Lehman Used Lehman As Collateral – What?

The level of audacious fraud on Wall Street should not be underestimated.

Zero Hedge brings us some insight into the latest investigative findings of the Lehman Bros. failure.

Tyler speaks to the portion of the report that shows how Lehman was backing their loan obligations:

At this point anyone who has even half a brain is feeling their front lobe liquefy. And in case one’s brain is still semi-solid, lets simplify – Lehman was pledging as collateral "assets" whose explicit worth was contingent on Lehman’s viability! Surely someone at Lehman brothers must have known about this. And the fact that they were so brazen as to suggest something that, as JPM rightfully concluded, was worthless in a catch 22 valuation, highlights the level of criminality and stupidity that serves at the backbone of what people assume is a sound and credible $3 trillion + shadow economy. This also means that should anyone ever delve into the collateral that banks hand off to each other in exchange for the tens of trillions in daily liquidity to gun the SPYs higher, they will find very little of actual value.

The report goes on to disclose that Lehman was also lying to its to its investors and creditors to the tune of 11.8 billion dollars.

Lehman told its creditors and investors it actually had a liquid asset pool (assets that could be quickly sold for hard cash) of 42 billion, but in actuality, 11.8 billion of that 42 billion were assets that were not liquid.  Most of that 11.8 billion was pledged as collateral on existing loans.

This is essentially accounting fraud.  A criminal misrepresentation of assets to investors and creditors.  It would be like taking out a home loan for a million, then turning around the next day and taking out another loan claiming the house as collateral.  Since the house is collateral on the existing loan, I would be criminally misrepresenting myself if I claimed I could use the house as collateral on a new loan.

This kind of nonsense goes on everyday in the criminal banking syndicates of Wall Street.

As Tyler points out:

Little did we know just how far the stench went, and that worthless assets (and we do mean worthless) are very likely the norm.

But of course, the criminality of the whole situation only gets more insane when the report goes on to disclose:

Although JPMorgan remained concerned that the CDOs were not acceptable collateral, Lehman informed JPMorgan that it had no other collateral to pledge.

Tyler writes:

So scratch what we said above. Lehman’s real liquidity pool was not $42 – $11.5 = $30.5 billion in Q3, it was bloody zero!

HAHAHA yeah boyeee!

Totally insolvent, no real assets, nothing but fake worthless derivatives paper.

BUT WAIT, THERE IS MORE!

The SEC is charged with ensuring banks “liquidity pools” are not a pile of fraudulent nonsense, as was the case with Lehman.  The report continues:

Eichner said that the SEC only “sampled” the CSE’s liquidity pools to ensure that the firms’ representations were accurate.  Eichner stated that this sampling was not statistically significant, and that he never received any report indicating that Lehman did not pass these sampling tests.  Eichner said that the SEC never had the opportunity to implement fully the steps set forth in the Liquidity Inspections Scope Memorandum because of the chaos surrounding Bear Stearns’ near collapse.  The SEC was aware in June 2008 that Lehman’s liquidity pool included a $2 billion “comfort” deposit at Citigroup.  The SEC staff viewed Lehman’s inclusion of that deposit in its liquidity pool as problematic, and discounted the value of the pool accordingly.  Nevertheless, there is no evidence that the SEC directed Lehman to remove the comfort deposit from its calculation of reported liquidity.  Eichner told the Examiner that “we applied a much different standard [for including assets in the liquidity pool] than anyone else,” and that the SEC “was very comfortable living with a world where the numbers in the public were the ones the firms worked out with their accountants.

Tyler writes:

In other words, the SEC was well aware that Lehman was materially misrepresenting the one most critical part of its financial situation to the entire world, and did nothing about it! The SEC should be disbanded for this gross, criminal negligence, and all of its senior executives sent into exile.

BUT LETS NOT LEAVE OUT THE CRIMINALLY NEGLIGENT FEDERAL RESERVE!

Report continues:


Bernanke said a “fundamental impediment” existed for Lehman: By mid-September, Lehman lacked not just “standard” collateral, but “any” collateral.

Tyler comments:

So the Fed was factually certain of Lehman’s insolvency in advance of the firm’s bankruptcy, and yet it did nothing to notify the SEC, or to remove Lehman from the tri-party repo system, where the firm was stuck for weeks after its bankruptcy, leaving JPM and Barclays to fight over the CCC-rated scraps of paper that were fundamentally collateralized with taxpayer money. What a shitshow.

Totally outrageous!

Not one federal agency did its job.  The SEC is criminally incompetent. The Fed is criminally negligent.  And the mega-banks didn’t give a flying crap because they knew that ultimately people like you and me would be paying for Lehman’s fraud with our tax dollars.

Praise Mao