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Neil Garfield- Steps to Securitization

Neil Garfield- Steps to Securitization


Mr. Garfield is a GENIUS
CameronBaxterFilms09
March 26, 2010
A casual conversation about the mechanics of securitization with Neil Garfield MBA JD, Wall Street insider and former trial attorney. Neil is the editor of http://www.LivingLies.Wordpress.com, the leading internet resource on foreclosure defense. He explains how the major banks and Wall Street used securitization to bypass traditional regulatory guidelines, and why it is so difficult for judges, lawyers and borrowers to understand what happened. Neil has just released a 2-disk, 4-hour foreclosure defense DVD set – The Garfield Continuum: Seminar for Laymen. A version for attorneys follows shortly. The DVD and the accompanying Workbook can be purchased at http://www.LivingLies-store.com
[youtube=http://www.youtube.com/watch?v=d_02YPLYzMs]
Wells Fargo’s Attorney– “We are the HOLDER of THE NOTE!
Later the attorney stated “Excuse me, I MISSTATED…We are ONLY the SERVICER”
Mr. Garfield “At which point I gave the lawyer an elbow, and I said “That means WE DON’T HAVE A HOLDER OF THE NOTE in this court room.” 

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New York Fed Warehousing Junk Loans On Its Books: Examiner's Report

New York Fed Warehousing Junk Loans On Its Books: Examiner's Report


Ryan Grim 
ryan@huffingtonpost.com
| HuffPost Reporting                                                                                                                 First Posted: 03-22-10 01:12 PM   |   Updated: 03-22-10 04:34 PM

As Lehman Brothers careened toward bankruptcy in 2008, the New York Federal Reserve Bank came to its rescue, For once, Grayson and Fed Chairman Ben Bernanke are in agreement, to a point. A New York Fed spokesman directed HuffPost to congressional testimony Bernanke delivered last month. “While the emergency credit and liquidity facilities were important tools for implementing monetary policy during the crisis, we understand that the unusual nature of those facilities creates a special obligation to assure the Congress and the public of the integrity of their operation,” Bernanke said. “Accordingly, we would welcome a review by the GAO of the Federal Reserve’s management of all facilities created under emergency authorities.”

Just how far that review would go is the subject of debate in the Senate.

The Valukas report found clear evidence that the New York Fed knew that Lehman was sending it garbage that it had no intention to market. In other words, the baskets of assets were created for the specific purpose of selling to the Fed for far more than they were worth.

Lehman knew it too: “No intention to market” was scrawled on one of the internal presentations about the assets. A separate bank, Citigroup, later characterized the assets as “bottom of the barrel” and “junk” when Lehman tried to push them their way, according to the report.

If Lehman hadn’t gone bankrupt anyway, the public would have no knowledge of this backdoor bailout. “It’s just fortuitous that we found out about this through a bankruptcy proceeding and a trustee that was willing to allow and pay for some digging,” said Grayson. “Do we really just have to hope for the best, that whenever the Fed does something wrong, we might someday find out about it?”

Geithner himself was aware that there was a gap between what Lehman claimed the assets were worth and what they were really worth. “The challenge for the Government, and for troubled firms like Lehman, was to reduce risk exposure, and the act of reducing risk by selling assets could result in ‘collateral damage’ by demonstrating weakness and exposing air’ in the marks,” Geithner said, according to the report.

The assets, called “Freedom CLOs”, were sold to the Fed’s “Primary Dealer Credit Facility,” according to the report.

Lehman immediately recognized the value of what the Fed had set up. A day after the PDCF was announced, an internal Lehman analysis suggested that “the new ‘Primary Dealer Credit Facility’ is a LOT bigger deal than it is being played to be.” The facility could be a used as “as a warehouse for all types of collateral, we should have plenty of flexibility to structure and rethink CLO/CDO structures.”

It was a get-out-of-debt scheme and could “serve as a ‘warehouse’ for short term securities [b]acked by corporate loans [and] “MAY BE THE ‘EXIT STRATEGY’ FUNDING SOURCE WE NEED TO GET NEW COMPETITION IN THE CORPORATE LOAN MARKET,” according to the Lehman analysis.

But not one that Lehman felt like discussing with the public. “Given that the press has not focused (yet) on the Fed window in relation to the [Freedom] CLO, I’d suggest deleting the reference in the summary below,” CEO Dick Fuld wrote in an April 4, 2008 email uncovered by the report. “Press will be in attendance at the shareholder meeting and my concern is that volunteering this information would result in a story.”

Fuld has declared himself vindicated by the report.

The Fed won’t say how much more toxic “garbage” is in the Fed’s “warehouse” and that also concerns Grayson.

