Editorial

You know it's going to get good when LIESman says something like "there is a point in time when ignorance goes from being amusing to being dangerous" to a grizzled trader like Santelli.

Well, Liesman did, and.... (we'll do facts after the video)

Now for the facts:

Any government can pump stock prices of insolvent institutions for a while by allowing them to lie on their balance sheets.  The poster child for this is, of course, Lehman brothers.  I reproduce for your edification a chart showing two quarterly reports during which Lehman was arguably insolvent (light gray) and then (in pink) a further period of time spanning more than a month when their counterparties knew they had no cash, yet FRBNY and The Fed, including but not limited to FRBNY, Paulson, Geithner and every other bank they dealt with knew they had no money.  Yet their stock continued to trade, the company continued along, and Dick Fuld was on CNBS saying he was going to "burn the shorts."

What was the outcome Steve?  Was it "all ok in the end" even though for a period of more than six months the stock continued to trade and in fact after that first report went up significantly?

What caused the collapse?  They ran out of cash flow.

Now about those other large banks and their balance sheets....

As a corollary to the above governments can also pump markets generally by replacing private demand in GDP with borrowing and spending, just as you can by using your credit card even though your income has been cut off.  This can and does lead to huge market rallies - for a while.  However, unless you can manage to increase credit in the system generally, meaning that private parties "come back" and take over from government, eventually the government becomes unable to sustain such a practice, just as you become unable to sustain such a practice.  In point of fact the government has borrowed and spent ten percent of GDP (in addition to all that it was spending before) for the last two years.  This has prevented the recognition of an economic depression in the "statistics" put forward by government, but that replacement of private demand is not, in fact, private demand!  Thus you have unemployment and underemployment, even under the government's statistics (among those who want jobs), hovering near one person in five in the economy, and only 60% of the labor force is actually working.  The other 40% of working-age, non-institutionalized people, are not working - which means they're drawing on social programs of some sort.  This, of course, exacerbates the demand for the government to continue borrowing and spending that additional 10% of GDP.

What will cause this to collapse?  The same thing - recognition that the banks are in fact broke (and there are a bunch of them that are), inability to sell or roll over enough debt to satisfy the leaches in society, one of the rating agencies growing a pair of balls and downgrading the United States and more.  Indeed, a lockup in the credit markets could easily occur just as it did in 2008, and for the same reasons - a recognition that "heh that jackass over there has no good collateral!"

Can the government keep this from happening forever?  No.  

Can it do so for "an extended period of time"?  Sure, but for exactly how long?

That's the key, isn't it?  We're not running an 89% debt-to-GDP ratio, it's in fact over 500%.  We're lying just as Lehman was lying, but on a grander scale.  Yet when Rick Santelli brings this up, the pump monkeys go nuts.

Why?

Well gee, if you want to sell something to someone that is based on a fraudulent premise, how much luck will you have if the truth is exposed?

'Nuff said.

What a load of bull:

March 15 (Bloomberg) -- The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.

The governments of the two economies must balance bringing down their debt burdens without damaging growth by removing fiscal stimulus too quickly, Pierre Cailleteau, managing director of sovereign risk at Moody’s in London, said in a telephone interview.

I can tell you this - while I cannot predict what the UK will do, the US is not going to do jack about its deficits.

The CBO is always wrong - they estimate too positively about fiscal deficits.  They always have and always will, and they're projecting another $9 trillion by 2019 added to the debt.

The fact is this: The United States is borrowing and spending about 10% of GDP right now more than it was during Bush's administration.  This is clearly unsustainable and Moody's is well-aware of both that and the fact that it is not going to do jack.

If Moody's was an honest ratings agency it would take the government at its word.  The government has said (from their own budget!) that they will borrow and spend like mad.  That should be all that is required to take a ratings action - a statement of intent to destroy the sovereign balance sheet.

“The emphasis of the market, and our own, will move increasingly away from public finance developments in 2010, towards medium-term consolidation plans and the credibility thereof,” Moody’s said.

Achieving the fiscal consolidation necessary to avert a downgrade will test “social cohesion” and may involve rewriting the “social contract” between governments and their people, Cailleteau said. “People have to decide what level of pain they are willing to accept to have a healthy economy.”

Answer from our government: NONE.

This is nothing more than a jawbone as Moody's lacks the balls to do the right thing - which is to take action based on the printed and published budget of the Obama Administration - a budget that the CBO projects will more than double the public float over the next nine years, while at the same time Social Security will be trying to redeem their "special T-Bills" as they will be in deficit as well.

This line of BS reminds me of this (thanks to Widgeon on the forum for finding and sticking it in my face!)

