"How Bad Is the Lehman Bankruptcy Report for Geithner?"

[WhiskeyGirl]

If you're looking for a reader's guide to attorney Anton R. Valukas' report [pdf] on the bankruptcy of Lehman Brothers in September 2008, Yves Smith at Naked Capitalism has a quirky, erudite take that calls the cops on Secretary of the Treasury (then president of the Federal Reserve Bank of New York) Tim Geithner.

    And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets. If so, he is not fit to be Treasury secretary or hold any office related to financial supervision and should resign immediately.

...Geithner's main concern seems to be with preventing a panic over the diseased state of Lehman. Geithner not only acknowledges his efforts at concealment, but seems to believe they were the right thing to do:

    In addition to the losses Lehman would incur by selling “sticky” assets at firesale prices, deleveraging also raised the additional problems of market perception and valuation.3187 As Secretary Timothy Geithner explained to the Examiner, selling “sticky” assets at discounts could hurt Lehman by revealing to the market that Lehman “had a lot of air in [its] marks” and thereby further draining confidence in the valuation of the assets that remained on Lehman’s balance sheet.3188

The first sentence is drawn from a November interview between Geithner and Valukas, the second from "Reducing Systemic Risk In A Dynamic Financial System," a speech Geithner delivered in June 2008. To say dressing up Lehman's bleeding sores was wrong, you need to acknowledge that a central bank should not engage in the suppression of information, and I'm pretty sure we lost that argument a long time ago.

Smith suspects (not without reason) that this mission to regulate the market's feelings toward Lehman led Geithner to connive at what certainly looks to have been a fraud: the erroneous counting of "501 Repos" -- assets Lehman sold with an agreement to repurchase -- as straightforward sales. That is, the outside world thought these toxic assets were gone from Lehman's books, when in fact they were merely festering. Smith has some interesting words about whether, and why, Lehman counterparties went along with this charade. (Likeliest answer: They were all betting on the come like the rest of America.) Geithner, typically, says he would have caught the problem if only we'd given him more power:

    From 2003 to 2009, Treasury Secretary Timothy Geithner served as President of the Federal Reserve Bank of New York (“FRBNY”). The Examiner described to Secretary Geithner how Lehman used Repo 105 transactions to remove approximately $50 billion of liquid assets from the balance sheet at quarter‐end in 2008 and explained that this practice reduced Lehman’s net leverage. Secretary Geithner “did not recall being aware of” Lehman’s Repo 105 program, but stated: “If this had been a bank we were supervising, that [i.e., Lehman’s Repo 105 program] would have been a huge issue for the New York Fed.”3489

http://reason.com/blog/2010/03/12/how-bad-is-the-lehman-bankrupt

Why did taxpayers have to fund the bailout?  The AIG passthrough?

What are those 501 Repos and Repo 105 transactions exactly?

How many of them are there?

Who keeps the Federal Reserve honest?  The job rotation?

[WhiskeyGirl]

from the comments -

John|3.12.10 @ 12:44PM|#

If the CFO of a company hides the true financial state of that company in order to avoid stock prices going down, it is called securities fraud. Indeed, isn't that what the guys at World Com and Enron were guilty of? Geitner does the exact same thing here as President of the New York Fed. What about all of those investors who kept or worse yet bough Lehman stock in the summer and fall of 2008 who had no idea, thanks to Timmy, that the company was so sick? The guy is just a criminal.

R C Dean|3.12.10 @ 1:31PM|#

If Holder was AG for a thousand years, he'd never get around to prosecuting Geithner.

Tim Cavanaugh|3.12.10 @ 6:04PM|#

I agree, and I'm not defending him. The administration of justice has a lot to do with perception, and Geithner can apparently put off the reckoning forever just by talking about the Chaos and Armageddon and Meltdown and Great Depression On Steroids he and his council of cooler heads prevented.

resno dan |3.12.10 @ 12:46PM|#

"Speaking as somebody who believes Geithner must not only be removed from office but be imprisoned like Magneto in a metals-free environment where the will be no conductivity for his brain waves of pure bamboozlement.."
Thats pretty good! We need to use the word bamboozlement more often!!!

But I think Geithner thinks of himself as the Captin of the Titannic, who must not frighten the riff raff and orphans, lest they flee to the lifeboats, taking up space best reserved for banksters and Fed regulators

[WhiskeyGirl]

July 2008 timeline -

The FDIC estimated that its takeover of IndyMac would cost between $4 billion and $8 billion.

