Is the Fed Helping the Big Banks to Cook the Books?

April 15, 2010 by · Leave a Comment 

By Mike Whitney–Information clearing House

April 12, 2010 – On Friday, the Wall Street Journal revealed details of a cover up by the nations largest banks that have been engaged in potentially-criminal accounting activities to conceal the amount of debt on their balance sheets. The SEC has been notified of the allegations and has launched a probe to determine whether further action is needed. Among the banks implicated, are Goldman Sachs, JP Morgan, Bank of America, and Citigroup. According to the WSJ:

“Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York. A group of 18 banks….understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.” (“Big Banks Mask Risk Levels”, Kate Kelly, Tom McGinty, Dan Fitzpatrick, Wall Street Journal)

The article, titled “Big Banks Mask Risk Levels”, has set off alarm bells on Wall Street because of the similarity between Lehman Bros. “repo 105” transactions and these new signs of obfuscation by other large banks.  “Repo 105” is an arcane accounting device that Lehman used to hide $50 billion in debt off its balance sheet in an attempt to mislead investors about the true condition of its financial health. The WSJ story suggests that the practice may be more widespread than originally thought. The “repo 105” scandal is further complicated by suspicions that Lehman was assisted in its effort by the Federal Reserve Bank of New York which, at the time, was headed by Timothy Geithner. Here is a short recap of what transpired between the Geithner’s NY Fed and Lehman according to ex-regulator William Black and former NY governor Eliot Spitzer from an article on Huffington Post:

“The FRBNY knew that Lehman was engaged in smoke and mirrors designed to overstate its liquidity and, therefore, was unwilling to lend as much money to Lehman. The FRBNY did not, however, inform the SEC, the public, or the OTS (which regulated an S&L that Lehman owned) of what should have been viewed by all as ongoing misrepresentations.

The Fed’s behavior made it clear that officials didn’t believe they needed to do more with this information. The FRBNY remained willing to lend to an institution with misleading accounting and neither remedied the accounting nor notified other regulators who may have had the opportunity to do so…… We now know from Valukas and from former Treasury Secretary Paulson that the Treasury and the Fed knew that Lehman was massively overstating its on-book asset values.” (Time for the Truth”  William Black and Eliot Spitzer, Huffington Post) 

So the question is whether the NY Fed helped other banks conceal important financial information from investors, too. And–if that’s the case–then how can the public be confident that the biggest banks in the country are truly solvent?

According to the WSJ: “An official at the Federal Reserve Board noted that the Fed continuously monitors asset levels at the large bank-holding companies, but the financing activities captured in the New York Fed’s data fall under the purview of the Securities and Exchange Commission, which regulates brokerage firms.”
The Fed’s explanation is a tacit denial of its responsibility to regulate or report suspicious accounting practices to the appropriate agencies. The response is not just “buck passing”, but also suggests collusion . So far, there’s no clear link between the Fed and  the shady bookkeeping at the banks. But many now believe that–in the case of Lehman–the Fed acted as an “enabler”,  either by serving as a counterparty in repo 105 deals or by looking the other way while the transactions were executed.  Either way, the situation demands an independent investigation.

To put the WSJ article in context, it helps to review the details of the Lehman case. Here’s an excerpt from an article by Eric Dash in the NY Times:

“Newly released report on the collapse of Lehman Brothers … sheds surprising new light on Lehman’s dealings with the New York Fed. Lehman engaged in a series of transactions with the New York Fed that were similar to the ones that drew criticism from the bankruptcy court examiner who investigated its collapse….

The report by Mr. Valukas nonetheless raises fresh questions about the role of the New York Fed in supporting Lehman during the frantic months leading up to its collapse. It suggests that Lehman executives believed the Fed would be able to help the bank avert disaster and provide it with a business opportunity…

“Lehman, desperate for financing, seized its chance. It packaged billions of dollars of troubled corporate loans into an investment called Freedom CLO. Then, in a series of transactions, it shifted Freedom back and forth to the New York Fed, in exchange for cash. Those moves helped make Lehman look healthier.

