Lehman

News out of the Irish government is that Anglo Irish bank will be split into a funding bank and an asset recovery bank, saying that the bank's "own plan in its current form does not provide the most viable and sustainable solution." Those who are familiar with Lehman will recall that this was a plan expected to be put into place for Lehman, in which a CRE-asset holding division would be spun off and allowed to roll off its assets. This plan was scrapped as it was deemed unviable. Glad to see it will work in Ireland.

In today’s world of trillion dollar bailouts, $2-4 billion doesn’t sound like much, so let’s give some perspective here… in its golden days, Lehman Brother’s market cap was roughly $47 billion. So you’re talking about bets equal to an amount between five and 10% of its market cap. Not exactly chump change.

And Lehman had no idea where it was or how much it really owed.

Mind you, we’re only addressing Lehman’s options and futures derivatives, we’re completely ignoring its mortgage backed securities, collateralized debt obligations (CDOs), and other Level 3 assets. Options and futures are literally the “tip of the iceberg,” the most visible portion of the behemoth that was Lehman’s off balance sheet derivative issues. After all, these are regulated securities unlike most derivatives.

In an indication of just how good "redundancy" record keeping is within the financial industry, Bloomberg discloses that according to testimony by Barclays' Elizabeth James, a director of
Barclays’s futures business, in bankruptcy court, Lehman Brothers basically had no idea whatsoever how big its derivative book was within a +/- range of $2 billion. In addition to robts running wild and jeopardizing flash crashes on a daily basis, this should certainly restore some credibility to the market. “Lehman’s books were in such a mess that I don’t think
they knew where they were.” She said she received an e-mail from former Barclays
trading executive Stephen King saying Lehman had “absolutely no
idea” if it had sold $2 billion more options than it had
bought, or whether it owned $4 billion more than it had sold. Just lovely.

Fox Biz' Charlie Gasparino reports that the SEC has likely issued Wells Noticed to former Lehman executives. It is unclear who they are but between Fuld, Callan, and Gregory, one can be sure that at least one of the three will be involved. Charlie also says the executives are trying to prevent the SEC from filing formal allegations. However, in light of the huge slap to the face for the SEC after the Repo 105 disclosure, we doubt Schapiro's farm will be amenable to yet another bust, like the Goldman and BofA settlements.

Are Dick Fuld's days in non-captivity numbered? After the Repo 105 criminal disclosure came and went, most have forgotten about the last ditch attempt by Lehman to misrepresent its balance sheet (with or without the complicity of E&Y) as it was collapsing into insolvency. That may soon be ending. Charlie Gasparino, via Dow Jones, has the (fluid) scoop.

Apparently what is good enough for Greenlight, SAC, Citadel and Goldman, is not quite up to snuff for Och-Ziff. The 7 West 57th-based, $25.6 billion AUM, hedge fund believes that it should be exempt from responding in an ongoing investigation by the bankrupt Lehman estate, which is probing the abovementioned hedge funds whether they engaged in rumormongering that may have brought down Lehman Brothers. And Lehman is unhappy: in a filing from the Lehman bankruptcy docket, the state claims that "Och-Ziff, one of the world's largest hedge funds, was involved with, or has information that pertains to, the "short-and distort" efforts." If this is indeed true, it is not very surprising that "Och-Ziff has already begun stonewalling to attempt to prevent this information from seeing the light of day by interposing frivolous and dilatory objections to the Debtors' Rule 2004 Subpoena." As the Lehman examination has already proven to be a gold mine for illegal practices conducted by Wall Street, we would not be surprised if the most recent 2004 investigation uncovers some new and even more shocking results. To be sure, Zero Hedge has never been a fan of the "short selling raid" theory - fair value can and always will find a way to creep up to the surface, unless of course it doesn't exist in the first place, like in Lehman's case. Additionally, funds would have to be extra stupid to keep written evidence of this kind of complicit and illegal activity. Which is why Och-Ziff's response is perplexing. And if the estate had credible reason to pursue Och-Ziff, we can only imagine the same must be true about Greenlight, SAC, Citadel and Goldman. Suddenly the Lehman bankruptcy case became interesting all over again.