The Jenner and Block report on Lehman just keeps on giving.

Today I am going to focus on FRBNY's culpability in the apparent Lehman fraud - that is, the role that FRBNY (and thus Tim Geithner) played in keeping an insolvent institution afloat through the use of fraudulent artifices.

We must look first to what the PDCF, or "primary dealer credit facility" was created to be.  The report does this for us:

Under the PDCF, the FRBNY would make collateralized loans to broker‐dealers, such as LBI, and in effect, act as a repo counterparty. Unlike a typical counterparty, though, with the creation of the PDCF, the FRBNY was generally understood by market participants to be the “lender of last resort to the broker‐dealers.”5332 Reflecting the fact that broker‐dealer liquidity had become increasingly dependent on overnight repos to obtain short‐term secured financing,5333 the PDCF was structured as an overnight facility.

Pursuant to the Federal Reserve Act’s requirement that a Federal Reserve Bank lend only on a secured basis, and according to the convention in repo lending, the FRBNY advanced funds against a schedule of collateral. Collateral accepted by the PDCF initially consisted of: Treasuries, government agency securities, mortgage‐backed securities issued or guaranteed by government agencies, and investment grade corporate, municipal, mortgage‐ and asset‐backed securities priced by clearing banks.5334

The FRBNY set the lending rate for PDCF advances equal to the rate charged by the Federal Reserve’s discount window, available to depository institutions.5335 In fact, the PDCF was frequently analogized to the traditional discount window, or viewed as expanding the discount window to securities broker-dealers.

In short, the PDCF was essentially an extension of the overnight repo market set up to deal with a very-specific circumstance - Bear Stearn's near collapse, despite having valid and good, market-recognized marginable collateral that could be posted for overnight repos.

The problem is, as I noted at the time, that broker/dealers used the PDCF not as it was intended and announced but rather as a scheme to post illiquid or even trash collateral that nobody else would take in exchange for liquidity - that is, cash.

Indeed, at the time I said:

These banks could take dogsqueeze, put it in a box and slap a $1 million price tag on it, and given the utter lack of prosecutorial supervision of the law - existing law - they'd get away with it literally forever.

They could then make loans against this "value" and yet what they actually hold is worth zero.

When they ran low on cash they'd then tender that dogcrap to The Fed for a TAF or PDCF loan, and that's ok too - our Congress simply doesn't give a damn as the hundred million dollars in bribes, er, "campaign contributions", insure that blatant violations of The Federal Reserve Act are not only tolerated but cheered whenever Wall Street needs more "slop" for its pigtrough - at your expense.

This was, at the time, an educated guess.  Now we know it was much more - it was fact:

It gets better.  Not only was Lehman aware that it was gaming the system it gamed public disclosure and FRBNY was aware what was going on:

So we have the company intentionally avoiding public disclosure of "a material event."  Securities laws are supposed to prevent this sort of thing - if they're enforced.

Did FRBNY know of this?  It sure looks that way:

But wait a second - that's not what the PDCF was intended to be.  So here's a clear statement that FRBNY knew that Lehman (and perhaps others) were in fact gaming the system and yet they did nothing about it.

Who ran FRBNY at the time?  None other than Tim Geithner.

It gets better.

Remember the "tests" of the PDCF from that time?  Those were lies too:

Lehman drew on the PDCF facility sparingly prior to its bankruptcy. Lehman accessed the PDCF seven times in the liquidity stress period that followed the Fed brokered sale of Bear Stearns to JPMorgan.5368 Both internally, and to third parties, Lehman characterized these draws as “tests,”5369 although witnesses from the FRBNY have stated that these were not strictly “tests,” but instances in which Lehman drew upon the facility for liquidity purposes.

And again, FRBNY and Tim Geithner allowed to be promulgated to the market false information about the character of the use of this facility.

Nor does it end there.  FRBNY and Tim Geithner appear to have countenanced and sat silent while Lehman deliberately and intentionally was counting assets that were encumbered in its liquidity numbers!  Specifically:

FRBNY, however, is both a regulator and a lender.  In addition the distinction may be immaterial; if you are a party to a violation of the law and do nothing about it, you can be held accountable as an accessory before or after the fact.  In this case these false statements by Lehman appear to be nothing more than a garden-variety fraud, and it certainly appears that Tim Geithner and FRBNY were both fully-aware of what was going on and intentionally said nothing.

The report makes clear that the market was misled, and relied on the misleading statements.  Specifically:

On the basis of Lehman’s reported liquidity pool, specifically its reported size and composition of easy‐to‐monetize assets, market participants formed positive opinions of Lehman’s liquidity profile. Certain influential participants, and rating agencies in particular, cited Lehman’s liquidity pool as the basis for concluding that Lehman’s liquidity position was sound.

