	Generational Dynamics
	Forecasting America's Destiny ... and the World's

\| HOME \| WEB LOG \| COUNTRY WIKI \| COMMENT \| FORUM \| DOWNLOADS \| ABOUT \|

Generational Dynamics Web Log for 13-Mar-2010
13-Mar-10 News - Will 'Repo 105' scam send Lehman management to jail?

Web Log - March, 2010

13-Mar-10 News - Will 'Repo 105' scam send Lehman management to jail?

Dozens killed in new terrorist attacks in Lahore, Pakistan

Terrorist bombings in Lahore, Pakistan, kill dozens

On Friday, seven terrorist bombings struck Lahore, Pakistan, killing almost 50 people, according to the Pakistan Times.

Lahore is in the far east of Pakistan, on the border with India, and is the heart of the Punjabs, a mostly Sunni Muslim ethnic group.

According to some analysts, the bombings are being set off Punjabi terrorists as a kind of "sympathy" terrorist act for terrorists in another Sunni ethnic group, the Punjabs. The Taliban of Afghanistan and western Pakistan are from the Punjab ethnic group.

There is a Shia Muslim ethnic group in Pakistan, namely the Sindhis of southern Pakistan. Historically, Shia and Sunni Muslims have tried to exterminate each other in a number of wars, and Hindus have historically been allied with Shia Muslims in these wars.

Possibly the bloodiest war of the 20th century was the war between Muslims and Hindus that followed Partition, the 1947 partitioning of the Indian subcontinent into Pakistan and India. Generational Dynamics predicts that that war will be re-fought.

Here's how Lehman Brothers' 'Repo 105' scam worked

I've read a number of articles on the Lehman bankruptcy report on Friday. As far as I can figure out, Lehman's "Repo 105" scam worked as follows:

Suppose that I have $100 billion in bad loans in my portfolio, and that I call them assets, even though they're really "toxic assets," which means that I'm stuck with them, unless I sell them for 20 cents on the dollar.
Ideally what I'd want to do is sell them to you, or to some sucker, who'll pay me $100 billion for the toxic assets. That would be great for me, because now I'd have cash in my portfolio, not toxic assets. That would be a SALE, and would make my balance sheet look a lot better.
Since there are no such suckers around, you and I make an agreement. I'll borrow $100 billion from you, and give you the toxic assets as collateral. In two weeks, I'll return $102 billion to you (original amount plus interest), and you'll return the toxic assets to me. This deal is a short-term collateralized LOAN, not a sale. It doesn't affect my balance sheet, because I still own the toxic assets, even though I've used them to borrow money.
A "Repo 105" transaction is the above LOAN transaction, set up in a convoluted way so that it can be declared as a SALE transaction under securities law. In some cases, this may be legal, but at best it's borderline.
Lehman Brothers did $50 billion in these short-term Repo 105 loans in Q2 of 2008, just before the company collapsed, according to FT Alphaville. So what's the big deal? Glad you asked.
The big deal is that these Repo 105 loans were done RIGHT AT THE END of the quarter, so that they appeared as a "sale" on the quarterly financial reports, even though the sales would be reversed a week later.
There's more. In order to pull off this scam, Lehman needed signoff from a law firm, but none of the Wall Street law firms they approached would sign off on it, saying that it violated American securities laws.
Soooooooooo ... Lehman did the deal through its London office, and got London's high class Linklaters (pronounced LINK-lay-ters) law firm, as well as the London office of accountancy firm Ernst & Young, to sign off on the deal, according to the London Times.

Lehman used these transactions to hide their financial problems until the day they declared bankruptcy. Thus, any investor who invested in Lehman in Q3 of 2008 was being defrauded.

It's incredibly sleazy, but is it illegal? I've been listening to financial pundits debate this question, and most of them say that CEO Richard Fuld, as well as other Lehman officials, would figure out a way to protect themselves, and avoid criminal convictions.

I disagree with this assessment, because it doesn't take into account changing moods. In the 1930s, bankers perpetrated the same sorts of sleaze, but it took a few years to send them to jail, as people got angrier and angrier.

The same thing is happening today, and banks charge 30% interest rates and use the money to pay themselves million dollar bonuses. The public is getting angrier and angrier, and the financial crisis is nowhere near its worst point yet.

Here's what I wrote in 2006: I have some advice for the economics experts, journalists, professors, investors, central bankers, pundits and politicians that have been telling us that everything is OK and getting better: You'd better have your underground bunker picked out, because people are going to be coming after you, and the guillotine is going to seem mild compared to the punishment that they're going to want to inflict on you.

The Lehman bankruptcy report is 2,200 pages long, and will serve as a roadmap for civil and criminal charges brought against many other financial executives who perpetrated Repo 105 scams and broke other laws.

The report was prepared by Anton R. Valukas, Chairman of Jenner & Block. You can find the entire report on their web site at http://lehmanreport.jenner.com/.

I heard one pundit on CNBC attempt to justify these scams by pointing out that Lehman management knew they were in trouble, so they had no choice but to "double down to save themselves, and hope for a run of good luck." The problem with that logic is that they're doubling down with other people's money. If you want to gamble with your own money, that's one thing, but when you gamble with other people's money, without their permission, then you're defrauding them.

Nobody believes that Lehman was the only bank using these and other scams to defraud investors. That's why so many banks had to be bailed out.

The important lesson from all this, as I pointed out yesterday, is that all of these practices are continuing today, and exactly the same people are perpetrating them. Your favorite bank or country could be close to bankruptcy, but you'd have no idea because the management is lying to everyone, and using accounting gimmicks like Repo 105. That means that your favorite bank or country could go bankrupt tomorrow, and there's no way you could even have any idea that it's coming, until it's too late.

New round of foreclosures threatens housing market

Seriously delinquent mortgages <font face=Arial size=-2>(Source: Washington Post)</font>

Seriously delinquent mortgages (Source: Washington Post)

Homeowners today with delinquent mortgages differ, for the most part, from those who were delinquent in 2008. Those consisted largely of holders of subprime mortgages, often people who couldn't make payments when their adjustable rate mortgages reset.

Today, most delinquent mortgage loan holders are people who have standard mortgages, but who have lost their jobs, according to the Washington Post. More than 75% of delinquent borrowers today have traditional prime loans. Many of them have not made any mortgage payment whatsoever in six months.

Thus, there are 5-7 million properties ready to hit the market. This is the "shadow inventory" that I've described in the past. (See "'Shadow inventory' of unsold homes continues to grow.")

Additional Links

In its strongest statement yet, Google will have to "bear the consequences" if it stops censoring search results on its Chinese web site. The implication is that Google will be forced to leave China. China Daily

In 2012, the US is scheduled to give "operational control" to a South Korean commander in the event of a war with North Korea. However, the South Koreans are seeking to postpone the transition, since they may not be ready. Asian Times

(Comments: For reader comments, questions and discussion, see the 13-Mar-10 News - Will 'Repo 105' scam send Lehman management to jail? thread of the Generational Dynamics forum. Comments may be posted anonymously.) (13-Mar-2010) Permanent Link
Receive daily World View columns by e-mail
Donate to Generational Dynamics via PayPal

Web Log Pages