Brian Rezny submits:

Author’s Disclosure: none

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By Charles Hugh Smith, OFTWOMINDS
The saying “never waste a crisis” was bandied about the body politic last year as if it actually had meaning; alas, the crises were all squandered to prop up a doomed status quo.

I am not being cavalier when I say that things falling apart is the first necessary step for renewal, growth and wisdom. The collapse of a business, career, marriage, government, project or dream offers a unique opportunity to free oneself of an impossible status quo or an impossible double-bind.

Up until the moment of acceptance of complete and utter bankruptcy (the insolvency of the enterprise, home purchase, project, marriage, etc.), the participants flay themselves to keep trying to save what cannot be saved and propping up what has become an impossible burden.

The acceptance of bankruptcy/insolvency is a moment of loss and liberation. We mourn the loss of all that work, all that hope and all those dreams, and then we look on the world with fresh eyes, sadder, wiser yet also more realistically hopeful.

If we have any stomach for self-reflection, then we can in hindsight see the critical errors of judgment, the flawed assumptions, the mission creep, the fatal over-reach, the unresolved conflicts, the inherent inadequacies of talent, experience and capital, the tight, desperate clinging of those with the most to lose to the status quo even as it collapses under its own weight.

Those who contributed little but gained the most complain most bitterly, chastizing those who carried the burdens for falling down; those who carried most of the burden find a freedom they had forgotten existed.

All that seemed essential has been lost–the marriage, the corner office, the fancy vehicle, the identity as a go-getter entrepreneur, the comaraderie of the office, the home of one’s own, the sense of mission and purpose, the small affections one feels for the familiar be it factory, desk, colleagues, tools and even the pathway to the front door.

And yet there is one gift left in the ruin and rubble–a new understanding of oneself and of one’s limitations, weaknesses and strengths. Yes, strengths. The flaws and weaknesses are always painfully visible, but in a fair appraisal of When Things Fall Apart, we come to see the strengths which were present but overwhelmed or misapplied to an impossible situation.

“Hope springs eternal” has two meanings When Things Fall Apart. Those struggling to save what cannot be saved keep trying, even as they know deep inside that the battle is lost and it is futile to continue; they are spurred on by guilt, obligation, duty, and a keenly desperate hope that miracles will arise and save the status quo from a collapse which was ontological (inherent) to its nature and structure.

The real miracle is the collapse. After the status quo has finally given way to the fiscal and political realities, then real hope begins. Not the false impossible hope for miracles, but the real miracles of self-knowledge, an integrated understanding of the inherent unsustainability of the status quo, and the learning which only springs from failure.

Failure is how we learn. What did you learn when every jump shot dropped (basketball analogy) and you won effortlessly? What did you learn when everyone seemed to want to gather round you while you basked in the limelight? What did you learn when your business took off from the very start? Very little.

Conversely, what did you learn When Things Fell Apart? Isn’t that when you really learned about over-reach, mission creep, internally unresolvable conflicts, dependence, self-delusion, convenient fantasies, the limits of experience, fighting the last war, lies, greed, avarice, and a hundred other insights and understandings?

We as a nation have completely and utterly squandered the inherently inevitable collapse of our failed, rotten-to-the-core financial system. At great expense to ourselves and future generations, the Powers That Be of both parties have propped up a morally corrupt, venal, destructive and impossible-to-sustain financial system.

Nothing has been learned, and those bearing the burden (we the taxpayers) have not been freed of our burdens–we have been enslaved with even greater burdens.

What should have been done–close the insolvent institutions of whatever size, repudiate their bad debts and liquidate their assets–was not done. Excuses were made, failure was hastily covered up and the public shouldered the fatal losses engineered by private greed, corruption and fraud.

As a result, nothing has been learned and all the heavily-hyped hope is false. We as a nation remain delusional and unenlightened. The status quo has been propped up at great cost in treasure and wisdom, and an honest hope for renewal and real progress has been lost.

The collapse of the status quo has just been pushed forward, and the speed and ferocity of that coming collapse have been dialed up to maximum. When Things Fall Apart it will not just be the financial status quo which implodes, but the status quo of housing, commercial real estate, healthcare and Defense.

We as a society have squandered a miraculous opportunity to learn, and our “leaders” have squandered the opportunity to lead in their craven surrender to the Power Elites and Protected Fiefdoms which have the most to lose from the inevitable Collapse.

The Powers That Be have tacked a few years onto the life of the status quo, at the cost of a greater collapse to come. The chickens of their lies, pervarications, propaganda, embezzlement, fraud and corruption will come home to roost in the 2011-2016 timeframe. The bag of accounting tricks, cover-ups and bail-outs is almost empty, but there may be enough “hope” and delusion left to sustain one more election cycle.

