Best of the Week
Most Popular
1. Dollargeddon - Gold Price to Soar Above $6,000 - P_Radomski_CFA
2.Is Gold Price On Verge Of A Bottom, See For Yourself - Chris_Vermeulen
3.Dow Stock Market Trend Forecast 2018 - Nadeem_Walayat
4.Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - P_Radomski_CFA
5.Why The Uranium Price Must Go Up - Richard_Mills
6.Dow Stock Market Trend Forecast 2018 - Video - Nadeem_Walayat
7.Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - GoldCore
8.More Signs That the Stock Market Will Rally Until 2019 - Troy_Bombardia
9.It's Time for A New Economic Strategy in Turkey - Steve_H_Hanke
10.Fiat Currency Inflation, And Collapse Insurance - Raymond_Matison
Last 7 days
Golden Sunsets in the Land of U.S. Dollar Hegemony - 20th Sep 18
5 Things to Keep in Mind When Buying a Luxury Car in Dubai - 20th Sep 18
Gold Price Seasonal Trend Analysis - Video - 20th Sep 18
The Stealth Reason Why the Stock Market Keeps On Rising - 20th Sep 18
Sheffield School Applications Crisis Eased by New Secondary Schools Places - 20th Sep 18
Precious Metals Sector: It’s 2013 All Over Again - 19th Sep 18
US Dollar Head & Shoulders Triggered. What's Next? - 19th Sep 18
Prepare for the Stock Market’s Volatility to Increase - 19th Sep 18
The Beginning of the End of the Dollar - 19th Sep 18
Land Rover Discovery Sport 'Approved Used' Bad Paint Job - Inchcape Chester - 19th Sep 18
Are Technology and FANG Stocks Bottoming? - 18th Sep 18
Predictive Trading Model Suggests Falling Stock Prices During US Elections - 18th Sep 18
Lehman Brothers Financial Collapse - Ten Years Later - 18th Sep 18
Financial Crisis Markets Reality Check Now in Progress - 18th Sep 18
Gold’s Ultimate Confirmation - 18th Sep 18
Omanization: a 20-year Process to Fight Volatile Oil Prices  - 18th Sep 18
Sheffield Best Secondary Schools Rankings and Trend Trajectory for Applications 2018 - 18th Sep 18
Gold / US Dollar Inverse Correlation - 17th Sep 18
The Apple Story - Trump Tariffs Penalize US Multinationals - 17th Sep 18
Wall Street Created Financial Crash Catastrophe Ten Years Later - 17th Sep 18
Trade Wars Are Going To Crash This Stock Market - 17th Sep 18
Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - 17th Sep 18
Financial Markets Macro/Micro View: Waves and Cycles - 17th Sep 18
Stock Market Bulls Prevail – for Now! - 17th Sep 18
GBPUSD Set to Explode Higher - 17th Sep 18
The China Threat - Global Crisis Hot Spots & Pressure Points - 17th Sep 18 - Jim_Willie_CB
Silver's Relationship with Gold Reaching Historical Extremes - 16th Sep 18
Emerging Markets to Follow and Those to Avoid - 16th Sep 18
Investing - Look at the Facts to Find the Truth - 16th Sep 18
Gold Stocks Forced Capitulation - 15th Sep 18
Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - 15th Sep 18
Trading The Global Future - Bad Consequences - 15th Sep 18
Central Banks Have Gone Rogue, Putting Us All at Risk - 15th Sep 18
Gold Price Seasonal Trend Analysis - 14th Sep 18
Growing Number of Small Businesses Opening – and Closing – In the UK - 14th Sep 18
Gold Price Trend Analysis - Video - 14th Sep 18
Esports Is Exploding—Here’s 3 Best Stocks to Profit From - 13th Sep 18
The Four Steel Men Behind Trump’s Trade War - 13th Sep 18
How Trump Tariffs Could Double America’s Trade Losses - 13th Sep 18
Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - 13th Sep 18
Trading Cryptocurrencies: To Win, You Must Know Where You're Wrong - 13th Sep 18
Gold, Silver, and USD Index - Three Important “Nothings” - 13th Sep 18
Precious Metals Sector On a Long-term SELL Signal - 13th Sep 18
Does Gambling Regulation Work - A Case Study - 13th Sep 18
The Ritual Burial of the US Constitution - 12th Sep 18
Stock Market Final Probe Higher ... Then the PANIC! - 12th Sep 18
Gold Nuggets And Silver Bullets - 12th Sep 18
Bitcoin Trading - SEC Strikes Again - 12th Sep 18

