Anton Valukas

Scandal After Scandal, Lie Upon Lie ... What's Going On?

The Inmates Are Running the Asylum

The MF Global probe begins. Here are the broad scope details from Bloomberg

• Trustee liquidating MF Global brokerage has started a probe into the company’s failure after getting a judge’s go-ahead. To protect books and records, forensic accountants are “securing” offices in NYC, Chicago, trustee James Giddens said in a statement today.
• "Significant’’ numbers of brokerage accounts being transferred
• Individual accounts will probably be transferred next week
• Giddens, team will work weekend on bulk transfers

As readers will recall, it was only 2 years after the Lehman filing, did Anton Valukas discover such critical mainstays of modern banking fraud as Repo 105. Alas, we do not hold much hope here, at least in the beginning, and certainly not before the FBI is involved.

When back in 2010, Lehman examiner Anton Valukas exposed the bankrupt bank's Repo 105 practices (which subsequently we learned were also partaken into by most other banks, although the trail ends there and nobody was prosecuted for it, let alone went to jail -after all, everyone was doing it, and everyone knew about it), many were shocked and appalled that such a blatant window dressing practice was allowed to continue quarter after quarter. Which is why we suppose nobody will be surprised to learn that glaringly "in your face" window dressing continues to this very day quarter in and quarter out by the same Primary Dealers who already leech billions in free Fed (i.e., taxpayer) money courtesy of a collusive BWIC/OWIC spread-to-market in the Fed's daily POMOs. The quote-unquote shocking chart below is one we have demonstrated on numerous occasions in the past: it shows total primary dealer assets on a weekly basis as reported publicly by the New York Fed. We have made it clear time and again, that this chart demonstrates nothing short of the end of quarter window dressing, when PDs convert their asset holdings into cash to make their Tier 1 Capital much more robust than it truly is. After all, none other than JPM and Citi were praising just how prepared for Basel III they are with their "sterling" capitalization ratios... which were only sterling courtesy of precisely the highlighted window dressing which occurs each and every quarter. We expect nothing less from Bank of America and Morgan Stanley when they report their own numbers in the coming days. We also expect the regulators to do absolutely nothing to prevent this blatant abuse of fiduciary duty which has no other purpose than to hide the true sad state of America's banking system.

And while the general public frets over the latest geopolitical disasters, the SEC proves Rahm Emanuel correct once again, and letting no disaster go to waste, man-made or natural, the world's most incompetent (but massively underpaid, or so they claim) regulator is preparing to let Dick Fuld completely off the hook for last spring's stunning Repo 105 report by Anton Valukas, whose findings even the bankruptcy expert said were probably cause for civil lawsuits. The WSJ reports: "In recent months, Securities and Exchange Commission officials have grown increasingly doubtful they can prove that Lehman violated U.S. laws by using an accounting maneuver to move as much as $50 billion in assets off its balance sheet, which made it appear that the securities firm had reduced its debt levels....After zeroing in last summer on the battered real-estate portfolio and an accounting move known as Repo 105, SEC officials have grown more worried they could lose a court battle if they bring civil charges that allege Lehman investors were duped by company executives. The key stumbling block: The accounting move, while controversial, isn't necessarily illegal." Oh no, illegal it is. The problem is that should the SEC actually pursue it and win, that act would open up the floodgates for hundreds of lawsuits against everyone from Bank of America and Citi, which have also disclosed they used comparable tactics to misrepresent the true status of their books, to shady accounts like Ernst & Young, all the way to FASB at the very top of the corruption pyramid. And with hundreds of millions if not billions in legal fees about to be paid out if the fraudclosure back door settlement fails, the SEC simply can not allow the pursuit of justice to threaten the viability of America's only national interest: that of its criminal banking syndicate.

It always seemed to us that the whole Lehman Repo 105 fiasco seemed to be too much of a slam dunk for nobody to get sued over it. Yet here we were, almost a year after the Valukas report, and nobody was even pretend to be fighting off justice, or even a bunch of brain impaired porn addicts. Not so any longer. Bloomberg reports that per an unsealed filing in the Lehman bankruptcy docket, the Lehman 401(k) retirement plan, which had just under $230 million invested in Lehman stock, has sued Dick Fuld "and other former executives of the defunct firm for failing to disclose Repo 105, a financing method allegedly used to conceal billions of dollars of debt." And all this is occurring as the SEC is scrambling to find new and improved ways to pay off its multi-million midget porn bill, up to an including firing every staffer with an IQ over 50...All 4 of them.

Developing news that the SEC is proposing a rule that will make EOQ window dressing, along the lines of the Repo 105 transactions that made so many headlines yet resulted in absolutely no criminal convictions, more difficult. We will bring you more some time in 2394 when this proposal actually becomes enforced, but in the meantime here is our chart that shows just how much of a pervasive phenomenon this is among the Primary Dealer community. Readers can find out more about this here: End Of Quarter Primary Dealer Asset Window Dressing Games Continue. We will update this chart in the first week of October when the Q3 window dreassing game is complete. We expect another 30 billion up and down swing as banks "fix" their capitalization ratios just in time for their 10-Q filings.

The WSJ reports that, as broadly expected, Lehman is not alone in its illegal Repo 105 window-dressing scam: it turns out that Citigroup and Bank Of America also routinely used such shady practices for years. As Michael Rapoport reports, "Citigroup said the misclassified transactions-of $5.7 billion as of the end of 2009, and as much as $9.2 billion over the past three years-involved "a very limited number of our business units" that "used this type of transaction in very small amounts." So its all good - fraud may have been performed but it was just nickel and diming: after all it's not like Citigroup was robbing cemeteries or anything (and since guilt was neither admitted nor denied in that specific case, one can say Citi was never sleeping because it was robbing graveyards but only due to honest mistake). Sure enough, this disclosure come only after the SEC demanded clarification on Repo-105 comparable transactions at all major firms. And with such daily distractions as ten trillions point swings in the market, and crude oil filling up the world ocean, who really cares anymore that all US banks commit fraud on a daily basis. The punchline: "Bank of America and Citigroup say their misclassifications were due to errors--not an attempt to make themselves look less risky." Well, that surely justifies everything.

In October of last year we wrote an extended piece discussing the conflict between the bankrupt Lehman Brothers estate (i.e., its unsecured creditors) and Barclays, in which JPMorgan played a prominent part, as it was the critical tri-party repo clearing bank on all of Lehman's collateral that would subsequently go to Barclays. As we summarized, extortion attempts back then by Barclays only had the adverse effect of making Jamie Dimon very, very angry: "Barclays' attempt to nickel and dime JPM (and the US taxpayers) so infuriated Jamie Dimon that he penned an angry letter to John Varley,
Barclays Group CEO (which CC:ed Barclays' president Bob Diamond),
threatening with litigation in case Barclays is intent on sticking JPM
with Lehman collateral that it thought was without value and not worth
assuming in a time when every single day stock prices were crashing
further lower." As we expected in October, the resolution would most likely involve litigation, as by dint of its collateral clearing position, JPM had unprecedented knowledge about Lehman's affairs: a special status that would likely be abused in a court of law. Sure enough, here is the lawsuit: the estate of Lehman Brothers, desperate to pick another several bps in recovery on their Lehman General Unsecured Claims, has sued JPMorgan, claiming Jamie Dimon's bank pushed Lehman into bankruptcy by forcing it to turn over $8.6 billion in collateral. As Lehman was completely insolvent long before JPM demanded any incremental collateral comfort, claiming that JPM was the catalyst for Lehman's bankruptcy is absolutely the same as saying that Goldman forced AIG's bankruptcy by increasing its collateral demands. While both arguments are ludicrous, should the JPM case proceed to court, it is tantamount that AIG immediately seek legal action against Goldman Sachs on identical grounds.

In a nutshell, Bernanke says he was not supervising Lehman, Fuld was not aware of Repo 105, and the SEC had never heard of such a concept.The only person who is not lying, Anton Valukas says that he "found Lehman was significantly and persistently in excess of its own risk limits" and confirms that the SEC is nothing but a pathetic liar lead by incompetent idiots: "we found that the SEC was aware of these excesses and simply acquiesced" and "we believe it is clear that the SEC wasLehman's primary regulator." And just in case the FRBNY thinks it can avoid claims of potentially criminal negligence "
Valukas concludes: "there were "serious lapses" in SEC, federal reserve bank of New York working together to avert Lehman's failure." In other the CEO, the Regulators and the deranged money printer all wash their hands of the fraud that very well may have led to the biggest and most dramatic bankruptcy in history, despite that the independent third party arbiter finds them all guilty of gross incompetence and possibly collusion.

April 19 (Bloomberg) -- Lehman Brothers Holdings Inc., which has been investigating whether any companies may have contributed to its bankruptcy, issued at least five subpoenas to investment firms and hedge funds including Goldman Sachs Group Inc., SAC Capital Advisors LP, Greenlight Capital Inc. and Citadel Investment Group LLC, according to court filings. Bankrupt Lehman is conducting its own probes separately from the 2,200-page report by examiner Anton Valukas that was published on March 11.