We as a nation will learn one thing: our “leadership” has failed, completely and utterly, and we will have to lead ourselves.

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More articles from Charles Hugh Smith….

Sounds insane. Your stockbroker rings you up with the name of a stock that “you just gotta buy.” Your obvious first question: “What’s it selling at? He tells you it’s about $43 a share. So you do your due diligence and discover the stock is already a big winner, having shot up more than 100% from its 52-week low of $20 a share. Why, you wonder, didn’t he call you when it was $20? What makes such a purchase seem even crazier is that further due diligence reveals the stock sold as low as $3.20 in 2008, meaning it has soared more than 15 fold in about two years.

Since everybody knows stocks don’t go up forever and the rule is you buy low and sell high, not vice-versa, you come to an obvious conclusion: Your broker is out of his mind, the inmates must surely be running the asylum on Wall Street, and, of course, you say nuts to the stock.

In this instance, though, maybe a hearty hello to the stock, rather than a fast, dismissive goodbye, might be a wiser investment strategy. So, at least, is the thinking of Morgan Stanley’s crack banking analyst, Betsy Graseck, who is strongly pitching the stock in question — bank biggie JPMorgan Chase & Co. In effect, she’s recommending purchase of the shares with an “overweight rating” despite their meteoric rise. The intrepid analyst, though, apparently has no trepidations because she figures it has the market muscle to balloon to $59 over the next 12 months, a gain of about 38% from current levels.

Why so gung-ho? For starters, Graseck is convinced we’re in the beginning stages of economic healing with powerful credit improvements coming in the banks. Further, as credit costs fade with credit card losses peaking, she expects per-share earnings to rise as delinquencies accelerate in the first quarter and non-performing loans decline meaningfully in the first half. In fact, Graseck expects JPM to be one of the first banks with materially declining NPLs, partly because of its low exposure to commercial real estate.

On the earnings front, Graseck is forecasting a 17% year-over-year gain in 2010, and over the next three years a whopping 130% increase, driven primarily by declining credit costs. Further, she expects accretion from JPM’s $1.9 billion acquisition of the Washington Mutual bank in September 2008 to boost earnings going forward. Likewise, JPM’s relatively stronger balance sheet should enable it to snare a bigger market share. Yet another plus: The bank could grow international investment banking from its already number one position (roughly 14%-15% of global IB fees).

In specific dollars and cents, the analyst pegs JPM’s per-share earnings at $3.02 this year, versus $2.58 last year, and $4.78 in 2011.

Graseck also takes note of several risks, namely the prospects of larger reserve hikes and higher credit losses than currently anticipated, as well as thinner net interest margins if rates fail to begin to rise in August as Morgan Stanley economists are currently forecasting.

She’s not alone in her risk concerns. JPM’s latest short interest — a bet that its stock price will fall — shows a short position of 25.7 million shares. Among the banking problems cited by one short seller are the prospects of substantially more writeoffs from bad loans, especially in commercial real estate, falling loan demand and the lack of lending. “Many investors,” he says, “seem to believe bank stocks are now money in the bank, but I wouldn’t bank on that because it’s really not clear the ill effects of the recession are almost over.”

Meredith Whitney, one of Wall Street’s leading bank trackers, also has some worries, having recently said she thought bank stocks were vulnerable to a 10%-15% decline.

As far as JPMorgan Chase goes, Graseck is obviously in love to push a stock that has already risen from the basement to the penthouse. She may be right, of course. But while I don’t want to mess around with the affairs of the heart, it’s worth keeping in mind that Wall Street love affairs are notorious for their short lifespan and bitter endings.

What do you think? E-mail me at Dandordan@aol.com

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By Karl Denninger, The Market Ticker

This is unbelievable:

The war over mark-to-market accounting is about to get hot, again. In coming weeks, the Financial Accounting Standards Board is likely to propose that banks expand their use of market values for financial assets such as loans, according to people familiar with the matter. That departs from current practices in which banks hold loans at their original cost and create a reserve based on their own view of potential losses. 

Let’s cut the pump-monkey crap and recall for everyone exactly how that “current practice” came to be, shall we?

Back last spring as I have written about more than once, the dishonorable Mr. Kanjorsky, Barney Frank’s stooge, held a hearing in which he basically put a gun to FASB’s head and informed them that they would allow banks to mark their loans to model – or Congress would introduce a law overriding FASB.

FASB objected, but it didn’t matter.  In the end they relented.

This was the catalyst for the huge rally in the stock market.  It was a declaration of legalized accounting fraud from the people who oversee financial accounting matters.

Now, a year later, after Barney Frank comes to realize that it was precisely this “gun up your butt” approach to financial regulation that has made all efforts to modify home loans (including cramdowns) worthless, we see some effort to change things.

Why does it make modifications worthless?  Simple – a second loan behind an underwater first (e.g. a HELOC) is worth zero if the first is underwater and forecloses.  That’s because it is a subordinate lien and is only entitled to be paid (at all) if the first is fully recovered.  In a case where the first is underwater, it won’t be recovered; ergo, the second is worth exactly nothing.

But “mark to fantasy”, otherwise known (by me anyway) as legalized accounting fraud, has these banks carrying the loan on their books at or near 100 cents on the dollar.  That’s because “the loss hasn’t happened yet”, so since they’re entitled to “model” a potential outcome 30 years in the future, they can say “well property prices won’t stay down for that long, so we don’t have to take the loss!”

It’s bogus of course as the odds of someone paying on an underwater loan for a decade are close to zero.  Anything that interrupts the borrower’s cash flow – a loss of job, a medical problem, or simply being tired of taking it in the cornhole month after month while they could buy a house across town for half the price – results in a foreclosure, because the property isn’t worth enough to sell and extinguish the mortgage.

Under mark-to-market rules banks had to price these loans at the current market’s appraisal of their worth.  Thus, as home prices declined and people were more and more underwater the market price would fall toward the zero that would be recovered if the foreclosure happened.  This would in turn make the foreclosure no more damaging to the bank balance sheet than not foreclosing, and thus, the market would tend to clear.

But no!  We can’t have that!  So instead we have this fantasy.  The consequence is banks letting people live in a house that they haven’t made a payment on in a year – and sometimes two.  Nobody cares if the loan is performing or not, because it was probably sold to some poor bastard and the servicer is advancing interest payments anyway!  Moody’s, S&P and Fitch keep downgrading these bonds in a furious fusillade, but nobody cares at the bank, because the bank doesn’t hold that paper – some fool pension fund does.

(What’s left unsaid there, of course, is that said pension fund might be getting their interest payments now, but they sure as hell will not get the principal at maturity – because it doesn’t exist.  What that will do to the pension funds is obvious, but heh, so long as the banks get to lie, it’s all ok that pensioners get screwed, right?)

What the bank holds is the HELOC and they are often the servicer as well.  They have a terrible conflict of interest in this regard because if they foreclose then the HELOC is worth nothing, and they take the full dollar hit right here and now.  If that was to be done across the board with these delinquent loans my analysis shows that many banks Tier 1 common equity levels would be forced below regulatory minimums and in some cases would be destroyed altogether.  The latter would force immediate FDIC seizure.   It is thus cheaper to advance the interest payment to the bondholder and pretend, even though the payments aren’t coming in, praying that somehow the borrower who hasn’t made a payment in a year will suddenly come up with $25,000 to “come current.”  (Yeah, right.)

Let me be absolutely crystal-clear – this is an outright scam promulgated by the same jackassery in The Government (SEC, Treasury and Congress) and The Fed that led to the destruction of Lehman.  Instead of forcing these institutions to take their marks and admit to their losses they were allowed to put forward abjectly false and misleading financial statements.  In the case of Lehman it appears the law was broken.  But in the case of the big banks today Congress got the rules changed by shoving a gun up FASB’s nose so as to make the INTENTIONAL false reporting of asset values a lawful act.

This should have absolutely never, ever happened and those dishonorable knaves in Congress responsible should resign NOW.

These banks should have been taken into receivership by the FDIC and closed.  We would still have the $3 trillion we have blown trying to prop up the economy - well more than enough to pay off the depositors when the assets were liquidated.  Deposits would have been dispersed to strong community banks, lending them further strength and ability to lend to qualified borrowers.  The scam-meisters on Wall Street would have lost their jobs and been closed down, we would have taken a horrific hit in the market but it would now be over and the economy would truly be on the mend.

Instead we lied and pretended, creating a false dawn and a market rally based on nothing more than a scam.  This cannot hold indefinitely, and yet the conditions for a true recovery in those asset prices will not happen for over a decade – if ever.  If we do not stop this insanity cash flow will force the issue eventually and by then The Government will have blown its wad furiously trying to replace 10% of GDP in the private market, as it has for the last two years, and thus be unable to fund the FDIC deficiency.

The simple fact of the matter is that as I have written about for over three years I absolutely believe that if valued on market prices these banks were insolvent then and are today.  Hiding the fact of that insolvency with bogus accounting fictions does nothing to solve the problems that face us and in chokes off lending, prevents markets (especially housing and commercial real estate) from clearing and will absolutely prevent any durable economic recovery from occurring.

Oh yes, it has pumped the stock market to the moon, but the test is not whether the stock market goes to the moon – it is whether the market price reasonably reflects underlying fundamental value, and there the evidence is clear – it does not.

The danger here from continued obfuscation could not be more grave.  We may have already passed the point where the government is capable of funding the deficiency to come in the FDIC accounts, but if we do not stop this crap, it is a certainty that such will occur, exactly as did in Iceland.

More articles from the Market Ticker….

Zero Hedge

Ultimately the biggest loser from the whole Repo 105 scandal may not be the perpetrators, i.e., Fuld, the firm’s numerous CFOs, Tim Geithner and Mary Schapiro, but the alleged “fact-checkers” – auditors Ernst & Young. Just like Enron’s Star Wars-based off balance sheet accounting gimmicks brought down Arthur Anderson, so “Repo 105″ may likely be responsible for the downfall of E&Y. Although while in Enron’s case, it was just the accounting that brought the firm down, in Lehman’s case the confluence of numerous factors will render each individual one relatively less critical, potentially to the point of irrelevance. And while book cooking was just as big of an issue for Lehman as it was for Enron, the fact that the bank did pretty much every other borderline illegal thing possible, will take away focus from just the Repo 105 fiasco, or just the liquidity misrepresentations, or just the commercial real estate book mismarking, and so forth. So to facilitate a decision on E&Y culpability, we present a candid look at Ernst & Young’s Financial Services Office, the company’s presentation on Paragraph 10 of IAS 39 overseeing Repo agreements, E&Ys analysis of FAS 140 “Accounting for Financial Transfers and Repurchase Financial Transactions”, the Examiner’s conclusions on the firm’s breach of conduct, the firm’s soon to be dwindling banking client base, and last, and most certainly least, a snapshot of E&Y’s Lehman co-lead partner, Hillary Hansen, against whose negligent actions, as part of the Lehman E&Y practice, the Examiner concludes “that sufficient evidence exists to support a colorable claim for malpractice.”

Follows a presentation of E&Y’s Financial Services Office.

In the United States, Ernst & Young LLP is the only public accounting firm with a separate business unit dedicated to the financial services marketplace. Created in 2000, the New York–based Financial Services Office today includes more than 3,300 professionals in more than 30 locations across the US, as well as in Bermuda, the Bahamas and the Cayman  Islands. Key offices throughout the US include Boston, Charlotte, Chicago, Dallas, Los Angeles, McLean, Minneapolis, New York, Philadelphia, San Francisco and Stamford. Our financial services professionals provide high-quality assurance, tax, transaction and advisory services, including operations, risk and technology, to our asset management, banking, capital markets and insurance clients.

In addition, Ernst & Young professionals in our financial services practices worldwide align with key global industry groups, including Ernst & Young’s Global Asset Management Center, Global Banking & Capital Markets Center and Global Insurance Center, which act as hubs for sharing industry-focused knowledge on current and emerging trends and  regulations in order to help our clients address key issues.

The group’s key contacts are listed in the attached presentation. Note the name of Bill Schlich, one of the two E&Y people named by the Examiner as responsible for the negligence colorable claim against the firm in the Lehman case.

E&Y was quite aware of the concept of traditional Repos, as can be ascertained by the following company presentation:

Furthermore, E&Y was certainly quite aware of the nuances of SFAS 140, the accounting board’s green light of what would, with Linklaters’ blessing shortly, become known as Repo 105. In essence, SFAS 140 is what allowed the accounting of repos as true sales. Some complications, as E&Y itself notes, arising from SFAS, are that “in saome cases it may not be possible for attorneys to provide true sale opinions under U.S. bankruptcy law when the transactions are combined and integrated.” The full E&Y SFAS 140-associated education session is presented below.

EY SFAS 140 Repo Alert

A brief tangent here, which goes toward disclosure. Surely the use of SFAS 140 in Lehman’s operations should have merited some mention in the firm’s public filings, which after all would need E&Y’s blessing. Yes and no. As the examiner points out, Lehman did not follow through on full disclosure requirements:

In a few of its financial statements, Lehman stated that “The Company accounts for transfers of financial assets in accordance with SFAS 140” and followed this statement with a summary of SFAS 140’s three criteria for recognizing the transfer of financial assets as sales (LBHI 10?Q, filed July 15, 2002), at p. 8; see also id. at p. 42 (discussing SFAS 140 in the context of securitizations and special purpose entities). In these instances where Lehman made the general disclosure regarding SFAS 140: (1) the SFAS 140 disclosure was listed under “Consolidation Accounting Policies” along with a disclosure regarding Special Purpose Entities or was part of a “Securitization activities” disclosure; (2) Lehman did not state that it treated some repo transactions as sales under SFAS 140; and (3) the financial statement contained other disclosure(s) stating that Lehman treats repo transactions as secured financings (i.e., not as sales) and/or regarding securities owned and pledged as collateral (as described above) (LBHI 10?Q (filed July 15, 2002), at pp. 8, 14; LBHI 10?Q (filed Oct. 15, 2002), at pp. 9?10, 17; LBHI 2002 10?K, at pp. 69, 71, 91; LBHI 10?Q (filed Oct. 15, 2003), at pp. 10?11, 12?13, 20; Lehman Brothers Holdings Inc., Quarterly Report as of Feb. 28, 2007 (Form 10?Q) (filed on Apr. 9, 2007), at pp. 11?12 (“LBHI 10?Q (filed Apr. 9, 2007)”); LBHI 10?Q (filed July 10, 2007), at pp. 11?12; LBHI 10?Q (filed Oct. 10, 2007), at pp. 11?12).