Market Oracle FREE Newsletter

Trading Any Market

Is the Fed Helping the Big Banks Cook the Books? 

Politics / Credit Crisis 2010 Apr 13, 2010 - 02:31 AM GMT

By: Mike_Whitney

Politics

Best Financial Markets Analysis ArticleOn Friday, the Wall Street Journal revealed details of a cover up by the nations largest banks that have been engaged in potentially-criminal accounting activities to conceal the amount of debt on their balance sheets. The SEC has been notified of the allegations and has launched a probe to determine whether further action is needed. Among the banks implicated, are Goldman Sachs, JP Morgan, Bank of America, and Citigroup. According to the WSJ:


"Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York. A group of 18 banks....understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters." ("Big Banks Mask Risk Levels", Kate Kelly, Tom McGinty, Dan Fitzpatrick, Wall Street Journal)

The article, titled "Big Banks Mask Risk Levels", has set off alarm bells on Wall Street because of the similarity between Lehman Bros. "repo 105" transactions and these new signs of obfuscation by other large banks. "Repo 105" is an arcane accounting device that Lehman used to hide $50 billion in debt off its balance sheet in an attempt to mislead investors about the true condition of its financial health. The WSJ story suggests that the practice may be more widespread than originally thought. The "repo 105" scandal is further complicated by suspicions that Lehman was assisted in its effort by the Federal Reserve Bank of New York which, at the time, was headed by Timothy Geithner. Here is a short recap of what transpired between the Geithner's NY Fed and Lehman according to ex-regulator William Black and former NY governor Eliot Spitzer from an article on Huffington Post:

"The FRBNY knew that Lehman was engaged in smoke and mirrors designed to overstate its liquidity and, therefore, was unwilling to lend as much money to Lehman. The FRBNY did not, however, inform the SEC, the public, or the OTS (which regulated an S&L that Lehman owned) of what should have been viewed by all as ongoing misrepresentations.

The Fed's behavior made it clear that officials didn't believe they needed to do more with this information. The FRBNY remained willing to lend to an institution with misleading accounting and neither remedied the accounting nor notified other regulators who may have had the opportunity to do so...... We now know from Valukas and from former Treasury Secretary Paulson that the Treasury and the Fed knew that Lehman was massively overstating its on-book asset values." (Time for the Truth" William Black and Eliot Spitzer, Huffington Post)

So the question is whether the NY Fed helped other banks conceal important financial information from investors, too. And--if that's the case--then how can the public be confident that the biggest banks in the country are truly solvent?

According to the WSJ: "An official at the Federal Reserve Board noted that the Fed continuously monitors asset levels at the large bank-holding companies, but the financing activities captured in the New York Fed's data fall under the purview of the Securities and Exchange Commission, which regulates brokerage firms."

The Fed's explanation is a tacit denial of its responsibility to regulate or report suspicious accounting practices to the appropriate agencies. The response is not just "buck passing", but also suggests collusion . So far, there's no clear link between the Fed and the shady bookeeping at the banks. But many now believe that--in the case of Lehman--the Fed acted as an "enabler", either by serving as a counterparty in repo 105 deals or by looking the other way while the transactions were executed. Either way, the situation demands an independent investigation.

To put the WSJ article in context, it helps to review the details of the Lehman case. Here's an excerpt from an article by Eric Dash in the NY Times:

"Newly released report on the collapse of Lehman Brothers ... sheds surprising new light on Lehman’s dealings with the New York Fed. Lehman engaged in a series of transactions with the New York Fed that were similar to the ones that drew criticism from the bankruptcy court examiner who investigated its collapse....