As horrific as the gulf environmental catastrophe is, an even more intractable and cataclysmic disaster may be looming. The yet unknowable costs associated with clean-up, litigation and compensation damages due to arguably the world’s worst environmental tragedy, may be in the process of triggering a credit event by British Petroleum (BP) that will be equally devastating to global over-the-counter (OTC) derivatives. The potential contagion may eventually show that Lehman Bros. and Bear Stearns were simply early warning signals of the devastation lurking and continuing to grow unchecked in the $615T OTC Derivatives market. What is yet unknowable is what the reality is of BP’s off-balance sheet obligations and leverage positions. How many Special Purpose Entities (SPEs) is it operating? Remember, during the Enron debacle Andrew Fastow, the Enron CFO, asserted in testimony nearly 10 years ago that GE had 2500 such entities already in existence. BP has even more physical assets than Enron and GE. Furthermore, no one knows the true size of BP’s OTC derivative contracts such as Interest Rate Swaps and Currency Swaps. Only the major international banks have visibility to what the collateral obligations associated with these instruments are, their credit trigger events and who the counter parties are. They are obviously not talking, but as I will explain, they are aggressively repositioning trillions of dollars in global currency, swap, derivative, options, debt and equity portfolios.

The BP crisis in the Gulf of Mexico has rightfully been analysed (mostly) from the ecological perspective. People’s lives and livelihoods are in grave danger. But that focus has equally masked something very serious from a financial perspective, in my opinion, that could lead to an acceleration of the crisis brought about by the Lehman implosion.

Headlines for now. Not too surprising based on the recent lawsuit between the two firms, which we have presented previously in depth.

The title says it all...

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.

David Rosenberg is out with some very fitting analogies of the current sovereign crisis. If he is proven prescient, which we have no doubt he will, the Greek near-default will have massiverepercussions to the entire developed world when all is said and done."In my opinion, Greece is the same canary in the coal mine that Thailand was for emerging Asia in 1997, which ultimately led to the Russian debt default and demise of LTCM; the same canary in the coal mine that New Century Financial in early 2007 proved to be in terms of being a leading indicator for the likes of Bear Stearns and Lehman. So, the most dangerous thing to do now is to view Greece as a one-off crisis that will be contained." Furthermore, as he makes all too clear, if a $1 trillion bailout can only buy 400 points in teh Dow, Europe, aside from all the other fundamentals which confirm the same, is doomed, and even the ever-optimistic market now realizes it. Lastly, should Europe pursue the required austerity measures, the hit to European GDP will be massive, and is certainly not being priced in European stocks, but certainly not in US stocks, whose primary export market is about to disappear.

There is no question now that the complacency about Greece and the peripheral European implosion is identical to the Bear->Lehman->Financial collapse pathway that the US experienced between March and September 2008. And just like back then Bear was small enough to bail out, soon we will hit a country that not even the IMF's half a trillion rescue facility will be sufficiently large to prevent from teetering over. At this point it is nothing but a waiting game. However, unlike the US, when after Lehman the Fed scrambled to throw $24 trillion of Fed signed paper at the fire, expecting a comparable coordinated and rapid response from the Eurozone is ludicrous, especially with Goldman shorting it. So those who believe they can time the market melt up until the next unsustainable sovereign blow up - good luck (of course here we refer to the daytraders who take their guidance from the Momo Money brigade, whose refrain for 60 minutes each day is "it will go up because it is going up." Brilliant). For everyone else, we present a short primer from UBS on how to play the sovereign crisis, at least until the point when playing anything is futile and the global scramble for cash crashes the Keynesian dream.

According to estimates by The Economist, foreign banks’ exposure to Greece, Portugal and Spain combined comes to €1.2 trillion. All this could all end horribly, if governments refuse to cut spending and markets refuse to fund that spending.

A few weeks ago we indicated that the S&P Large contracts surged in the week ended March 23by the biggest amount since the March 2009 lows (which incidentally was followed up by the latest phase of the most ridiculous market melt up since 1932), observing the capitulation phase of the melt up. So it is interesting to point out that non-commercial speculative positions in the just as relevant E-Mini contracts hit the greatest short exposure since the collapse of Lehman, declining to -51,180 in the week ended April 20th. The last time we were negative by such an amount was in November 2008, when the market was plunging daily, however then the bias was positive with E-Minis surging all the way to the March inflection point at which point they collapsed once the market started its seemingly endless creep higher. Have we reached another inflection point, with the E-Mini specs, at least, betting there is a market correction upcoming?