“Essentially, Lehman was able to temporarily warehouse illiquid investments that were worrying its investors at the New York Fed in return for cash. The Fed created this facility immediately after the near collapse of Bear Stearns. Some suspect that other banks engaged in similar maneuvers. (“Fed Helped Bank Raise Cash Quickly”, Eric Dash, New York Times)

So why did “Lehman executives believe the Fed would be able to help the bank avert disaster and provide it with a business opportunity”? Most likely, because that had been standard operating procedure. The Fed was merely acting as it had before. Lehman used the repo market to amplify leverage to maximize profits, (the same as the other banks) and when they couldn’t find a counterparty to accept their garbage collateral, the Fed would step in and provide short-term loans and “warehouse” their toxic assets. In essence,  the Fed was helping to defraud  investors who believed the banks reports were accurate. Here’s Yves Smith at Naked Capitalism who sums it up perfectly:

“The NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations……at a minimum, the NY Fed helped perpetuate a fraud on investors and counterparties. This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large. “And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets.”  naked capitalism

So if the NY Fed had no moral qualms about its “repo 105” dealings with Lehman, than why would hesitate to do the same thing for the other banks?  Tyler Durden at Zero Hedge answers the question like this:

“We contend that Repo 105 type book-cooking and quarter end balance sheet window dressing was a prevalent phenomenon among all the banks. The fact that over the past two and a half years this resulted in a differential from the peak quarterly assets of over $65 billion is unbelievable, and the fact that this had slipped through the regulators’ fingers is inexcusable…..

We are confident that armed with this data, the SEC will be able to provide a prompt and logical response why the primary dealers have such a peculiar pattern in downshifting their assets toward quarter end, and much more relevantly, who the counterparties are that would consistently take the other side of these quarter end window-dressing trades.” (“Evidence That Primary Dealers Have Collectively Engaged In Repo 105 And Qtr-End Book Cooking Type Schemes For Years” zero hedge,  4-9-10)

Durden’s logic is flawless. If Lehman was being aided in it’s “book cooking” by the NY Fed, then the other banks were probably being helped, as well. It looks like Geithner left his fingerprints everywhere. 

If we add these new developments to the fact that the Financial Accounting Standards Board’s (FASB) “mark to market” rule has been suspended (allowing banks to arbitrarily assign whatever value they choose to the own illiquid assets) and, the fact that the Federal Reserve still refuses to allow an independent audit of the dodgy collateral it accepted from the banks in exchange for Treasuries and other loans; then it still looks like the banking system is either teetering or insolvent.

And don’t expect the Securities and Exchange Commission to get to the bottom of this either. SEC chairman Mary Schapiro is a proven financial industry loyalist who has no intention of upsetting her Wall Street overlords by digging too deep or issuing subpoenas. If she pursues the investigation at all, it will only be to placate the public and to apply liberal amounts of whitewash to the whole matter.

Biden/Obama Humiliated by Israel

March 18, 2010 by · Leave a Comment 

“Wiping the Spit Off Their Faces”

By Uri Avnery

March 15, 2010 “Information Clearing House” — SOME WEEKS the news is dominated by a single word. This week’s word was “timing”.

It’s all a matter of timing. The Government of Israel has insulted the Vice President of the United States, Joe Biden, one of the greatest “friends” of Israel (meaning: somebody totally subservient to AIPAC) and spat in the face of President Barack Obama. So what? It’s all a matter of timing.

If the government had announced the building of 1600 new housing units in East Jerusalem a day earlier, it would have been OK. If it had announced it three days later, it would have been wonderful. But doing it exactly when Joe Biden was about to have dinner with Bibi and Sarah’le – that was really bad timing.

The matter itself is not important. Another thousand housing units in East Jerusalem, or 10 thousand, or 100 thousand – what different does it make? The only thing that matters is the timing.

As the Frenchman said: It’s worse than criminal, it’s stupid.

THE WORD “stupid” also figured prominently this week, second only to “timing”.

Stupidity is an accepted phenomenon in politics. I would almost say: to succeed in politics, one needs a measure of stupidity. Voters don’t like politicians who are too intelligent. They make them feel inferior. A foolish politician, on the other hand, appears to be “one of the folks”.

History is full of acts of folly by politicians. Many books have been written about this. To my mind, the epitome of foolishness was achieved by the events that led to World War I, with its millions of victims, which broke out because of the accumulated stupidity of (in ascending order) Austrian, Russian, German, French and British politicians.

But even stupidity in politics has its limits. I have pondered this question for decades, and who knows, one day, when I grow up, I might write a doctoral thesis about it.

My thesis goes like this: In politics (as in other fields) foolish things happen regularly. But some of them are stopped in time, before they can lead to disaster, while others are not. It this accidental, or is there a rule?

My answer is: there certainly is a rule. It works like this: when somebody sets in motion an act of folly that runs counter to the spirit of the regime, it is stopped in its tracks. While it moves from one bureaucrat to another, somebody starts to wonder. Just a moment, this cannot be right! It is referred to higher authority, and soon enough somebody decides that it is a mistake.

On the other hand, when the act of folly is in line with the spirit of the regime, there are no brakes. When it moves from one bureaucrat to the next, it looks quite natural to both. No red light. No alarm bell. And so the folly rolls on to the bitter end.

I remember how this rule came to my mind the first time. In 1965, Habib Bourguiba, the president of Tunisia, took a bold step: he made a speech in the biggest refugee camp in Jericho, then under Jordanian rule, and called upon the Arabs to recognize Israel. This caused a huge scandal all over the Arab world.

Some time later, the correspondent of an Israeli paper reported that in a press conference at the UN headquarters, Bourguiba had called for the destruction of Israel. This sounded strange to me. I made inquiries, checked the protocol and found out that the opposite was true: the reporter had mistakenly turned a no into a yes.

How did this happen? If the journalist had erred in the opposite direction and reported, for example, that Gamal Abd-el-Nasser had called for the acceptance of Israel into the Arab League, the news would have been stopped at once. Every red light would have lit up. Someone would have called out: Hey, something strange here! Check again! But in the Bourguiba case nobody noticed the mistake, for what is more natural than an Arab leader calling for the destruction of Israel? No verification needed.

That’s what happened this week in Jerusalem. Every government official knows that the nationalist Prime Minister is pushing for the Judaization of East Jerusalem, that the extreme nationalist Minister of the Interior is even more eager, and that the super-nationalist Mayor of Jerusalem practically salivates when he imagines a Jewish quarter on the Temple Mount. So why should a bureaucrat postpone the confirmation of a new Jewish neighborhood in East Jerusalem? Just because of the visit of some American windbag?

Therefore, the timing is not important. It’s the matter itself that’s important.

DURING HIS last days in office, President Bill Clinton published a peace plan, in which he tried to make up for eight years of failure in this region and kowtowing to successive Israeli governments. The plan was comparatively reasonable, but included a ticking bomb.

About East Jerusalem, Clinton proposed that what is Jewish should be joined to the State of Israel and what is Arab should be joined to the state of Palestine. He assumed (rightly, I believe) that Yasser Arafat was ready for such a compromise, which would have joined some new Jewish neighborhoods in East Jerusalem to Israel. But Clinton was not wise enough to foresee the consequences of his proposal.

In practice, it was an open invitation to the Israeli government to speed up the establishment of new settlements in East Jerusalem, expecting them to become part of Israel. And indeed, since then successive Israeli governments have invested all available resources in this endeavor. Since money has no smell, every Jewish casino-owner in America and every Jewish brothel-keeper in Europe was invited to join the effort. The Biblical injunction – “Thou shalt not bring the hire of a whore, or the price of a dog, into the house of the Lord thy God, for any vow; for even both these are abomination unto the Lord thy God” (Deuteronomy 23:18) – was suspended for this holy cause.

Now the pace is speeded up even more. Because there is no more effective means of obstructing peace than building new settlements in East Jerusalem.

THAT IS clear to anyone who has dealings with this region. No peace without an independent Palestinian state, no Palestinian state without East Jerusalem. About this there is total unanimity among all Palestinians, from Fatah to Hamas, and between all Arabs, from Morocco to Iraq, and between all Muslims, from Nigeria to Iran.

There will be no peace without the Palestinian flag waving above the Haram al-Sharif, the holy shrines of Islam which we call the Temple Mount. That is an iron-clad rule. Arabs can compromise about the refugee problem, painful as it may be, and about the borders, also with much pain, and about security matters. But they cannot compromise about East Jerusalem becoming the capital of Palestine. All national and religious passions converge here.

Anyone who wants to wreck any chance for peace – it is here that he has to act. The settlers and their supporters, who know that any peace agreement would include the elimination of (at least) most settlements, have planned in the past (and probably are planning now) to blow up the mosques on the Temple Mount, hoping that this would cause a worldwide conflagration which would reduce to ashes the chances of peace once and for all. Less extreme people dream about the creeping ethnic cleansing of East Jerusalem by administrative chicanery, demolition of houses, denying means of livelihood and just making life in general miserable for Arabs. Moderate rightists just want to cover every empty square inch in East Jerusalem with Jewish neighborhoods. The aim is always the same.

THIS REALITY is, of course, well known to Obama and his advisors. In the beginning they believed, in their innocence, that they could sweet talk Netanyahu and Co. into stopping the building activity to facilitate the start of negotiations for the two-state solution. Very soon they learned that this was impossible without exerting massive pressure – and they were not prepared to do that.

After putting up a short and pitiful struggle, Obama gave in. He agreed to the deception of a “settlement freeze” in the West Bank. Now building is going on there with great enthusiasm, and the settlers are satisfied. They have completely stopped their demonstrations.

In Jerusalem there was not even a farcical attempt – Netanyahu just told Obama that he would go on building there (“as in Tel Aviv”), and Obama bowed his head. When Israeli officials announced a grandiose plan for building in “Ramat Shlomo” this week, they did not violate any undertaking. Only the matter of “timing” remained.

FOR JOE BIDEN, it was a matter of honor. For Mahmoud Abbas, it is a matter of survival.

Under intense pressure from the Americans and their agents, the rulers of the Arab countries, Abbas was obliged to agree to negotiations with the Netanyahu government – though only “proximity talks”, a euphemism for “distance talks”.

Clearly, nothing will come out of these talks except more humiliation for the Palestinians. Quite simply: anyone building in East Jerusalem and the West Bank is announcing in advance that there is no chance for an agreement. After all, no sane Israeli would invest billions in a territory he intends to turn over to the Palestinian state. A person who is eating a pizza is not negotiating about it in good faith.

Even at this late stage, Abbas and his people still hope that something good will come out of all this: the US will acknowledge that they are right and exert, at long last, real pressure on Israel to implement the two-state solution.

But Biden and Obama did not give much cause for hope. They wiped the spit off their faces and smiled politely.

As the saying goes: when you spit in the face of a weakling, he pretends that it is raining. Does this apply to the president of the most powerful country in the world?

Uri Avnery’s website http://www.avnery-news.co.il

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Security Without Freedoms

December 31, 2009 by · Leave a Comment 

By Paul Craig Roberts

December 22, 2009 “Information Clearing House” — Obama’s dwindling band of true believers has taken heart that their man has finally delivered on one of his many promises–the closing of the Guantanamo prison. But the prison is not being closed. It is being moved to Illinois, if the Republicans permit.

In truth, Obama has handed his supporters another defeat. Closing Guantanamo meant ceasing to hold people in violation of our legal principles of habeas corpus and due process and ceasing to torture them in violation of US and international laws.

All Obama would be doing would be moving 100 people, against whom the US government is unable to bring a case, from the prison in Guantanamo to a prison in Thomson, Illinois.