Fox Business reports that the investigation around Lehman is intensifying. Surely the SEC, now generically equated with objects that float around in sewers in formal conversation, has realized it has to do something, anything, to find at least one scapegoat for the financial collapse. Which is why we read with little surprise Gasparino's report that "thee SEC has ramped up its inquiry into Lehman’s fall, particularly after court-appointed bankruptcy examiner Anton Valukas issued a lengthy report stating that Lehman’s top executives were “grossly negligent” in possibly hiding the risky nature of the firm’s finances during its final day." What we find much more interesting is that "yet another investigative agency, the Public Accounting Oversight Board
-- created under the 1992 Sarbanes-Oxley law to investigate and
discipline public accounting firms -- has launched an inquiry into the
role of Lehman’s auditor, Ernst & Young, following the examiner’s
report, which accused the big accounting firm of “professional
malpractice,” for its work in approving accountings techniques Lehman
used during its dying days in the summer of 2008." In the absence of any Wall Street villains, which it is now all too clear have endless diplomatic immunity from prosecution by the corrupt regulators, will the auditor, together with Dick Fuld, be made into the sacrificial lambs? Or will we continue the farce that anything even remotely related to capital markets integrity and reporting is real and valid? Judging by the nearly 60 days of no S&P downticks, the market has answered that question for us.

Gasparino breaks news that David Einhorn will be brought in as a witness in the upcoming Congressional hearing on the Lehman's fraudulent disclosure as reported by the much discussed Anton Valukas report. According to the Fox Business senior correspondent: "Einhorn through a spokesman declined to comment, but a person close to Einhorn said “it wouldn’t be a surprise” if he was called in some way given his role in exposing Lehman’s problems. A spokesman for US Rep. Barney Frank, the chair of the committee, didn’t return a telephone call for comment." With Tim Geithner most likely present at the hearing, this will be quite a memorable spectacle, which will certainly result in absolutely nothing as usual.

It seems it was just yesterday that Bernanke was on the edge of committing perjury and lying that the Federal Reserve of New York knew nothing about Lehman's "more peculiar" off balance sheet transactions. Oh wait, it was: as a reminder in his cross by Scott Garrett, the New Jersey representative asked whether the "Fed was aware of the Repo 105 and the accounting irregularities going on?"
Bernanke answers "No - they were hidden." Oops. Because a story just released by the Financial Times seems to indicate otherwise, and unless Merrill Lynch is lying out of their derriere, Mr. Bernanke should be immediately investigated for potential perjury before the American people. "Securities and Exchange Commission and Federal Reserve officials were warned by [Merrill Lynch] that Lehman Brothers was incorrectly calculating a key measure of its financial health months before its collapse in 2008...In the account given by the Merrill officials, the SEC, the lead
regulator, and the New York Federal Reserve were given warnings about
Lehman’s balance sheet calculations as far back as March 2008."  Amusingly, the sole purpose why Merrill would rat out Lehman is to make its own disastrous situation more agreeable, as often happens when the rats realize the sinking of the ship is inevitable. Well, unlike Merrill, whose liquidity situation was equally as disastrous on the weekend of September 14th, which found a pressed suitor in the form of BofA (and its Fed/Goldman-puppet CEO Ken Lewis), Lehman was not quite so lucky (one wonders why). Yet the bigger issue is why does the Fed keep on lying to the American public without any trace of consequence? When will someone finally wake up and sue the Federal Reserve (and we don't mean FOIA), or at least slap a racketeering lawsuit on "those people?" Oh yeah, the market is up, American Idol is on TV, G-Pap has done all that was needed to (not) be bailed out, so all shall be well. This is better known as "if the other Ponzi dude was thrown in jail, you must acquit" defense.

What is $50 billion between a couple of psychopaths? It's basically “a drop in the ocean” according to Max Abelson's account of how the Repo 105 fiasco is seen by the other side. Several ex-Lehman bankers speak off the record in "The repo men's new Lehman shrug" and confirm that not only is Wall Street terminally deluded in its own self-importance, but that basically everyone in finance is a megalomaniac, with no sense of relative worth, or any worth, for that matter, unless it goes straight into their back pocket. “I’m like, whatever" says London managing director #1, when asked what his reaction to the Repo 105 disclosure is. So when is it not "whatever?" $500 billion? $500 trillion? In its pursuit of finding ever more complex ways of defrauding the middle class silly (without the latter even being aware its share of net global wealth is about to decline from 1% to half that), Wall Street's bankers have passed the clinical psychopathology barrier, and will stop at nothing to destroy the wealth of everyone else not only with impunity, but with a smirk and a smile. Now that's net worth change you can believe in.