Pasadena, Calif.-based IndyMac Bancorp Inc., the holding company for IndyMac Bank, has been struggling to raise capital as the housing slump deepens.

IndyMac had $32.01 billion in assets as of March 31.

http://www.cbsnews.com/stories/2008/07/11/business/main4255066.shtml

The Whittier Daily News is reporting that The Federal Deposit Insurance Corp. has hired Lehman Brothers Holdings Inc. to devise a strategy to sell IndyMac or its separate parts.  “We don’t want to look like we are endorsing (Lehman Brothers), but because of the size and the complexity of this bank – it’s a $30 billion bank – we wanted to bring in an investment firm,” said FDIC spokesman David Barr regarding the decision to use New York-based Lehman Brothers.

The FDIC hiring Lehman is an interesting choice considering their history with IndyMac’s reverse mortgage subsidiary Financial Freedom.  Lehman purchased the reverse mortgage company in 2001 and sold the company three years later to IndyMac for around $80 million in cash.

Most analysts will agree that Financial Freedom is the most valuable asset the failed bank has, but it’s unclear how much companies are willing to pay for it.  Last year Genworth purchased Liberty Reverse Mortgage for $50 million but the terms of the most recent reverse mortgage acquisitions haven’t been disclosed.  The good news for IndyMac is that there are plenty of companies looking to enter the reverse mortgage business.  The bad? It’s doubtful they will receive anywhere near the $80 million they paid to acquire the company.

more here - http://reversemortgagedaily.com/2008/07/23/fdic-hires-lehman-brothers-to-sell-indymac-assets/

Note reverse mortgages are insured by Ginnie Mae, the little sister of Freddie and Fannie.

Fast forward to January 2009, OneWest

(Reuters) - The assets of failed U.S. mortgage lender IndyMac are being bought by a group of private equity and hedge fund firms, including Dune Capital Management and J.C. Flowers & Co, which are putting up $1.3 billion in cash.

http://www.reuters.com/article/idUSTRE5014DP20090103

How much did Lehman sell off?  What was Lehman's plan to sell off IndyMac?

Why did the plan change after Obama took office?

How much are taxpayers losing because of the Obama administration's change in plans?

Why did they choose to save Goldman Sachs and not Lehman?

Would the FDIC's plans to break up IndyMac have been cheaper for taxpayers?

[WhiskeyGirl]

And this is from Zero Hedge:

"Lehman has become merely the latest example of all that is broken with today's crony capitalist system.... The evident conclusion is that the core driver of modern capitalist society is fraud at its very core, and nothing short of a massive revolutionary overhaul of the political system, which is the number one defender .. of very lucrative bribes and kickbacks originating from the same rotten Wall Street that (is) nothing but a sham filled with toxic assets" Zero Hedge

This story isn't going away. Someone has to go to jail. It's clear that Geithner acted as the "chief facilitator" of industrial scale securities flim-flam which led directly to the Great Crash of '08. He needs to be held accountable for his actions.

http://www.marketoracle.co.uk/index.php?name=News&file=article&sid=17879

[WhiskeyGirl]

Geithner and Bernanke's Possibly Criminal Roles
Lehman Brothers Scandal Rocks the Fed

By MIKE WHITNEY

After a year-long investigation, court-appointed bank examiner Anton Valukas has produced a deadly 2,200 page report which details the activities that led to the Lehman Brothers bankruptcy. The report is a keg of dynamite. The question now is whether anyone in government has the nerve to light the fuse. Valukas provides powerful evidence that Lehman executives were involved in “balance sheet manipulation” by implementing an arcane accounting procedure called “Repo 105” which masked the bank's true financial condition from investors and regulators.

According to Valukas, Lehman was “Unable to find a United States law firm that would provide it with an opinion letter permitting the true sale accounting treatment" using Repo 105. So, Lehman executives went outside of the country in an effort to enlist the support of a London law firm that would approve the procedure.

It is impossible to overstate the significance of Valugas's findings. The report exposes the opaque but central role of the repo market which provides essential short-term loans for financial institutions. (Lehman used repos to conceal the full extent of its collapse, by dint of the amount of leverage it was using, meaning the pitiful asset anchor tethered to a vast zeppelin of debt) More importantly, it shows the cozy and, very probably criminal relationship between the country's main regulatory bodies and the Wall Street behemoths. The activities of the New York Fed (NYFRB), which at the time was headed by Timothy Geithner, is particularly suspect in this regard. The report should trigger an immediate Congressional investigation, probing the whole affair and most importantly the role of the Fed.

more here - http://www.counterpunch.org/whitney03152010.html