NYT Muffs Merrill/Magnetar Piece (And Why is No One Investigating the Related Bonus Fraud?)
by ilene - August 10th, 2010 2:51 pm
NYT Muffs Merrill/Magnetar Piece (And Why is No One Investigating the Related Bonus Fraud?)
By Yves Smith and Tom Adams, an attorney and former monoline executive, at Naked Capitalism
Louise Story has penned what presents itself as an important story at the New York Times, one that charges Merrill Lynch with misrepresenting the size of its subprime, specifically, collateralized debt obligation exposures, in the runup to the global financial crisis. The ruse the article depicts is a CDO called Pyxis., which purportedly served as a dumping ground for exposures Merrill could not unload. Initially, Merrill was able to escape reporting these positions because it claimed to have hedged the risk. In fact, the hedges failed, the bank was ultimately on the hook and was later forced to ‘fess up to the magnitude of its holdings. This revelation sounds juicy in that Citigroup and some of its recent senior executives paid fines to the SEC for similar, albeit less convoluted-sounding, misconduct.
But in fact, the story is astonishingly incomplete, to the point of being misleading. While Merrill’s probable accounting improprieties are noteworthy and merit investigation by the authorities, they are not the most important element of this episode. CDO abuses amounted to accounting fraud to enable employees and executives to loot their companies. Moreover, they were not perpetrated by isolated actors, but were part of what Bill Black calls a criminogenic environment.
To put it more simply, if you think Merrill’s misrepresentations to investors are a big deal, they are only a small aspect of the bigger, and frustratingly largely untold, tale of the role of CDOs in the crisis. CDOs were the epicenter of the upheaval, the device that magnified a what otherwise would have been contained subprime bubble into an economy-wrecking meltdown. When the music stopped, it was the dealers themselves that wound up holding much of the toxic paper they’d created. AAA rated CDOs went from haircuts of 2-4% in early 2006 to 95% in later 2007. The collapse in CDO valuations and the resulting inability to use CDOs as collateral for repo was a major, if not the major, cause of dealer illiquidity and insolvency which resulted in massive bailouts and backdoor subsidies.
Accounts like Ms. Story’s are blind man and the elephant affairs: at best, they do a good enough job of depicting, say, the trunk, but leave the beast…
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Ratigan Deconstructs Goldman, Connecticut AG Blumental Wants Criminal Charges Filed
by ilene - April 16th, 2010 8:02 pm
Ratigan Deconstructs Goldman, Connecticut AG Blumental Wants Criminal Charges Filed
Courtesy of Tyler Durden
We expected Dylan to explode during today’s show. We were disappointed as he somehow managed to contain it, and did a pretty good recap of the Goldman affair (if a little too many matchbox cars on the show for our taste). The notable take home for us was that CT AG Blumenthal said that "criminal charges have to be pursued against Goldman." We are sure Cuomo is not too far from this line of thinking. And we would be remiss if we did not point out that credit has to be given where it is due: Gretchen Morgenson (whom half the blogosphere was bashing a month ago over semantics) and Louise Story broke the entire story 4 months ago, and the SEC complaint reads verbatim from the authors’ December 24 article.
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Investigation Begins Into E&Y's Role In Connection With Lehman's Repo 105 Scam
by ilene - April 13th, 2010 3:43 pm
Investigation Begins Into E&Y’s Role In Connection With Lehman’s Repo 105 Scam
Courtesy of Tyler Durden
Fox Business reports that the investigation around Lehman is intensifying. Surely the SEC, now generically equated with objects that float around in sewers in formal conversation, has realized it has to do something, anything, to find at least one scapegoat for the financial collapse. Which is why we read with little surprise Gasparino’s report that "thee SEC has ramped up its inquiry into Lehman’s fall, particularly after court-appointed bankruptcy examiner Anton Valukas issued a lengthy report stating that Lehman’s top executives were “grossly negligent” in possibly hiding the risky nature of the firm’s finances during its final day." What we find much more interesting is that "yet another investigative agency, the Public Accounting Oversight Board — created under the 1992 Sarbanes-Oxley law to investigate and discipline public accounting firms — has launched an inquiry into the role of Lehman’s auditor, Ernst & Young, following the examiner’s report, which accused the big accounting firm of “professional malpractice,” for its work in approving accounting techniques Lehman used during its dying days in the summer of 2008." In the absence of any Wall Street villains, which it is now all too clear have endless diplomatic immunity from prosecution by the corrupt regulators, will the auditor, together with Dick Fuld, be made into the sacrificial lambs? Or will we continue the farce that anything even remotely related to capital markets integrity and reporting is real and valid? Judging by the nearly 60 days of no S&P downticks, the market has answered that question for us.
More from Gasparino:
It was the use of one of those accounting techniques, known as Repo 105, which appears to be at the top of the list of investigators, people with knowledge of the inquiry say. The use of the accounting technique, which is designed to temporarily lower the amount of “leverage,” or borrowing a firm uses to stay afloat thus lowering its risk levels, isn’t necessarily illegal. In fact, Lehman sought and received a favorable opinion from Ernst & Young to use the technique in 2008.
But what might fall afoul of the securities laws, according to people close to the inquiry, is if Lehman turned to the gimmick in a concerted effort to hide its risk level. One person with knowledge of the inquiry say investigators
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW.