Editor's Note - Bernanke's lies yesterday on Fed transparency pissed me off mightily, so we're republishing another case of Federal Reserve non-transparent corruption. Wait until you read this one. Audit the Fed anyone?!!!
This is a living, breathing advertisement for the need to have absolute transparency in all future Fed rescues. Geithner is the guilty party. His criminal transgression was aiding and abetting 'concealment of toxic assets.' The FRBNY helped Lehman disguise the true nature of its massively insolvent balance sheet, accepting a bundle of Lehman's worst assets, named Freedom CLO.
These were the same assets that Citigroup called 'junk' and said were 'impossible to value,' when refusing to accept them as collateral from Lehman. That didn't stop the New York Fed from accepting these assets in exchange for cash.
The rub for Geithner is the following: he knowingly allowed the largest and most important of the twelve Federal Reserve banks to be used as a "warehouse" for junk loans, even though guidelines say only investment grade bonds may be accepted. So Geithner violated the Fed's internal restrictions in order to help make Lehman look less insolvent.
Is anyone surprised. Just another reason our Treasury Secretary belongs in jail.
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The New York Fed Warehoused Junk Assets for Lehman
Source - Huff Po
As Lehman Brothers careened toward bankruptcy in 2008, the New York Federal Reserve Bank came to its rescue, sopping up junk loans that the investment bank couldn't sell in the market, according to a report from court-appointed examiner Anton R. Valukas.
The New York Fed, under the direction of now-Treasury Secretary Tim Geithner, knowingly allowed itself to be used as a "warehouse" for junk loans, the report says, even though Fed guidelines say it can only accept investment grade bonds.
Meanwhile, the Fed and Geithner both strongly oppose a congressional measure to authorize an independent audit of the central bank and its lending facilities. The provision passed the House but is under attack in the Senate, where Banking Committee Chairman Chris Dodd (D-Conn.) says he hopes to stop it.
Without an audit, the Fed is able to conceal the specifics of what it holds on its balance sheet. If the Lehman deal is any indication, the Fed is hiding billions of dollars in toxic loans on its books.
"The Fed legally is forbidden from taking such assets. There's a legal requirement that the Fed's assets be investment grade," Rep. Alan Grayson (D-Fla.) told HuffPost. Grayson, who is the cosponsor of the Grayson-Paul Audit the Fed measure that passed the House, said the Lehman scandal shows precisely why such an audit is needed.
"The net result of this is we know the Fed knowingly bought assets for more than they were worth -- substantially more than they were worth -- and actually created a market for garbage that Lehman was more than happy to push on the Fed because they regarded the public as the suckers of last resort," said Grayson.
A Fed spokesman told the New York Times that a "third party" valued the assets and found they met the standards. Yet the Fed, after accepting the assets, "reduced prices to limit the risk" -- an immediate concession that they were, in fact, over-priced. Otherwise, why reduce their price?
Continue reading Ryan Grim at the Huffington Post...
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The New York Fed and a CLO called Freedom
They were considered the dregs of — “bottom of the barrel,” as one banker put it.
But as Lehman executives tried to keep the floundering bank afloat in 2008, they used these troubled investments to raise quick cash that helped mask the extent of the firm’s troubles. And they did it with the help of the .
The newly released report on the collapse of Lehman Brothers — which lays out what it characterizes as “materially misleading” accounting at the bank — also 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 examiner, Anton R. Valukas, drew no conclusions about the transactions with the Fed, and focused instead on deals that were known inside Lehman as “Repo 105.”
But 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.
“Bernanke and Co. may have ‘saved the day’ ” a Lehman executive, Geoffrey Feldkamp, wrote in an e-mail message to a colleague in March 2008, according to the report. Neither , the chairman of the , nor officials saved Lehman, of course. But it was that month that the Fed started a special lending program open to Wall Street banks like Lehman that could not borrow directly from it. The Fed also lowered its standards for the kinds of collateral that it would accept against such short-term loans.
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 . Some suspect that other banks engaged in similar maneuvers.
“There were a number of tricks designed to make their balance sheet look stronger than it was,” said Janet Tavakoli, a structured finance analyst. “And they weren’t alone.”
A spokesman for the New York Fed said the loan facility was created to help the entire financial system and prevent the problems at one bank from cascading. The collateral accepted from Lehman met the Fed’s standards, he added. A third party valued it, the Fed accepted it and then reduced prices to limit the risk.
In March 2008, Lehman packaged 66 corporate loans to create the $2.8 billion Freedom CLO, which it planned to use exclusively for transactions with the Fed, the examiner’s report found.
The idea, according to a former Lehman trader familiar with Freedom, was to temporarily reduce the size of Lehman’s balance sheet. The Repo 105 transactions, according to the examiner, were created with a similar goal in mind.
The deals with the New York Fed let Lehman pledge Freedom — a mix of low-quality assets, plus some cash — in return for all cash from the Fed.
- According to the examiner’s report, New York Fed officials were aware that Lehman viewed the lending facility as an opportunity to finance a bundle of loans that it could not offload easily to a rival bank. In August 2008, Lehman tried to pledge Freedom CLO and similar investments as collateral for its trading positions with . A Citigroup executive rejected the offer as “junk” that was impossible to value, the report said.
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