“The Fed’s balance sheet is a cartoon version of what’s actually inside,” said Grayson.
“We only get to basically do autopsies on the carcasses of the Fed’s failures, but what we don’t find out is when they show favoritism to companies that do not end up in bankruptcy.”

The Treasury didn’t immediately respond to a request for comment. Below is the relevant section of the report:

(c) In Addition to a Liquidity Backstop, Lehman Viewed the PDCF as an Outlet for Its Illiquid Positions
The PDCF not only provided Lehman with a ready response to those who speculated it would go the way of Bear Stearns, but also a potential vehicle to finance its illiquid corporate and real estate loans. A day after the PDCF became operational, Lehman personnel commented: “I think the new ‘Primary Dealer Credit Facility’ is a LOT bigger deal than it is being played to be . . . .” They mused that if Lehman could use the PDCF “as a warehouse for all types of collateral, we should have plenty of flexibility to structure and rethink CLO/CDO structures . . . .” Additionally, by viewing the PDCF as “available to serve as a ‘warehouse’ for short term securities [b]acked by corporate loans,” the facility “MAY BE THE ‘EXIT STRATEGY’ FUNDING SOURCE WE NEED TO GET NEW COMPETITION IN THE CORPORATE LOAN MARKET.”

Lehman did indeed create securitizations for the PDCF with a view toward treating the new facility as a “warehouse” for its illiquid leveraged loans. In March 2008, Lehman packaged 66 corporate loans to create the “Freedom CLO.” The transaction consisted of two tranches: a $2.26 billion senior note, priced at par, rated single A, and designed to be PDCF eligible, and an unrated $570 million equity tranche. The loans that Freedom “repackaged” included high?yield leveraged loans, which Lehman had difficulty moving off its books, and included unsecured loans to Countrywide Financial Corp.

Lehman did not intend to market its Freedom CLO, or other similar securitizations, to investors. Rather, Lehman created the CLOs exclusively to pledge to the PDCF. An internal presentation documenting the securitization process for Freedom and similar CLOs named “Spruce” and “Thalia,” noted that the “[r]epackage[d] portfolio of HY [high yield leveraged loans]” constituting the securitizations, “are not meant to be marketed.”

Handwriting from an unknown source underlines this sentence and notes at the margin: “No intention to market.”

Lehman may have also managed its disclosures to ensure that the public did not become aware that the CLOs were not created to be sold on the open market, but rather were intended solely to be pledged to the PDCF. An April 4, 2008 email containing edits to talking points concerning the Freedom CLO to be delivered by Fuld stated:

“Given that the press has not focused (yet) on the Fed window in relation to the [Freedom] CLO, I’d suggest deleting the reference in the summary below. Press will be in attendance at the shareholder meeting and my concern is that volunteering this information would result in a story.”

It is unclear, based solely on the e?mail, why a reference linking the FRBNY’s liquidity facility to the Freedom CLO was deleted. One explanation could be that Lehman did not want the public to learn that it had securitized illiquid loans exclusively to be pledged to the PDCF. Another reason may have been to hide the fact that Lehman needed to access the PDCF in the first place, given that accessing the securities dealers’ lender of last resort could have negative signaling implications.

The FRBNY was aware that Lehman viewed the PDCF not only as a liquidity backstop for financing quality assets, but also as a means to finance its illiquid assets. Describing a March 20, 2008 meeting between the FRBNY and Lehman’s senior management, FRBNY examiner Jan Voigts wrote that Lehman “intended to use the PDCF as both a backstop, and business opportunity.” With respect to the Freedom securitization in particular, Voigts wrote that Lehman saw the PDCF

as an opportunity to move illiquid assets into a securitization that would be PDCF eligible. They [Lehman] also noted they intended to create 2 or 3 additional PDCF eligible securitizations. We avoided comment on the securitization but noted the firm’s intention to use the PDCF as an opportunity to finance assets they could not finance elsewhere.

Thus, the FRBNY was aware that Lehman viewed the PDCF as an opportunity to finance its repackaged illiquid corporate loans. The Examiner’s investigation has not determined whether the FRBNY also understood that these Freedom-style securitizations were never intended for sale on the broader market.

In response to a question from FRBNY analyst Patricia Mosser on whether Voigts knew “if they [Lehman] intend to pledge to triparty or PDCF,”5359 Voigts replied that the Freedom CLO was “created with the PDCF in mind.”

According to internal Lehman documents, Lehman did in fact pledge the Freedom CLO to the PDCF. On three dates, March 24, 25 and 26, 2008, Lehman pledged the Freedom CLO to the FRBNY on an overnight basis, and received $2.13 billion for each transfer.5361 FRBNY discussions concerning the CLO’s underlying assets, however, took place on or around April 9, 20085362 — more than a week after the FRBNY began accepting the CLO.

 

UPDATE: Tyler Durden at Zero Hedge has been all over this scandal.

Get HuffPost Business On Twitter, Facebook, and Google Buzz! Know something we don’t? E-mail us at huffpostbiz@gmail.comsopping up junk loans that the investment bank couldn’t sell in the market, according to a report from court-appointed examiner Anton R. Valukas.

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Lehman Bankrutpcy: 'Repo 105,' Firm's 'Accounting Gimmick,' Was Like 'A Drug,' Emails Show

Lehman Bankrutpcy: 'Repo 105,' Firm's 'Accounting Gimmick,' Was Like 'A Drug,' Emails Show


Umm could we now say, we told you so?…Now on with Goldman and the rest of the dealers!

Huffington Post   |  Ryan McCarthy First Posted: 03-12-10 10:52 AM Dick Fuld

** UPDATE: Scroll down to see Dylan Ratigan’s segment **

The arcane “accounting gimmick” employed by Lehman Brothers as the firm failed in 2007 and 2008, was like “a drug” propelling the bank to conceal the true nature of its financial health, according to bankruptcy documents released yesterday.

As news organizations pore through the 2,200 pages of documents released by Anton Valukas, the examiner in charge of sifting through the most expensive bankruptcy in history, new details have surfaced about possible criminal actions by Lehman executives.

An executive referred to by Lehman execs as the firm’s “balance sheet” czar — who later went on to become the firm’s COO — likely had knowledge of the firm’s highly creative accounting maneuvers, notes The New York Times. Here’s the NYT:

“I am very aware … it is another drug we [are] on,” Herbert McDade wrote in an April 2008 e-mail cited by the examiner’s report. At other times, he is described as calling for a limit to the number of Repo 105 transactions.

At the center of the controversy is a technique called “Repo 105,” under which Lehman was able to move $50 billion off of its balance sheet in the second quarter of 2008 alone, MarketWatch reports. Here’s more from Market Watch:

[Repo 105 is] essentially a type of secured loan and is booked that way in the accounts — leading to an increase in both assets and liabilities. 

Lehman’s trick was to use a clause in the accounting rules to classify the deal as a sale, even though it was still obliged to repurchase the assets at a later date. That meant the assets disappeared from the balance sheet, and it could use the cash it received to temporarily pay down other liabilities…. [Repo 105] was crucial for maintaining the group’s credit rating as rating agencies and investors began to focus more on leverage and demanded lower risk.

In a series of e-mail messages cited by the examiner, one Lehman executive writes of Repo 105: “It’s basically window-dressing.” Another responds: “I see … so it’s legally do-able but doesn’t look good when we actually do it? Does the rest of the street do it? Also is that why we have so much BS [balance sheet] to Rates Europe?” The first executive replies: “Yes, No and yes. :)”

But these accounting techniques did not sit well with every Lehman executive. The Wall Street Journal passes along this nugget from the examiner’s report, which suggest that Ernst & Young, Lehman’s auditors, were not concerned about the firm’s use of Repo 105. Here’s the WSJ:

In May 2008, a Lehman Senior Vice President, Matthew Lee, wrote a letter to management alleging accounting improprieties;82 in the course of investigating the allegations, Ernst & Young was advised by Lee on June 12, 2008 that Lehman used $50 billion of Repo 105 transactions to temporarily move assets off balance sheet and quarter end.
The next day on June 13, 2008 Ernst & Young met with the Lehman Board Audit Committee but did not advise it about Lee’s assertions, despite an express direction from the Committee to advise on all allegations raised by Lee. Ernst & Young took virtually no action to investigate the Repo 105 allegations. Ernst & Young took no steps to question or challenge the non disclosure by Lehman of its use of $50 billion of temporary, off balance sheet transactions. Colorable claims exist that Ernst & Young did not meet professional standards, both in investigating Lee’s allegations and in connection with its audit and review of Lehman’s financial statements.”

 

NPR Marketplace reporter Alisa Roth said on Friday that it’s a “safe bet” that there will be “another big round of white-collar trials, like we had post-Enron.”

The question will be how far anybody can prove the responsibility extended. The report says “colorable claims” could be made against some Lehman execs and against Ernst & Young, the accountants. And by colorable claims, it means evidence that’s strong enough to potentially get a jury to award damages.

UPDATE: On Friday’s Dylan Ratigan Show, the MSNBC host delved into the Lehman saga with former New York Governor Eliot Spitzer, breaking down the firm’s fraudulent meltdown in easily-understandable terms.

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