The report by Mr. Valukas nonetheless raises fresh questions about the role of the New York Fed in supporting Lehman during the frantic months leading up to its collapse. It suggests that Lehman executives believed the Fed would be able to help the bank avert disaster and provide it with a business opportunity...

“Lehman, desperate for financing, seized its chance. It packaged billions of dollars of troubled corporate loans into an investment called Freedom CLO. Then, in a series of transactions, it shifted Freedom back and forth to the New York Fed, in exchange for cash. Those moves helped make Lehman look healthier.

“Essentially, Lehman was able to temporarily warehouse illiquid investments that were worrying its investors at the New York Fed in return for cash. The Fed created this facility immediately after the near collapse of Bear Stearns. Some suspect that other banks engaged in similar maneuvers. ("Fed Helped Bank Raise Cash Quickly", Eric Dash, New York Times)

So why did "Lehman executives believe the Fed would be able to help the bank avert disaster and provide it with a business opportunity"? Most likely, because that had been standard operating procedure. The Fed was merely acting as it had before. Lehman used the repo market to amplify leverage to maximize profits, (the same as the other banks) and when they couldn't find a counterparty to accept their garbage collateral, the Fed would step in and provide short-term loans and "warehouse" their toxic assets.

In essence, the Fed was helping to defraud investors who believed the banks reports were accurate. Here's Yves Smith at Naked Capitalism who sums it up perfectly:

"The NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations...…at a minimum, the NY Fed helped perpetuate a fraud on investors and counterparties. This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large. “And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets." naked capitalism

So if the NY Fed had no moral qualms about its "repo 105" dealings with Lehman, than why would hesitate to do the same thing for the other banks? Tyler Durden at Zero Hedge answers the question like this:

"We contend that Repo 105 type book-cooking and quarter end balance sheet window dressing was a prevalent phenomenon among all the banks. The fact that over the past two and a half years this resulted in a differential from the peak quarterly assets of over $65 billion is unbelievable, and the fact that this had slipped through the regulators' fingers is inexcusable.....

We are confident that armed with this data, the SEC will be able to provide a prompt and logical response why the primary dealers have such a peculiar pattern in downshifting their assets toward quarter end, and much more relevantly, who the counterparties are that would consistently take the other side of these quarter end window-dressing trades." ("Evidence That Primary Dealers Have Collectively Engaged In Repo 105 And Qtr-End Book Cooking Type Schemes For Years" zero hedge, 4-9-10)

Durden's logic is flawless. If Lehman was being aided in it's "book cooking" by the NY Fed, then the other banks were probably being helped, as well. It looks like Geithner left his fingerprints everywhere.

If we add these new developments to the fact that the Financial Accounting Standards Board's (FASB) "mark to market" rule has been suspended (allowing banks to arbitrarily assign whatever value they choose to the own illiquid assets) and, the fact that the Federal Reserve still refuses to allow an independent audit of the dodgy collateral it accepted from the banks in exchange for Treasuries and other loans; then it still looks like the banking system is either teetering or insolvent.

And don't expect the Securities and Exchange Commission to get to the bottom of this either. SEC chairman Mary Schapiro is a proven financial industry loyalist who has no intention of upsetting her Wall Street overlords by digging too deep or issuing subpoenas. If she pursues the investigation at all, it will only be to placate the public and to apply liberal amounts of whitewash to the whole matter.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2010 Copyright Mike Whitney - 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.

Mike Whitney Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Jerry
13 Apr 10, 10:49
Is the Fed Helping the Big Banks Cook the Books?

Why do you think right after entering office, Obama said there will be no investigations into criminal activity and proceeded to have Geithner join his group.....and of course we know there is no true reforms.....Obama wants to get back to the way it was but it ain't goin' happen and the public outrage is legitimate!!!


Post Comment

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

6 Critical Money Making Rules