Tuesday, March 16, 2010

Repo 105 is LEHMANGATE: Systematic Fraud and Geithner Knew About It

(Note: I'm going to post two parts to this post. I think it's important for all who are interested to really understand what happened, why and who's to blame. It's easier to eat an elephant one bite at a time).

You'll see that Geithner was unequivocally involved with knowledge about Repo 105, LEHMANGATE.  But the real question is, at what point in time did Obama know?  And if Obama did not know, then he's unworthy to be President because it means he lacks the political strength, depth and experience demanded by the job (what did he run before being elected?).  I believe we are watching another "Watergate" unfold.  The difference between then and now is that we may not have political leaders in Congress who are willing to do what's required to make the full truth known.

I finally spent some time dissecting exactly what Lehman did and how they got away with what they were doing. Let me say this: If all of Lehman's upper management PLUS the relevant Ernst&Young people PLUS the relevant people at the NY Fed - including Tim Geithner - do not do jail time over this, it's time to either start organizing a revolution or move out of the country. If these guys get away with this without serious legal and financial punishment, it is the clearest indication that our country is no longer held accountable by the Constitution OR Rule of Law in any respect. It means that full-scale mob-style criminality has invaded every aspect of our Banking, Corporate and Government systems, starting at the top with the White House and Congress.

Just to summarize briefly and coherently what Lehman did: Lehman engaged in repo transactions which, at the surface appeared to be standard repo maneuvers used by banks to raise short term financing by taking Treasury securities and sending them to a counterparty, who takes the Treasuries as collateral and gives Lehman cash to use on a short term basis - usually overnight to two weeks. Lehman then unwinds the repo by sending the cash plus a little more - representing interest paid on the transaction - back to the lending entity and the lender sends back the Treasury collateral back to Lehman. The transaction is accounted in a way which does not change any aspects of Lehman's balance sheet for accounting, regulatory and financial purposes.

What Lehman did is exploit a rule that says if Lehman sends collateral representing 105% of the cash they borrow, under accounting regulations, Lehman can account for the transaction as a "sale of securities" and use the cash taken in to repay other short term debt, making Lehman's balance sheet looking less leveraged - i.e. of much higher quality - to regulators and investors at the end of each quarter. As Lehman approached bankruptcy, it started including risky, worthless securities as part of the "repo" collateral package - toxic assets that Lehman could not get off its balance sheet at any price. Using this type of collateral is unconventional in the extreme and could NEVER be considered a "sale" of securities under any non-fraudulent accounting ruling. NEVER.

The Treaury collateral Repo 105 would be okay if it were done once or twice, but Lehman did it repeatedly and systematically every quarter since at least 2007. Anyone with an accounting 101 background from a good school knows that Ernst&Young should have raised a red flag and disallowed the treatment of the transaction as a "sale" the second time Lehman used it. Afterall, doing this once without reversing the transaction could for sure be considered a bona fide sale. Maybe even with the reversal (the unwind of the repo). But to engage in this systematically and serially every quarter would raise an objection over the accounting treatment as "sale" and any accounting firm doing its job properly and ethically would not sign off on the accounting treatment. This is especially true once Lehman started using toxic waste as collateral. Clearly pure manipulative fraud.

To think that E&Y did not know any better is to ask us to believe that the E&Y people either are complete idiots or do not know accounting rules. Stupidity and ignorance notwithstanding, we can only conclude this situation was pure nefarious intent to fraud in which E&Y participated. Remember Arthur Anderson/Enron if you think this is not probable.

In fact, just this morning, clusterstock.com has posted an article from Andrew Ross Sorkin who says that the SEC and the Federal Reserve Bank of NY (Tim Geithner's NY Fed) were all over Lehman during the heart of the "Repo 105" period (here's the link: Geithner knew about Repo 105).
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.
What this tells us is that not only are all of the Lehman's upper management AND the E&Y people involved are guilty of direct fraud and corruption, but that everyone from the NY Fed and the SEC who were involved either were complete idiots with respect to basic accounting rules and reguations (and should be fired immediately with no pension benefits) OR that they enabled the fraud to persist by looking the other way. This would include Tim Geithner, who should no longer be given the benefit of using the "I can't recall" or the "I had no idea" defense. He is clearly knee-deep in this. Geithner's motivation to look the other way would be to keep the market from seeing the extent of Lehman's insolvency.


For starters I would call on Obama to force Geithner to either resign from his Treasury position or outright fire him. Fool us twice - cheating on taxes and getting away with it plus his story about not knowing about AIG/Goldman - shame on us. Fool us again, time to impeach Obama unless he gets rid of Geithner immediately.


  1. nice overview...if you're not pissed, then you're not paying attention...Wait, I remember uttering the very same words when W was in office. Yep, "Change we can believe in"

    I've said it for a while, this whole financial unwinding has an Enron feel to it. The more you dig, the sicker you feel. And it's not exactly encouraging to realize that we've had nearly 10 years to prevent the financial disaster and couldn't. Gives me no confidence in the next piece of legislative attempt to fix the existing mess.

  2. thanks. the real question this raises is "what else is going on with Wall Street?" we know Goldman commits fraud everyday...

  3. Thanks.

    Ernst & Young will probably be the target of 1000 lawsuits.

    Timmy can play dumb. Its plausible in his case. lol

  4. LOL. I don't think Tim can play dumb this time if Congress/Cuomo really wants to nail him. There's just no way he didn't know what was going on.

  5. Time To Clean House . . . .
    Can OBAMA do the Right Thing ?
    I seriously Doubt IT !

  6. Nah, these guys are above the law, not because I think so, but because it's blatantly obvious by the failure to address even the bare minimum.

    You can thank the the W Bush coup for that.

    Mission Accomplished.

    Have you opened your eyes yet, America? Didn't think so.

    Meanwhile bonuses are up.

  7. This whole shannigan, and particularly all whom it involved from top to bottom should illustrate the gravity of the situation.

    ...and those of us suckers that work and save get punished. Only in the USA.