At Lehman, Watchdogs Saw It All

[BR_Parkway]

Almost two years ago to the day, a team of officials from the Securities and Exchange Commission and the Federal Reserve Bank of New York quietly moved into the headquarters of Lehman Brothers. They were provided desks, phones, computers — and access to all of Lehman’s books and records. At any given moment, there were as many as a dozen government officials buzzing around Lehman’s offices. These officials, whose work was kept under wraps at the time, were assigned by Timothy Geithner, then president of the New York Fed, and Christopher Cox, then the S.E.C. chairman, to monitor Lehman in light of the near collapse of Bear Stearns.

Similar teams from the S.E.C. and the Fed moved into the offices of Goldman Sachs, Morgan Stanley, Merrill Lynch and others.

There were plenty of reasons to send in these SWAT teams. With investors on edge about the veracity of valuations on Wall Street — and with hedge fund managers like David Einhorn publicly questioning Lehman’s numbers — the government examiners rifled through Lehman’s accounts. They also interviewed executives about various decisions, and previewed the quarterly earnings reports.

Yet now, two years later, we learn through a 2,200-page report from Lehman’s bankruptcy examiner, Anton R. Valukas, that the firm was taking a creative approach with its valuations and accounting.

One crucial move was to shift assets off its books at the end of each quarter in exchange for cash through a clever accounting maneuver, called Repo 105, to make its leverage levels look lower than they were. Then they would bring the assets back onto its balance sheet days after issuing its earnings report.

And where was the government while all this “materially misleading” accounting was going on? In the vernacular of teenage instant messaging, let’s just say they had a vantage point as good as POS (parent over shoulder).

http://www.nytimes.com/2010/03/16/business/16sorkin.html?pagewanted=print

What did Timmy know and when did he know it? This is going to be a huge scandal before it's all said and done. And just what is going on inside the rest of these banks?

[hobbit709]

1. They're all in cahoots.

[midnight]

2. True. And they must love the new consumer protection agency that they get

to run.

[BR_Parkway]

3. Seems almost like going back and giving immunity to them to put

the 'watchdog' under their roof.

Oh wait, I guess the telecoms were the precedent for that

[KharmaTrain]

4. A Generation Of Ineptitude

How does one "regulate" when you've been brought up in a culture of "deregulation" and not wanting to intervene or, even worse, not knowing how to do so. The SEC was totally defanged and things were fine and dandy as long as everyone was making money...who cared how it was made, just as long as it was made...everyone is happy. It's when the shit hit the fan that the SEC was exposed for being completely inept with no clue as to where its jurisdiction (if any was) and how to clamp down on those they learned to fear and avoid.

Think on this one...when was the last case of a major corporate investigation or prosecution from the SEC? I recall a proposed investigation back in the 90s involving the merger of several large broadcast corporations with tons of conflicts of interest. The SEC made some noise about wanting to "see the books", the corporate swamped them with reams of worthless numbers that tied them up for years and nothing was ever followed through.

It's not just Timmy...he's one of the clueless...coward as much as conflicted. The entire "regulatory" system had been beat down and made into a joke. The sad thing is our gridlocked government and administration is also full of those fearful of power or any "change" that could rock the boat.

[mopinko]

5. the other banks all passed their stress tests.

tim geitner is a villain around here, but the stress tests, and necessary private capitol infusions to pass them, did almost as much to stabilize the banking system as the tarp funds.
funny you don't hear too much about that, especially here.

[BR_Parkway]

6. Did they? First off, how many knew that Lehman failed the 3 tests

that Treasury came up with and only "passed" the stress test that they designed internally until the Valukus report came out last week?

So how do we know the others passed their stress tests? No argument on the capital infusions helping to stabilize things, but I have to wonder if they weren't induced to invest by fraud.

The banks are still carrying the 2nd mortgages on their books at nearly full value - yet the underlying assets are close to 30% underwater on their first mortgages. If the house isn't worth as much as the first lien on it, then the 2nd has to be pretty well worth zero. Any clue what the stress tests assumptions were for actually collecting on the 2nd liens?

How about the CRE market? How much is still showing on the books as solid value that, in reality is worth 20-40% less in today's market?

There's a reason they are fighting so hard not to let anyone outside audit the books and oversee their actions.

[unblock]

7. many companies (not just banks) do all sorts of things to dress up their quarterly statements

some of them are real business things, some of them are purely financial, and others are just accounting gimmickry.

the vast majority of these things are perfectly legal, and some of them actually have some business merit, though i'd say most of them don't. the classic example is changing payroll from 15th and last to 1st and 15th, i.e., delaying the last paycheck by one day. this doesn't really change the business very much at all, but the quarter you implement this, you only show 5 payroll cycles instead of 6, so your profitability goes way up. very handy if you would have posted a loss otherwise.

companies do lots of things to push expenses or revenue into one quarter or another. as long as there's high pressure around quarterly performance, and in particular, that the end of quarter snapshot is more important than the preceding 89 days, there's going to be plenty of gimmickry like this.

it takes strong regulation, oversight, and enforcement to curb the excesses in this area.