...

“The basis for Moody’s assessment of Lehman’s liquidity,” the report continues, “is the strength of their overall funding framework, which includes an ample liquidity cushion of high-quality unencumbered assets."

While private parties may have no obligation to "rat out" misperceptions of the market, it is my position that a government agency or actor, irrespective of what other hats they wear, DOES have such an affirmative obligation.

The SEC has concluded:

Post earnings announcement on September 9[, 2008], Holdings’ liquidity decreased . . . from $41 billion to $25 billion – $16 billion of which was required by clearing banks at the start of the day and approximately $7 billion of which was in liquid securities that became near impossible to monetize immediately in this extremely stressed market environment -primarily because of a loss of repo capacity.

As a result, . . . ”free cash” available intra day was less than $2 billion.

With LBIE facing a projected cash shortage of $4.5 billion on September 15, Lehman had no choice but to place LBIE into administration because of potential director liability. This resulted in a cross‐default of and triggered the filing [of LBHI] on September 15.

In other words, essentially the entire liquidity pool was tied up in security agreements with various firms, and this was the proximate cause of the bankruptcy filing.

The paper makes a clear case that FRBNY was aware of both the encumbrance and Lehman's lack of disclosure of this fact to the investment community and did nothing about it.

Here is the bottom line folks: Tim Geithner, then-head of FRBNY, is responsible as the chief executive for everything that went on there.  Whether he had personal knowledge or not is immaterial, although it is extremely difficult to believe that he would not know about the most-important issue facing the markets in the summer and early fall of 2008.

The record is clear, however, that while the NY Fed knew that (1) Lehman was gaming the PDCF with assets that other banks refused to repo against (in fact Citi called one of them "garbage") and (2) it was encumbering its so-called "liquidity pool" with security agreements and as a consequence there was in fact no liquidity available FRBNY did nothing to alert the SEC or investors of this fact.

This paper appears to set forth several prima-facie cases of violations of Securities Laws, both on a civil and criminal level.

The further question, however, is whether culpability extends to both FRBNY and the banks with which Lehman was doing business with.  The paper also makes a prima-facie case that both FRBNY and these other banks were fully-aware of what Lehman was up to and intentionally looked the other way, deeming it "not their problem."

This, I believe, is false. 

I cannot have constructive or actual knowledge that you have the intention of robbing a bank (breaking the law) and yet drive you to the bank.  If I continue with assisting you in the furtherance of your scheme once I become aware of it I am subject to being charged as an accessory or even as a primary criminal actor in the case.

How is this different?

Further, how is it that we can have a Treasury Secretary who, it appears, had either full or constructive knowledge of the gaming that Lehman was undertaking and yet did nothing about it, leading directly and proximately to the market meltdown in 2008.

Literal trillions of dollars were lost due to this malfeasance and misfeasance, along with millions of jobs.  Yet one of the "watchdog" agencies involved in banking clearing and regulation knew about it, did nothing, and the head of that organization now runs Treasury.

It has been my contention that Geithner was largely responsible for willful blindness in the lead-up to this mess since it began.  We now have a "smoking gun" making a clear and nearly-impossible to refute case.

I call upon prosecutors both at a State and Federal level to look into this for potential prosecution under both civil and criminal Racketeering statutes, including their counterparty banks and FRBNY.

Tim Geithner must be fired by The President.  If he refuses, then following the election in November, when I fully expect that Republicans will re-take both the House and Senate, impeachment proceedings must be brought against President Obama for his willful and intentional refusal to remove the person who this paper makes clear could have put a stop to the collapse for nearly six months and yet failed to do so.

The Jenner and Block report on Lehman has of course brought out many comments about Lehman and its management, along with what appears to be clear culpability of both management and government actors.  I wrote about these factors and raised serious questions as well.

Today, however, I want to focus in a different direction.

It is rare that we learn the precise reasons behind a collapse in the markets.  What set people off in 1987, for instance?  We'll probably never know.  Nor do we know what the precise cause was of the 1929 crash.

The Jenner and Block report, however, lays out something very disturbing: As early as July 31st it appears Citibank knew that Lehman in fact had no cash - nor any liquid collateral to post for repo transactions.

Repo transactions are what makes the world go 'round.  They're the "oil" in the engine, so to speak.  When two financial parties have various trades they're settling for one another (as Citi was for Lehman in the FX markets) the posting collateral to obtain short-term cash is how one secures the clearing of these trades.  There's nothing magical about them, but without them the common, every day occurrence of transactions in the marketplace simply stops.

Specifically: