Jim Chanos on Lehman

Jim Chanos is famous for having seen the writing on the wall at Enron and WorldCom when most people were still buying stock in these now infamous fraud cases. He has recently been asked what he thinks about Lehman including whether he thinks Lehman was a criminal fraud, he says "I think it was." He goes on to say that he thinks the CEOs and CFOs of the firms involved in the financial collapse should be hiring criminal defense attorneys and that he's surprised they haven't been prosecuted already. Here is a link to the interview on video. An article talking about the interview can be seen here.

The latest news on the investment banks

If you're tuned into the news these days, you probably have heard today that the SEC has charged Goldman Sachs with fraud regarding the subprime mortgage fiasco that is blamed for the "great recession." Some observers are speculating that this fraud case could be as significant as Enron was. If so, I would expect Goldman's stock to tank over the next few days as a complete picture of the fraud comes to light.

As for now, here is what we know. Both the WSJ and the LA Times reports that Goldman was essentially passing profits to a hedge fund known as Paulson & Co. The LA Times article explains Goldman's fraud as follows:

The SEC's lawsuit alleges that Goldman did not tell investors in the securities that they were based on a portfolio of mortgage bonds selected by a hedge fund. The investment bank subsequently helped the hedge fund, Paulson & Co., place bets against the same bond portfolio, the suit says.

Meanwhile, earlier in the week, The NY Times reported that Lehman's accounting methods are looking shadier by the minute. In particular, the Times article explains:

In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books.

The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.

While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.

None of this was disclosed by Lehman, however.

I wonder which investment bank will be in the news for fraud tomorrow?

Lehman not the only firm using the repo markets to obscure risk levels

According to the WSJ, the Federal Reserve Bank of New York has released data showing that several major banks masked their risk levels over the past five quarters.  How did they do it?  Perhaps unsurprisingly, the banks were using repo transactions.

A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—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.

...

The data highlight the banks' levels of short-term financing in the repurchase, or "repo," market. Financial firms use cash from the loans to buy securities, then use the purchased securities as collateral for other loans, and buy more securities. The loans boost the firms' trading power, or "leverage," allowing them to make big trades without putting up big money. This amplifies gains—and losses, which were disastrous in 2008.

I am interested in seeing how disclosure of the repo transactions varied across these firms.  Assuming some firms were forthright in the effect that the repo transactions were having on their financial statements, did investors punish firms for being honest?  I wonder if industry analysts were aware of the practice, and if so, did they expect most/all firms in the industry to engage in such transactions, regardless of whether or not the transactions were disclosed?

Director Sought for Financial Reporting Fraud Resource Center

The PCAOB is looking for a director for its planned Financial Reporting Fraud Resource Center.  According to the Journal of Accountancy:

“The Center is intended to complement the work of the PCAOB in improving audit quality in this area, by identifying opportunities and incentives for fraudulent financial reporting,” Daniel L. Goelzer, the PCAOB’s acting chairman, said in a press release. “We believe the Center’s work will raise the awareness of the investing public, other regulators and interested parties of financial reporting fraud.”

According to the job listing, the PCAOB is searching for someone who, among other things, can monitor emerging fraud risks (financial and nonfinancial) and developments (geoeconomic and geopolitical) in domestic and foreign capital markets, industries and public companies and analyze and interpret financial trends, developments and anomalies to identify factors that may contribute to financial reporting fraud.

Scammers Taking Advantage of Confusion About Health Care Bill

According to an article by The Associated Press, scammers are trying to cash in on confusion about the new health care legislation. Given that wherever there is money, there is fraud, this doesn't surprise me. Scammers are about as consistent a creature as they come! Here are a few quotes:

Health and Human Services Sec. Kathleen Sebelius said Tuesday she is warning state officials about a proliferation of scams involving phony health insurance policies. ...

Some of the hustlers are going door to door claiming there's a limited open-enrollment period to buy health insurance now. But the big expansion of coverage won't come for another four years, and door-to-door salespeople are unlikely to be part of the plan then.

"Unfortunately, scam artists and criminals may be using the passage of these historic reforms as an opportunity to confuse and defraud the public," Sebelius wrote in a letter to state insurance commissioners and attorneys general.

"Enron: The Smartest Guys in The Room," to premiere on CNBC tonight

Tonight (April 1) at 9pm ET, CNBC will premiere a documentary on the Enron fraud.  The Enron story continues to be relevant, as the Supreme Court is currently reviewing former CEO Jeffrey Skilling's appeal.  You can find more info on the documentary here, and here is a preview:



Note: although this is a fraud blog where we frequently discuss deception, as far as I know, this is not an April Fool's joke.