Back to E&Y – where things get really bleak for Ernst & Young is the following disclosure of a whistleblower arising from Lehman’s soon to be ashes, and E&Y’s treatment of his brand new information.

On May 16, 2008, Matthew Lee, then?Senior Vice President in the Finance Division responsible for Lehman’s Global Balance Sheet and Legal Entity Accounting, sent a letter to certain members of Lehman’s senior management identifying possible violations of Lehman’s Ethics Code related to accounting/balance sheet issues. Lehman involved Ernst & Young in its investigation of the concerns raised in Lee’s May 16, 2008 letter.

Subsequently, less than a month later, on June 12, 2008, Ernst & Young – Schlich and Hillary Hansen – interviewed Lee. Hansen’s notes of the interview reveal that Lee made certain statements to Ernst & Young about Lehman’s Repo 105 practice, including, most notably, the volume of Repo 105 activity that Lehman engaged in at quarter?end (May 31, 2008). Hansen’s notes specifically recount Lee’s allegation that Lehman moved $50 billion of inventory off its balance sheet at quarter?end through Repo 105 transactions and that these assets returned to the balance sheet approximately a week later.

To wit:

Hansen’s notes indicate that Lehman’s “Rates [and] Liquid Markets” businesses engaged in “Repo 105/Repo 108 [to] reduce[] assets by 50B [by] moving off B/S [i.e., balance sheet] in Europe & back in 5 days later.” Hillary Hansen, Ernst & Young, Handwritten Notes (June 12, 2008), at p. 1 [EY?LE?LBHIKEYPERS 5826869]. This is consistent with the Examiner’s conclusions that at quarter?end in second quarter 2008, Lehman reduced its balance sheet by slightly more than $50 billion through Repo 105 transactions.

Amusingly, while yesterday we discussed the interorganizational scapegoating, today we arrive at the intra-version. Bill Schlich, the partner named above, is quick to make thing Hansen’s fault.

When interviewed by the Examiner, Schlich did not recall Lee saying anything about Repo 105 transactions during that interview, although he did not dispute the authenticity of Hansen’s notes from the Lee interview. In spite of Hansen’s notes, Schlich maintained that Ernst & Young did not know that Lehman engaged in the following Repo 105 activity during the listed time periods: $49.1 billion at first quarter 2008 (Feb. 29, 2008); and $50.38 billion at second quarter 2008 (May 31, 2008).

Now Hillary Hansen, unwilling to be thrown under the bus without some token defense, also comes out with a scapegoating excuse. Left with little recourse, she blames incompetence.

During the Examiner’s interview of Hansen, Hansen recalled that while Ernst & Young questioned Lee about his May 16, 2008 letter, Lee “rattled off” a list of additional issues and concerns he held, one of which was Lehman’s use of Repo 105 transactions. Ernst & Young had no further conversations with Lee about Repo 105 transactions. Prior to her interview of Lee in June 2008, Hansen had heard the term Repo 105 “thrown around” but she did not know its meaning; according to Hansen, Schlich described Repo 105 transactions to her shortly after they met with Lee.

It is good to know that a head auditor on a top 5 investment bank was unfamiliar with its business practices, and the implications of SFAS 140, even though the firm, as presented above, was edumacating its partners about such things.

We are not sure, however, who Schlich and Hansen will be able to scapegoat this on. Full summary of key events follows:

On June 13, 2008 – the day after Lee informed Ernst & Young of the $50 billion in Repo 105 transactions that Lehman undertook at the end of the second quarter 2008 – Ernst & Young spoke to Lehman’s Audit Committee but did not inform the committee of Lee’s allegation, even though the Chairman of the Audit Committee had clearly stated that he wanted every allegation made by Lee – whether in Lee’s May 16 letter or during the course of the investigation – to be investigated. Ernst & Young met with the Audit Committee on July 8, 2008, to review the second quarter financial  statements and again did not mention Lee’s allegations regarding Repo 105. On July 22, 2008, Ernst & Young was also present when Beth Rudofker, Head of Corporate Audit, gave a presentation to the Audit Committee on the results of the investigation into Lee’s allegations.

 

Ernst & Young did not disclose to the Audit Committee – either during the meetings or in private executive sessions after – that Lee made an allegation related to Repo 105 transactions being used to move assets off Lehman’s balance sheet at quarter-end. Cruikshank told the Examiner that he would have expected to be told about Lee’s Repo 105 allegations. Similarly, Sir Gent told the Examiner that the alleged volume of Lehman’s Repo 105 transactions mandated disclosure to the Audit Committee as well as further investigation...Ernst & Young did not follow?up on either Lee’s allegations regarding Lehman’s Repo 105 activity or Reilly’s claim that he had no knowledge of Lehman’s alleged $50 billion Repo 105 usage figure. Ernst & Young signed a Report of Independent Registered Public Accounting Firm for Lehman’s second quarter 2008 Form 10?Q on July 10, 2008, less than four weeks after Schlich and Hansen interviewed Lee.

Not to beat a dead horse, but E&Y was at fault: as the Examiner points out:

Disclosure of the agreement to repurchase component of Repo 105 transactions was required in the MD&A. Lehman’s repurchase of the securities was a known event that was reasonably likely to occur and would have had a material effect on the company’s financial condition or results of operations. Lehman’s disclosure in the Liquidity and Capital Resources section should have included a discussion of what was known with respect to the timing and/or amounts of the cash flow created by the repayment of the Repo 105 cash borrowing in the first seven to ten days after quarter-end, specifically: (1) the availability of cash as a result of the repayment of the Repo 105 cash borrowing; (2) the ability to borrow more capital because of a reduction in debt rating or deterioration in leverage ratio due to the repayment of the Repo 105 cash borrowing; (3) the effect of the repayment of the Repo 105 cash borrowing on the cost of capital/credit rating; and (4) the economic substance and business purpose of the Repo 105 arrangements.

Indeed, there was a “duty to report”:

SEC Rule 12b?20 requires that all filings contain such additional information necessary to make the information contained in the filing not misleading. Moreover, “Once defendants choose to speak about their company, they undertake a duty to ‘speak truthfully and to make such additional disclosures as…necessary to avoid rendering the statements misleading.’”

And here is why the plaintiff bar is really hung over today. The lawsuits are coming:

An investor reviewing Lehman’s 2007 Form 10?K and two 2008 Forms 10?Q would not have been able to discern that Lehman was engaged in Repo 105 transactions. Indeed, Lehman made no disclosures in its Statement of Income, Statement of Financial Condition, Statement of Cash Flows, or MD&A sections (including its section on liquidity) from which an investor could infer that Lehman treated a certain volume of repo transactions as sales under SFAS 140, thereby decreasing its net assets and its net leverage ratio…In addition, even a sophisticated reader of Lehman’s financial statements would not have been able to ascertain from Lehman’s 2007 Form 10?K or its first and second quarter 2008 Forms 10?Q the amount of Lehman’s Repo 105 usage, nor even ascertain the fact that Lehman was engaged in these transactions, by attempting to quantify the amount of liquid securities temporarily removed from the balance sheet, as reported in Lehman’s public financial statements.

We sure hope that Fuld, O’Meara, Callan, Lowitt and all of E&Y are promtly depositing money in their legal representation singking fund:

The Examiner finds that sufficient evidence exists to support the finding of colorable claims against Richard Fuld, Christopher O’Meara, Erin Callan, and Ian Lowitt in connection with their actions in causing or allowing Lehman to file periodic reports that did not disclose Lehman’s use of Repo 105 transactions and against Ernst & Young for its failure to meet professional standards in connection with that lack of disclosure… While there were credible facts and arguments presented by each that may form the basis for a successful defense, the Examiner concluded that these possible defenses do not change the now final conclusion that there is sufficient evidence to support a finding that claims of breach of fiduciary duty exist against Fuld, O’Meara, Callan, and Lowitt and a colorable claim of professional malpractice exists against Ernst & Young.

And focusing again purely on E&Y:

The Examiner concludes that sufficient evidence exists to support colorable claims against Ernst & Young LLP (“Ernst & Young”) for professional malpractice arising from Ernst & Young’s failure to follow professional standards of care with respect to communications with Lehman’s Audit Committee, investigation of a whistleblower claim, and audits and reviews of Lehman’s public filings.

This surely can not be good news to E&Ys current batch of existing banking clients, which are US Bancorp, SunTrust, CapitalOne, Regions Financial, KeyCorp, Comerica, Cullen/Frost Bankers, and Zions Bancorp, among the largest ones. In fact, we anticipate that the termination letters are already in the mail.

Meet Hillary Hansen.

The weakest link in the above presentation is surely E&Y partner, and co-head of the Lehman account, Hillary Hansen. For all of you who would like to get a glimpse of this presumably tireless workhorse which was supposed to be working 24/7 figuring out what the hell was going on with Lehman’s books, you may be in for a disappointment. In this Fora TV presentation on the topic of “Women’s Networks Help Level the Playing Field” from January, 2009, we get a glimpse into Ms. Hansen’s busy lifestyle “I am a woman raising three small children, I commute from far away, I work home two days, usually I am not in on Fridays (laughter), I telecommute and often times I get asked how I fit it all together.” Oh yes, Ms. Hansen we are confident you will be getting that question and many others very soon. What we found hilarious is Ms. Hansen’s sentiment vis-a-vis her audit client Lehman Brothers. Fast forward to 17:15, where Hansen discloses that “We audit Lehman Brothers, UNFORTUNATELY.” Once again prophetic. However in the wrong direction. Something tells us that Lehman’s shareholders, despite knowing how great of a woman networker and a terrific partially-stay at home mom M.s Hansen may be, coupled with just how horrendous of an auditor, the lawsuits that are sure to follow will focus on the latter.

Full link of Hansen’s brief unspired monologue after the jump.

With all this information, we are confident that (again, with the assumption that we live in some semblance of a sane/ration world), E&Y’s Financial Services Office is done (even despite such ironically apropos warnings on the firm’s website as “Top six liquidity risk management challenges for global banks “), and quite possibly the entire firm. Integrity is the number one currency for an auditor, and just like Anderson, E&Y’s just went out in a puff of green-colored smoke. Then again, with America’s population broadly distracted by the healthcare debate, by the phantasmagorical market, and by mass scapegoating campaigns in which nobody seems intent on getting to the bottom of the responsibility chain, we will be very much unsurprised if nothing ends up happening, and the well-greased machine of endless corruption keeps chugging along as per usual.

And here, due to popular demand, is E&Y’s Global Code Of Conduct.

More articles from Zero Hedge….

By Charles Hugh Smith, OFTWOMINDS
The cliche will be wrong–bells will toll at the bottom in housing and stocks.

The Wall Street cliche is “they don’t ring a bell at the bottom,” meaning that there is no definitive signal that a market has truly hit bottom, as opposed to just another leg down in a longer slide.

Guessing that “the bottom is in” sets up another cliche, “catching a falling knife” which describes impatient speculators buying stocks or houses in the conviction that “the bottom is in” only to lose their shirts as the market continues its decline after a brief head-fake of “recovery.”

In the standard ideology of “investing” (code word for rampant speculation), it is “impossible” for bells to toll at the bottom because that would be too easy; the market famously trends in whatever way will cause the most loss and grief for the greatest number of participants/players. If a bell rang at the bottom, then everyone could jump in with low-risk certainty that the “bottom is in.”

But that’s only half the story. Let’s start by considering a number of things which are widely considered “impossible.” How about the notion that 4% of mortgage holders defaulting could trigger a collapse in the housing bubble?

Can 4% of Homeowners Sink the Entire Market? (February 21, 2007)

Oops, the “impossible” happened.

Here are a few other things currently considered “impossible” which seem not just likely but highly probable, if not guaranteed:

1. States will default on their bond, pension and entitlement obligations.

2. Pension funds will go broke.

3. Vast numbers of cities and counties will go bankrupt as the impossibility of raising taxes and meeting their soaring debt and pension obligations becomes obvious to all.

4. Commercial real estate will rival television as a “vast wasteland” of empty office towers, empty malls, empty strip malls, empty retail and empty warehouses.

So what’s the “other half of the story” in why the bells will toll at the bottom in stocks and housing? Simply this: nobody will want to buy stocks or houses even as the bells toll mournfully on, because the foundation beliefs which have propped up those markets for decades will be discredited and repudiated.

Those beliefs are:

1. That housing/real estate is the foundation of long-term wealth

2. That stocks/mutual funds beat other investment asset classes over the long haul.

What seems “impossible” now–that people will repudiate these core beliefs and turn in disgust from “the great opportunities in real estate and stocks”–will not only come to pass but it will mark a long “bottom” characterized by simmering anger at Wall Street and the real estate/lending industries for bankrupting everyone who “believed” that “housing never goes down,” “stocks are the best investment in the long run,” etc.

Right now our politics of experience is dominated by the stock market and housing. Every “news” website has stock market indices prominently displayed in their top-of-the-fold premium space, and every blip in the housing market is relentlessly hyped in blaring headlines–especially if it’s “good news” (foreclosures dipped 1%–the housing recovery is in full swing! Get in now! etc.)

Given that hype about the stock and housing markets is like the water we swim in, it seems “impossible” that a time will come when people either don’t care or the very sight of stocks and housing statistics will trigger disgust and revulsion.

This is what happens when the core belief in the goodness and light of housing and stocks is beaten out of a population by relentless, soul-destroying losses.

Here’s something else that’s currently considered “impossible” which seems highly probable to me, just based on history and human psychology: that stocks will trade at price-earnings ratios of 4 to 6, that dividends will exceed 10% because interest rates exceed 10%, and that houses will routinely sell for 10% or 20% of their bubble highs even in desirable areas. Houses in undesirable areas will have zero value except for scrap, and unfortunately most McMansions have little useable lumber or other materials, being largely constructed of wood chips, defective drywall, plastic piping, fake rock or brick, etc.

Stocks which sold for $40 a share today will trade for $1 or $2. Volume will be light because people will have given up playing the crooked shysters’ Wall Street games. The Dow Jones Industrial Average will trade around 1,000 (down from 10,600 today) and after years and years of shouting and screaming and hype about “the bargain of a lifetime” and “this is bottom, the market willl never go lower than 6,700 ever again in the entire history of humankind,” etc. etc. etc., people will have finally relinquished their core belief in the fairness, goodness and wonderfulness of stocks and housing as surefire pathways to wealth.

To those of you who consider these wild speculations, I recommend researching valuations in the depths of the Great Depression. Skyscrapers sold for the cost of their elevators. Nobody wanted houses or stocks because they were discredited and repudiated as stores of value and pathways to wealth.

At the bottom in stocks and housing, the bells will toll ceaselessly, but they will be ignored. People will only buy a house if it’s cheaper than renting and they have a large sum of disposable cash. The deep-seated notion that housing will appreciate and make the owner wealthy will have been discredited by reality. Nobody will buy for “appreciation” because that belief structure will have been destroyed. Housing will once again be shelter and an imperfect store of value. It will be valued for its “use-value” as shelter and the security of controlling a small parcel of land.

Wall Street will be gutted by one of two actions: people simply opted out, leaving the gangsters, fraudsters, crony “capitalists” and their politico enablers without money to play with/embezzle, or a great political uprising will have overwhelmed the bought-and-paid-for lackeys in Congress and a new political movement will have finally muzzled the ravenous blood-stained jackels of Wall Street, money-center banks and the socialist black holes of Fannie Mae, Freddie Mac, FHA, Ginnie Mae and all the other taxpayer-subsidized moneypits where wealth went to die.

Yes, it’s all “impossible,” just like the housing bubble popping was “impossible.” When you swim in a carefully manufactured politics of experience long enough, the most obscenely blatant hype and embezzlement become normalized. Only when you exit that poisoned water does all become illuminated and the “normal” discredited and repudiated.

There is more on this aspect of the politics of experience in Survival+: Structuring Prosperity for Yourself and the Nation and/or Survival+ The Primer.

Go to my main site at www.oftwominds.com/blog.html
for the full posts and archives.

More articles from Charles Hugh Smith….

“Fitch’s rating outlook for the U.S. banking sector remains negative, although many of the factors that put negative pressure on ratings are easing. We are pleased to offer a complimentary download of Fitch’s latest US Banking Quarterly, which includes individual comments on the top 24 banks rated by Fitch.”

Read more….

By Chris Carey, Bailout Sleuth

Regulators seized a New York bank on Thursday, in
a rare departure from the usual carefully coordinated Friday night closings.

The New York State Banking Department took over
LibertyPointe Bank and appointed the Federal Deposit Insurance Corp. as
receiver. The FDIC arranged for Valley National Bank to take over LibertyPointe’s
three branches, its $209.5 million in deposits and its $209.7 million in
assets.

Valley National paid a 0.5 percent premium for
the deposits, and entered into a loss-sharing deal with the government on $181.5
million of the assets.

LibertyPointe was based in New York City and was controlled by real estate
developer Shaya Boymelgreen. It had long been on the FDIC’s list of troubled
institutions.

Regulators issued a cease-and-desist order against the bank last
July, citing a high concentration of commercial real estate loans, excessive
delinquencies and inadequate provisions for loan losses.

Last October, the bank was given 30 days to
raise additional capital to strengthen its financial position.

The FDIC estimated that LibertyPointe’s failure would
cost its deposit insurance fund $24.8 million.

LibertyPointe was the 27th bank to fail so far this year.

More articles from the Bailout Sleuth….

Hat tip to DollarCollapse for the link to the EconomicRot.

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embed from "Elizabeth Warren (with Charlie Rose) on Commercial Real Estate"

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Commercial real estate lending has tentatively started to flow, but as any building owner will attest, credit isn’t easy to obtain and the onslaught of maturing commercial mortgages is chipping away at the confidence of investors. The challenges to…

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