Tuesday, December 21, 2010

NY case alleges Ernst & Young fraud as Lehman auditor

NY case alleges Ernst & Young fraud as Lehman auditor
Dec 21, 2010

New York prosecutors accused accounting firm Ernst & Young of helping to conceal Lehman Brothers Holdings Inc's financial problems before it collapsed in 2008.

The following are highlights from the civil fraud complaint filed by the office of New York Attorney General Andrew Cuomo in New York State Supreme Court:

- Ernst & Young approved Lehman's policy on Repo 105 transactions created in 2001 that allowed Lehman to park tens of billions of dollars of highly liquid fixed income securities with European banks for the sole purpose of reducing Lehman's balance sheet leverage.

- Senior Lehman personnel, including Kristine Smith, discussed the proposal with Kevin Reilly, the E&Y "engagement partner" in charge of E&Y's relationship with Lehman, and with E&Y partners William Schlich and Matthew Kurzweil.

- E&Y knew Lehman was treating the transfer of tens of billions of dollars of securities in Repo 105 transactions as "sales," not "loans" according to the complaint.

- Rather than expose this fraud E&Y year after year gave clean opinions on Lehman's financial statements even though they concealed massive Repo 105 transactions.

- In 2006, one of E&Y's auditors, Bharat Jain, became concerned about the heavy use of the Repo 105 transactions.

In a September 7, 2006, email to his senior manager, Jennifer Jackson, Jain noted that he would "like to know what is our thought process behind how much of these Lehman should do from reputational risk, etc. perspective. Are we comparing to other competitors, are we referring to any industry publications, any regulatory guidance, etc.?"

- In May 2008, E&Y was given a copy of a letter to senior financial executives at Lehman from Matthew Lee, an executive responsible for Lehman's global balance sheet, which raised serious questions about Lehman's financial statements.

- In June 2008, Lee told Schlich and another E&Y partner, Hillary Hansen, that Lehman was removing $50 billion in fixed income securities from its balance sheet each quarter by purporting to "sell them" to European counterparties.

-- Hansen raised concerns about Repo 105 with Schlich "who casually dismissed the concerns" by telling Hansen that they were being properly recorded as sales.

- In subsequent meetings about Lee's allegations, Repo 105 was not even mentioned even though E&Y had been instructed to tell Lehman's audit committee about Lee's concerns.

- E&Y misrepresented Lehman's compliance with applicable accounting standards, the complaint said.

- It said E&Y failed to challenge public statements by Lehman's management concerning the reductions in leverage that E&Y knew had been accomplished largely by the use of Repo 105 transactions.

(Compiled by Grant McCool; Editing by Gary Hill)

Tuesday, December 14, 2010

A Secretive Banking Elite Rules Trading in Derivatives

Daniel Singer runs a heating oil company in Elmsford, N.Y., and is a derivatives customer. In order to offer homeowners fixed-rate oil plans, he buys derivatives contracts. But since the trading system is not transparent, he can’t tell whether the prices he gets are fair or not.

A Secretive Banking Elite Rules Trading in Derivatives
New York Times
December 11, 2010

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.

In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.

The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.

Banks’ influence over this market, and over clearinghouses like the one this select group advises, has costly implications for businesses large and small, like Dan Singer’s home heating-oil company in Westchester County, north of New York City.

This fall, many of Mr. Singer’s customers purchased fixed-rate plans to lock in winter heating oil at around $3 a gallon. While that price was above the prevailing $2.80 a gallon then, the contracts will protect homeowners if bitterly cold weather pushes the price higher.

But Mr. Singer wonders if his company, Robison Oil, should be getting a better deal. He uses derivatives like swaps and options to create his fixed plans. But he has no idea how much lower his prices — and his customers’ prices — could be, he says, because banks don’t disclose fees associated with the derivatives...

Wednesday, December 8, 2010

U.S. Lays Out AIG Exit Plan

DECEMBER 8, 2010
U.S. Lays Out AIG Exit Plan
Treasury Looking to Unload $15 Billion of Its Shares in First Quarter of 2011
Wall Street Journal

American International Group Inc. on Wednesday entered into an agreement with the U.S. government that details, among other things, the rights the Treasury Department will have as it begins to sell its controlling stake in an accelerated exit plan.

The Treasury is aiming to sell at least $15 billion of its shares in the giant insurer in the first of a series of stock offerings starting in the first quarter of 2011, people familiar with the matter said.

Executing the share sales, which are expected to total over $60 billion over two years, will involve a careful balancing act that aims to disentangle the government from the company without destabilizing it. While Treasury wants to exit its ownership as quickly as possible, it doesn't want to get in the way if AIG needs to buttress its capital position or that of its insurance subsidiaries by selling shares.

Under the agreement released on Wednesday, the government will essentially be able to dictate the terms and frequency of AIG share sales until U.S. ownership drops below 33%...

Thursday, December 2, 2010

Madoff trustee files lawsuit against US banking giant JPMorgan Chase

Madoff Trustee Picard Sues JPMorgan
Fox Business
Dec. 2, 2010

The trustee for the victims of the multi-billion dollar Bernie Madoff Ponzi scheme filed a lawsuit against US banking giant JPMorgan Chase on Thursday, saying the bank enabled Madoff to conduct “massive fraud” against his victims.