker bell*

[Reggie Middleton]

I'll be discussing this on BBC at 2pm EST for those who wish to hear me rant.

[Cognitive Dissonance]

Reggie,

BBC? As in British Broadcasting Corporation? Or something else? Reference please! I would like to listen to you rant but since I'm clueless, please guide me.

[Reggie Middleton]

British Broadcasting Corporation

2pm EST, or shortly thereafter

I'm sure it will be short, and for a general audience.

You can also raise a ruckus over at huffpost: http://www.huffingtonpost.com/reggie-middleton/lehman-brothers-and-its-r_b_496325.html

[Leo Kolivakis]

"Lehman was allowed to get away with such nonsense because it was allowed to value its OWN securities."

Hmmm, sounds like some public pension funds I know of! Great piece Reggie.

[Anonymous]

Don't be an idiot Leo, this isn't about who values what it is about transparency.

Your fine ratings agencies and those whom are "valued" are one and the same.

Don't fall for the oldest trick in the book - collusion.

Right now accounting means nothing.

[Anonymous]

Reggie, you could have stopped at your first sentence.

The entire system is composed of nothing but money-sluts whose sole purpose is complete annihilation of ordinary people and the common good.

The sooner you realize that participation in this system enables this to continue the better person you yourself will be, not to mention the future of your children and family and so forth.

Disclosure: PMs and cash in the mattress, next to the shotgun, absolutely praying for Dick Fuld and anyone else from Slut Street, NY to come and touch it.

[Anonymous]

If by system you mean "leverage" or speculation then you are absolutely, absolutely correct.

However, do not to put "savers" in the same context of system.

Some of us like to actually better-thy-neighbor instead of bankrupt him and guarantee his kids a generation of misery.

[Anonymous]

Well said, hopefully the masses love cardboard - both for food and shelter.

The "American Dream" - caviar for me, cardboard for you.

[Gimp]

Bugs you could be right. No one wants to stop the gravy train when all aboard.

[bugs_]

Reggie the regulators saw what you saw,
heard the complaints from those who
bothered.

Its one thing to accuse them of being
captured.  This is bad yes.  I see a
far worse scenario - these agencies are
full of "deep shahs" and insider
traders that are acting for their own
account.

The bigger the disaster the greater the
profits.  I have felt this way since
watching what the regulators did with
Worldcom.

[MarketTruth]

Are you there yet?

Are you ready to finally pull out all your funds from banks and Wall Street?

Sell off all stocks/trades?

Perhaps even go on a labor strike with your co-workers and picket your State government?

Or are you just sitting there like a good sheeple?

**********************

NATIONAL STRIKE
April 15 to April 18TH
Tell Everyone You Know
POST THIS ON EVERY DISCUSSION BOARD
www.taxfree15.com

+++ Also ++++

Join The Civil Revolution
Watch and FWD THIS LINK
www.REVOLTstartsNOW.com

**********************

[Gimp]

It is the old "Emperor has no clothes" syndrome and also that the political system has been totally corrupted by money, therefore laws and regulations are only for those with no influence.

[Rusty_Shackleford]

Bingo!

F-ing A.

[Anonymous]

Indicte all FASB's Chairmen, they are the true enemy of capitalism.

CAPITALISM DID NOT FAILED, FRAUD rendered it useless!!!

FASB = FRAUD

[Anonymous]

I thought FASB stood for credibility.

Are you suggesting there is no credibility in precious government of the foreign-elite???

[Anonymous]

EXACTLY/.

[caconhma]

Unfortunately for all of us in the Western World, we have passed the Rubicon when a free-market economic model can survive. As of now, it is a history.

The Western ruling elites had two major choices: (1) either to take a strong medicine and let a free-market forces to fix/cure many political & economic ills or (2) to move to a government controlled political &economic system (a move to a totalitarian system).

The first choice was rejected since it would jeopardize the corrupt ruling political elite & economic oligarchy hold of their political & economic power grip and privileges that come alone. This choice was not acceptable for the ruling elite & oligarchy. There was/is not intention to lose anything when opportunities to  enhance their their power and privileges were so obvious.

Then, there is a second choice of the country socialization through highly expended government control. It this case, there would not be any problems with a potential depression and/or obligations to honor any obligations. Under this socialist (communist, fascist, etc., more or less totalitarian systems) model, "strong" governments can easily renege on any or all of its obligations. This approach has been selected by the US ruling political elite & economic oligarchy. 

The Bottom line: It appears that this bigger & bigger government power process is now irreversible in both the USA and EU. The result will be gradual abandoning of democracy and continuous deterioration of general population standards of living.

[Captain Willard]

+100.

Reggie also has it right: either they knew about Lehman and were crooked, or they didn't know and they were incredibly stupid.

But Caconhma is spot on: the Authorities are exploiting this crisis to further their Statist goals. We can expect Serfdom to follow.

[Anonymous]

I found another bag-holder!

The decisions have already been made. Where were you the last ten years? Try and keep up.

The only choice is real price discovery, which means Fraud Stret is closed until further notice by none other than those it defrauded with their new found mantra, "Greed is bad."

Most participants need their retirement prayers answered and are voting as such. They've come to the realization that they have been de-pants'ed and that their children don't even have a prayer..

[Anonymous]

Take a look at the letter Tiny Timmie sent to the
European commissioner:

http://www.ft.com/cms/b102c1be-2d31-11df-9c5b-00144feabdc0.pdf

http://www.nakedcapitalism.com/2010/03/why-is-geithner-lobbying-with-eu-...?

I think Reggie as a good point with regulatory capture, the
banksters got what amounts imho to the greatest scam in
American history and are still "cooking the books"

[Anonymous]

Isn't it time to take a hard look at the criminal code and create a class of new felonies to deal with accounting gimmicks, off book transaction, etc? How many more losses based on fraud, off book transactions, etc do we need before we act. Why would anyone invest in our companies, when there is virtually no law preventing fraud?

Once the new felonies are in place, turn it over to the FBI, forget the SEC.

The penalties for the felonies, would be substantial prison time and the forfeiture of all assets by the perp. Like RICO

[Rusty_Shackleford]

Fantastic idea.

Because the FBI isn't, at it's heart, a political organization headed by the same bunch or corrupt cronies, right?

Good luck.

[Anonymous]

Rusty, are you suggesting the large % of Jews runnings these instiutions are in some kind of conspiracy together or are victims of regulatory capture... I think the evil nazis hold them hostage..

Shapiro, Bair, Bernanke, Greenspan, Orzsag, Rahm, Frank, Gensler, and the FBI fuckhead. Any Japanese Americans allowed in our financial system anywhere ? ... WTF ??.

Say it ain't so... Crazy conspiracy talk. Nothing to see here..

Nikki..

Who was Murray Rothbard ?

[Anonymous]

Rusty, are you suggesting the large % of Jews runnings these instiutions are in some kind of conspiracy together or are victims of regulatory capture... I think the evil nazis hold them hostage..

Shapiro, Bair, Bernanke, Greenspan, Orzsag, Rahm, Frank, Gensler, and the FBI fuckhead. Any Japanese Americans allowed in our financial system anywhere ? ... WTF ??.

Say it ain't so... Crazy conspiracy talk. Nothing to see here..

Nikki..

Who was Murray Rothbard ?

[Anonymous]

At the end of the day, you have to have hope that someone or something remains uncorrupted and capable of exercising the justified authority of the state. FBI seems like as good a place as any - staffed by technocrats who can always be shamed into proper action by repeated viewing of "The Untouchables".

[Anonymous]

There are laws on the books now that could prosecute many of these people but the govt refuses to follow through - I wonder why ?

[DaveyJones]

exactly right. We have more than enough laws. We need to get rid of the lawless running this place.

[Anonymous]

Sorry piss-boy, it's good to be king.

[Madcow]

Look of the clip of Nancy Pelosi saying the crisis 'snuck up on us ... almost like it was upon little cat feet'

not kidding.  

[Rick64]

 The professional Hypocritician . I couldn't take the whole speech it was so full of holes.

[Anonymous]

After listening to an ex-banker on BBC and other various media talking heads analyze this situation I have been completely speechless. What they conclude is that this is not the time to point fingers but determine what can we learn from this situation.

It is truly impressive what Wall Street gets away with and will continue to get away with.