Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Social Mood and Leaders Impact on General Election Forecast 2019 - 9th Dec 19
Long-term Potential for Gold Remains Strong! - 9th Dec 19
Stock and Financial Markets Review - 9th Dec 19
Labour / Tory Manifesto's Impact on UK General Election Seats Forecast 2019 - 9th Dec 19
Tory Seats Forecast 2019 General Election Based on UK House Prices Momentum Analysis - 9th Dec 19
Top Tory Marginal Seats at Risk of Loss to Labour and Lib Dems - Election 2019 - 9th Dec 19
UK House Prices Momentum Tory Seats Forecast General Election 2019 - 8th Dec 19
Why Labour is Set to Lose Sheffield Seats at General Election 2019 - 8th Dec 19
Gold and Silver Opportunity Here Is As Good As It Gets - 8th Dec 19
High Yield Bond and Transports Signal Gold Buy Signal - 8th Dec 19
Gold & Silver Stocks Belie CoT Caution - 8th Dec 19
Will Labour Government Spending Bankrupt Britain? UK Debt and Deficits - 7th Dec 19
Lib Dem Fake Tory Election Leaflets - Sheffield Hallam General Election 2019 - 7th Dec 19
You Should Be Buying Gold Stocks Now - 6th Dec 19
The End of Apple Has Begun - 6th Dec 19
How Much Crude Oil Do You Unknowingly Eat? - 6th Dec 19
Labour vs Tory Manifesto Voter Bribes Impact on UK General Election Forecast - 6th Dec 19
Gold Price Forecast – Has the Recovery Finished? - 6th Dec 19
Precious Metals Ratio Charts - 6th Dec 19
Climate Emergency vs Labour Tree Felling Councils Reality - Sheffield General Election 2019 - 6th Dec 19
What Fake UK Unemployment Statistics Predict for General Election Result 2019 - 6th Dec 19
What UK CPI, RPI and REAL INFLATION Predict for General Election Result 2019 - 5th Dec 19
Supply Crunch Coming as Silver Miners Scale Back - 5th Dec 19
Gold Will Not Surpass Its 1980 Peak - 5th Dec 19
UK House Prices Most Accurate Predictor of UK General Elections - 2019 - 5th Dec 19
7 Year Cycles Can Be Powerful And Gold Just Started One - 5th Dec 19
Lib Dems Winning Election Leaflets War Against Labour - Sheffield Hallam 2019 - 5th Dec 19
Do you like to venture out? Test yourself and see what we propose for you - 5th Dec 19
Great Ways To Make Money Over Time - 5th Dec 19
Calculating Your Personal Cost If Stock, Bond and House Prices Return To Average - 4th Dec 19
Will Labour Government Plant More Tree's than Council's Like Sheffield Fell? - 4th Dec 19
What the UK Economy GDP Growth Rate Predicts for General Election 2019 - 4th Dec 19
Gold, Silver and Stock Market Big Picture: Seat Belts Tightened - 4th Dec 19
Online Presence: What You Need to Know About What Others Know About You - 4th Dec 19
New Company Tip: How To Turn Prospects into Customers with CRM Tech - 4th Dec 19
About To Relive The 2007 US Housing Market Real Estate Crash Again? - 3rd Dec 19
How Far Will Gold Reach Before the Upcoming Reversal? - 3rd Dec 19
Is The Current Stock Market Rally A True Valuation Rally or Euphoria? - 3rd Dec 19
Why Shale Oil Not Viable at $45WTI Anymore, OPEC Can Dictate Price Again - 3rd Dec 19
Lib Dem Election Dodgy Leaflets - Sheffield Hallam Battle General Election 2019 - 3rd Dec 19
Land Rover Discovery Sport Brake Pads Uneven Wear Dash Warning Message at 2mm Mark - 3rd Dec 19
The Rise and Evolution of Bitcoin - 3rd Dec 19
Virtual games and sport, which has one related to the other - 3rd Dec 19
The Narrative About Gold is Changing Again - 2nd Dec 19
Stock Market Liquidity & Volume Diminish – What Next? - 2nd Dec 19
A Complete Guide To Finding The Best CFD Broker - 2nd Dec 19
See You On The Dark Side Of The Moon - 2nd Dec 19
Will Lib Dems Win Sheffield Hallam From Labour? General Election 2019 - 2nd Dec 19
Stock Market Where Are We?  - 1st Dec 19
Will Labour's Insane Manifesto Spending Plans Bankrupt Britain? - 1st Dec 19
Labour vs Tory Manifesto Debt Fuelled Voter Bribes Impact on UK General Election - 30th Nov 19
Growing Inequality Unrest Threatens Mining Industry - 30th Nov 19
Conspiracy Theories Are Killing This Nation - 30th Nov 19
How to Clip a Budgies / Parakeets Wings, Cut / Trim Bird's Flight Feathers - 30th Nov 19
Hidden Failure of SIFI Banks - 29th Nov 19
Use the “Ferrari Pattern” to Predictably Make 431% with IPOs - 29th Nov 19
Tax-Loss Selling Drives Down Gold and Silver Junior Stock Prices - 29th Nov 19
We Are on the Brink of the Second Great Depression - 29th Nov 19
How to Spot REAL Amazon Black Friday Bargains and Avoid FAKE Sales - 29th Nov 19

Market Oracle FREE Newsletter

UK House prices predicting general election result

Lehman’s Contribution to the Financial Meltdown!

Companies / Credit Crisis 2008 Mar 12, 2010 - 04:47 PM GMT

By: Sy_Harding

Companies

Best Financial Markets Analysis ArticleSometimes things that seem too disappointing to be true do turn out to be true. Unfortunately over the decades that has happened too often in the financial industry.


For instance, just over a year ago a U.S. bankruptcy court in New York appointed former prosecutor Anton Valukas’s law firm to investigate the rumors of foul play at Lehman Brothers in 2008, prior to the firm’s failure. Lehman’s bankruptcy was the largest financial bankruptcy in history.

Valukas released the resulting voluminous 2,200 page report on Thursday. Its revelations are an eye-opener even to those who suspected there was more going on in the financial sector than was made public in 2008.

The report alleges that business decisions made by Lehman were not simply errors of judgment, or misunderstanding of the firm’s financial condition by its executives, but deliberate and secret manipulations, suggesting that former Lehman executives, its auditors, and several cooperating rival firms could face legal problems.

Lehman Brothers was the fourth largest investment bank in the U.S., one of the biggest dealers in large, complex trading schemes, and heavily invested in derivatives linked to sub-prime mortgages. Its tentacles reached far out into global financial activities, and at the time of its failure the extent to which its risks were shared with other major financial firms was unknown. So the firm’s failure in September, 2008 created panic in the financial sector, followed by the final spike-down collapse in the stock market to last year’s March low.

It puzzled many at the time that, after having bailed out Bear Stearns, Merrill Lynch, insurance giant AIG, mortgage giants Fannie Mae and Freddie Mac, and others, by either arranging for their purchase by stronger firms, or direct takeover by the government, the Treasury Department and Federal Reserve refused in the end to rescue Lehman.

The Valukas Investigation report may provide the answer. The Treasury’s attempt to rescue Lehman failed when the government balked at providing UK bank Barclays with a guarantee of Lehman’s trading obligations as part of the deal to have Barclays acquire Lehman.

Although it was similar to guarantees the government had provided in its other rescue deals, it was explained that there was a limit to how much public money should be risked in guarantees of that kind.

 But was the Treasury Department already aware of what the Valukas investigation report reveals, that Lehman officials had used “balance sheet manipulation” to hide some $50 billion of its leveraged debt from scrutiny, and so knew it could not guarantee the firm’s trading obligations, as Barclays wanted as part of a buyout deal?

The report says that by temporarily hiding the $50 billion of toxic assets via misuse of what are known as Repo 105 swaps, Lehman was able to be “materially misleading” by reporting much better risk-leverage numbers, which were a positive to investors, and also a positive to the rating agencies from which Lehman was anxious to maintain a favorable credit rating.

The 2,200 page report will be fodder for debate and conjecture for months to come as analysts plod through it in more detail. For instance, there are allegations that Lehman’s outside auditors were aware of how and why the Repo 105 swaps were undertaken but “took no steps to question or challenge the non-disclosure”, and that top executives hid the facts from the board of directors.

According to court records, Valukas has been sharing his evidence with the SEC, and believes a number of Lehman’s executives could face legal charges.

However, that would be quite different from the way government agencies acted in the aftermath of the last severe financial meltdown, after the 1929 crash.

At that time, Congress and the courts also undertook extended investigations into the causes of the financial and economic collapse. The findings of excess risk-taking with bank assets, and especially outright fraud, were shocking. For the first time serious regulations were imposed on Wall Street firms, and the Securities & Exchange Commission (SEC) was established to police the financial industry.

In one of his first acts as the SEC’s first chairman, Joseph P. Kennedy called in the nervous heads of Wall Street firms, as well as a number of corporate executives whose shady activities had been uncovered in the investigations, and to their great surprise he told them the SEC would not undertake investigation or prosecution for their past operations. No one went to jail. The top executives remained in their positions, only warned to change their ways.

Kennedy said he feared years more of charges and trials rehashing what had gone on before would be a hindrance to the country’s ability to move forward into better, more honest times. The decision was providential for Kennedy as well, since his own misdeeds as one of the most notorious of admitted market manipulators of the early 1900’s would also fade into the mists of time.

I wonder if the times have really changed that much. It’s interesting that here is another example of how secretive complex derivatives transactions and swaps can be used to mislead investors, rating agencies, and regulators, and even contribute significantly to financial meltdowns. And yet whether their use should be regulated is being debated.

Perhaps the Valukas Investigation report will shine a brighter spotlight on the situation.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2010 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules