Saturday, March 12, 2011

Lehman Brothers Executives Likely to Avoid Criminal Prosection

Sigh. Again we see the power of the wall street cartel as the criminals involved in one of the biggest heists in history are about to walk away scott free. Per the SEC, it appears that the use of "Repo 105" by Lehman Brothers was not necessarily illegal.

Per the WSJ: In the transactions, Lehman swapped fixed-income assets for cash shortly before the securities firm reported quarterly results, promising to buy back the securities later. The cash was used to pay down the company's debts. Emails sent by executives at the company referred to Repo 105 as a "drug" and "basically window dressing."

So basically, lets assume that you have an investment bank. Your assets are listed at 1 billion. Of those assets you have the "credit card loan portfolio" or CCLP which amounts to 100 million of the bank assets. Now lets assume that the vast majority of the credit card loans in the portfolio are nonperforming. Obviously the value of the credit card portfolio has fallen as many loans are in default. But here is what you do: you sell this portfolio of CCLP to another bank for face value, recieving cash for the CCLP but promising to buy back the CCLP. When its financial reporting time you list the 100 million as CASH as on the balance sheet as opposed to CCLP which is rotting and probably only worth .40 on the dollar. Once the quarterly reporting time is finished you then repurchase the junk from the bank. Hence the term, Repo 105.

This is an extremely fraudulent activity as it presents a false appearance of health for a financial institution. In this way, the banks were able to "paper" over their incredible losses. However, the problem arises because investors relied on these representations of financial health and invested based on the information provided in the quarterly report. Lehman used repo 105 to hide its bleeding losses, but eventually nothing could save this bank and investors lost billions.

Quoting Dick Fuld on the use of repo 105;

Last year, Mr. Fuld told lawmakers he had "absolutely no recollection whatsoever of hearing anything" about Repo 105 at the time of the transactions. Lehman's demise was caused by "uncontrollable market forces" and the U.S. government's unwillingness to rescue the firm, he said.

Make no mistake as the use of repo 105 was widespread across many of the major wall street investment houses. There is evidence to the effect that Bank of America and Citigroup also played these fun games with their balance sheets. But unfortunately the current rule is described as such: if one goes down they all go down, however, if one doesn't go down none of them will go down.

ABSOLUTELY NO RECOLLECTION WHATSOEVER OF HEARING ANYTHING!!!! Now THAT is a defense! Good job Cravath boys as you bill in the hundreds of millions of dollars to defend the scum of the earth who, in large part, played a big role in sending our economy down the shitter. But it is ok I guess, because retribution is finally beginning to take occuron those evil Wisconsin public workers. Or how about those pesky law grads that fail to pass the bar exam right away and go into default on their loans. Its a good thing that these ABA judges are rigfhtfully punishing these people by suspending their licenses as they clearly do not have the moral fiber to practice law.

To conclude from the WSJ:

But 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.

In a possible sign that the probe has slowed, the SEC hasn't issued a Wells notice to Lehman's longtime auditor, Ernst & Young, according to people familiar with the situation. The firm had concluded that the accounting in the Repo 105 transactions was acceptable. Wells notices are a formal signal that the SEC's enforcement staff has decided it might file civil charges against the recipient.

The snags are the latest sign of trouble for the SEC and other U.S. regulators trying to punish companies and executives at the center of the financial crisis. So far, no high-profile executives have been successfully prosecuted. Last month, a federal criminal investigation of former Countrywide Financial Corp. Chief Executive Angelo Mozilo was closed without charges.

Dick Fuld is on the second row, far right. Angelo Mozilo, last row, far right.


  1. same shit, different day.

  2. The SEC cannot and does not ever bring criminal charges as it is has no such authority.

  3. From the SEC website:

    First and foremost, the SEC is a law enforcement agency. The Division of Enforcement assists the Commission in executing its law enforcement function by recommending the commencement of investigations of securities law violations, by recommending that the Commission bring civil actions in federal court or before an administrative law judge, and by prosecuting these cases on behalf of the Commission. As an adjunct to the SEC's civil enforcement authority, the Division works closely with law enforcement agencies in the U.S. and around the world to bring criminal cases when appropriate.

  4. @ 6:19 pm

    The SEC does not have authority to bring criminal charges but does make referrals to the DOJ on a regular basis. It is much easier to prove civil liability than criminal liability, however, pursuing civil cases could easily open the door to criminal prosecutions.

  5. So if "it is much easier to prove civil liability" and the SEC could not make a case, why do you think Lehman's Repo 105 transactions involved criminal misconduct? You quote the WSJ saying: "the accounting move, while controversial, isn't necessarily illegal". And Ernst & Young apparently approved the usage of Repo 105.