Are the residents of Thomson despondent that the US government has chosen their town as the site on which to continue its blatant violation of US legal principles? No, the residents are happy. It means jobs.

The hapless prisoners had a better chance of obtaining release from Guantanamo. Now the prisoners are up against two US senators, a US representative, a mayor, and a state governor who have a vested interest in the prisoners’ permanent detention in order to protect the new prison jobs in the hamlet devastated by unemployment.

Neither the public nor the media have ever shown any interest in how the detainees came to be incarcerated. Most of the detainees were unprotected people who were captured by Afghan war lords and sold to the Americans as “terrorists” in order to collect a proffered bounty. It was enough for the public and the media that the Defense Secretary at the time, Donald Rumsfeld, declared the Guantanamo detainees to be the “780 most dangerous people on earth.”

The vast majority have been released after years of abuse. The 100 who are slated to be removed to Illinois have apparently been so badly abused that the US government is afraid to release them because of the testimony the prisoners could give to human rights organizations and foreign media about their mistreatment.

Our British allies are showing more moral conscience than Americans are able to muster. Former PM Tony Blair, who provided cover for President Bush’s illegal invasion of Iraq, is being damned for his crimes by UK officialdom testifying before the Chilcot Inquiry.

The London Times on December 14 summed up the case against Blair in a headline: “Intoxicated by Power, Blair Tricked Us Into War.” Two days later the British First Post declared: “War Crime Case Against Tony Blair Now Rock-solid.” In an unguarded moment Blair let it slip that he favored a conspiracy for war regardless of the validity of the excuse [weapons of mass destruction] used to justify the invasion.

The movement to bring Blair to trial as a war criminal is gathering steam. Writing in the First Post Neil Clark reported: “There is widespread contempt for a man [Blair] who has made millions [his reward from the Bush regime] while Iraqis die in their hundreds of thousands due to the havoc unleashed by the illegal invasion, and who, with breathtaking arrogance, seems to regard himself as above the rules of international law.” Clark notes that the West’s practice of shipping Serbian and African leaders off to the War Crimes Tribunal, while exempting itself, is wearing thin.

In the US, of course, there is no such attempt to hold to account Bush, Cheney, Condi Rice, Rumsfeld, Wolfowitz, and the large number of war criminals that comprised the Bush Regime. Indeed, Obama, whom Republicans love to hate, has gone out of his way to protect the Bush cohort from being held accountable.

Here in Great Moral America we only hold accountable celebrities and politicians for their sexual indiscretions. Tiger Woods is paying a bigger price for his girlfriends than Bush or Cheney will ever pay for the deaths and ruined lives of millions of people. The consulting company, Accenture Plc, which based its marketing program on Tiger Woods, has removed Woods from its Web site. Gillette announced that the company is dropping Woods from its print and broadcast ads. AT&T says it is re-evaluating the company’s relationship with Woods.

Apparently, Americans regard sexual infidelity as far more serious than invading countries on the basis of false charges and deception, invasions that have caused the deaths and displacement of millions of innocent people. Remember, the House impeached President Clinton not for his war crimes in Serbia, but for lying about his affair with Monica Lewinsky.

Americans are more upset by Tiger Woods’ sexual affairs than they are by the Bush and Obama administrations’ destruction of US civil liberty. Americans don’t seem to mind that “their” government for the last 8 years has resorted to the detention practices of 1,000 years ago–simply grab a person and throw him into a dungeon forever without bringing charges and obtaining a conviction.

According to polls, Americans support torture, a violation of both US and international law, and Americans don’t mind that their government violates the Foreign Intelligence Surveillance Act and spies on them without obtaining warrants from a court. Apparently, the brave citizens of the “sole remaining superpower” are so afraid of terrorists that they are content to give up liberty for safety, an impossible feat.

With stunning insouciance, Americans have given up the rule of law that protected their liberty. The silence of law schools and bar associations indicates that the age of liberty has passed. In short, the American people support tyranny. And that’s where they are headed.

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