    Are you saying the SEC is corrupt/incompetent/apathetic/under-resourced? Was Ernst & Young part of the fraud too? Or maybe it was none of these and I just don't understand why you are asserting that Lehman's use of Repo 105 transactions was criminal while simultaneously reporting that the SEC couldn't even make a civil case.

    Just wondering. Thanks.

  6. Thanks very much Living Well in California - I was sure that the SEC does not have authority to bring criminal actions and your comment confirms it.

    I guess I should have gone directly to the SEC site for confirmation as you did.

    Well done and thanks again.

  7. Anon @ 7:21 AM Said:

    Are you saying the SEC is corrupt/incompetent/apathetic/under-resourced? Was Ernst & Young part of the fraud too?

    Yes and Yes.

  8. WSJ: Auditors Face Fraud Charge Dec 20, 2010
    New York Set to Allege Ernst & Young Stood By as Lehman Cooked Its Books

    From the article:

    The transactions in question, known as "window dressing," involve repurchase agreements, or repos, a form of short-term borrowing that allows banks to take bigger trading risks. Some banks have systematically lowered their repo debt at the ends of fiscal quarters, making it appear they were less risk-burdened than they actually were most of the time.

    Lehman Brothers dubbed transactions of this type "Repo 105." The maneuver came to light in March, when the bankruptcy examiner investigating the firm's collapse more than two years ago found that it moved some $50 billion in assets off its balance sheet. Lehman labeled those transactions as securities sales instead of loans, which led investors to believe the firm was financially healthier than it really was.

    The bankruptcy examiner's report and the attorney general's investigation found that Lehman Brothers carried out the Repo 105 transactions on a quarterly basis in 2007 and 2008 without telling investors. Mr. Cuomo's investigation found that Repo 105 transactions started as far back as 2001, said the person familiar with the probe.

    The attorney general's investigation, which began after the bankruptcy examiner's report, found that Ernst & Young specifically approved of Lehman's use of Repo 105 transactions and provided the investment bank with a complete audit opinion from 2001 through 2007, said the person.

    Mr. Cuomo's office has also been investigating suspected window-dressing transactions at other banks, said the person, and is probing whether they similarly misled investors.

  9. My main question is: Since "it is much easier to prove civil liability" and the SEC could not make a case, why do you think Lehman's Repo 105 transactions involved criminal misconduct?

    From your 11:02 comment, is your answer that the SEC simply failed due to corruption or incompetence or apathy or lack of resources?

    And not that I give a hoot about the auditors, but if no one makes a case against Lehman, it's going to be difficult to get the auditors.

    Finally, it appears that you've pretty much given up on presuming innocence until guilt has been proven? I'm not saying that standard is applicable to blogs, just noting that it's surely not being applied by you.

    Thanks for your response and the interesting blog post.

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  11. NEVER GOING TO HAPPEN. These people control congress. While backwater tea party freshman congressman from Dogpatch, Alabama debate DOMA, abortion, and where Obama was born, and the democrats counter, the former executives of Lehman, and the current executives of Goldman and all the others will continue to laugh at us through their assholes.

  12. [Scene from the 1960's classic movie "The Graduate"]

    "As a friend of your father, let me give you a kindly peice of advice: 'Plastics'."

    [Fast forward to Peak-Oil, financial collapse, post-tsunami Japan, USA of 2011]

    "As a friend of your father, let me give you a kindly peice of advice: 'Farming'."

  13. "It's a beautiful day in the neighborhood...
    a beautiful day for a neighbor...
    Would you be mine?...
    Won't you be mine?...
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    Indeed, Japan's nuclear problems may be spreading.

    There are currently 3 Japanese nuclear reactors experiencing meltdown, and 3 more in trouble.

    The Jet Propulsion Laboratory is forecasting a magnitude 8.0 aftershock, which could completely destroy the damaged reactors at the Fukushima facility

  14. The situation in Japan is spiraling out of control. Follow and zerohedge on twitter for live updates. Nikkei futures were down 16% at one point.

  15. I read that one of the legal loopholes through which the vermin crawled was the absence of intent. And that's curious.
    An ancient tenet of English Common Law is mens rea, or guilty knowledge. In itself it is a venerable legal principle that ought to be preserved. But in case after case prosecuted against companies and individuals the Feds suspend it in order to get a conviction. In effect destroying the lives of innocent people. They invoke the principle when it suits them, suspend it when it doesn't. The rule of men is alive and well.
    On this topic I recommend Harvey Silverglate's readable, entertaining and scary book, Three Felonies a Day.

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