How insiders hid the mess on Wall Street
Two recent cases show how far Wall Street would go to hide toxic assets, says a U.S. advisory which continues to update its gold stocks.
Did this ever happen to you when you were a kid?
You broke something, so you thought, I’ll hide it and they’ll never find out what I did. The idea didn’t seem as dumb at the time as it does in retrospect.
They do the same thing on Wall Street (and at many other financial addresses). There’s one rather significant difference, though.
The kid’s act of desperation didn’t involve billions of dollars and the financial well-being of countless shareholders.
Recently, several cases have surfaced in which the authorities and big investment banks conspired to hide some nasty assets from the public eye.
These cases were sinister enough, says one U.S. advisory, to force one “to sit down and catch one’s breath.”
Review & Outlook, which is published by a Boston money management firm, gives us its take on these Wall Street manipulations.
Perhaps, it says, these revelations will push us further toward a new order in which banks will be forced to cut back on their trading activities.
But first, as we usually do with this advisory, we will get an update on the four precious metals stocks it holds, two from Canada, one from Australia and one international giant.
Exceedingly under valued
Gold bullion remains in a very narrow trading range at the moment, says the advisory. Ultimately, however, “prices should head considerably higher as unfortunately the global financial system remains very fragile.”
The advisory’s largest gold stock is international giant Newmont Mining (NYSE-NEM), which it considers “exceedingly under valued given the fundamentals of the business and their balance sheet strength.” The share price is now at $52.39 (a few dollars above its price a month ago) and yields about 0.8 per cent on its dividend of $0.40.
The advisory has been re-accumulating Canada’s IAMGOLD (TSX-IMG) at about 40 per cent below its highs of last fall “when it seemed to be on everyone’s buy list.” From its $21 peak in December, this gold stock is now trading at $15.24 and yields 0.4 per cent on its small $0.06 dividend.
The advisory still favours its two mid-cap producers, which have “excellent growth potential.” Canada’s Orvana Minerals Corp. (TSX-ORV) has held steady for several months and trades at $1.13. Australia’s Intrepid Mines (TSX/ASX-IAU) traded at $0.32 a month ago and is now at $0.37. Neither pays a dividend.
Trash-strewn back alley
Maiden Lane sounds like a tranquil byway in the countryside. In fact, “it is a gritty street in New York’s financial district located kitty-corner to the New York Federal Reserve Bank’s headquarters.”
It also became a convenient screen behind which the local Fed was able to hide some dirty dealings. The chairman of the New York Fed in May 2008 was Mr. Timothy Geitner, who currently holds the biggest financial job in Washington as Secretary of the Treasury.
Two years ago, Mr. Geitner stepped in to help J.P. Morgan purchase the failing investment bank Bear Stearns. The only problem was there was some broken crockery that Morgan didn’t want — a host of toxic assets.
So the Fed took them on. “It was illegal at the time for the Fed to buy collateralized debt obligations, mortgage-backed securities and the other exotic financial delicacies found on Bear Stearns’ books and in its off-balance sheet Special Investment Vehicles, or SIVs.”
No problem. The Fed created its own off-balance sheet SIV, loaned it about $28 billion, had it buy the Bear Stearns refuse, “and named the new organization after the trash-strewn back alley: Maiden Lane LLC.”
When insurance giant AIG was teetering on the brink of ruin, the process was repeated all over again. The Fed created Maiden Lanes II and III and lent it $48 billion to sop up $80 billion in toxic assets.
While the quantity of money tied up in the three Maiden Lanes was known from the outset, the nature of the assets was not, until Congressman Darrell Issa of California won his battle to compel the Fed to disclose the holdings of these three SIVs.
The bottom line: the “mark-to-market” value of the three Maiden Lanes is $15.3 billion below what the Fed spent to acquire the assets, and 66 per cent less than the value of all the securities.
The Case of Repo 105
“In case any of our dear readers and friends believe they have now heard it all,” says the advisory, “fasten your seat belts as the Maiden Lane events pale in comparison to those catalogued in what we refer to as the ‘Case of Repo 105,’ a story that involved Lehman Brothers, that now-famous defunct investment bank.”
This sleight-of-hand has been uncovered by Mr. Anton Valukas, a Chicago lawyer appointed special examiner to a bankruptcy court.
Lehman referred to the transactions in question as “Repo 105” and “Repo 108.” In them, it would remove securities from its balance sheet for seven to 10 days to create a materially misleading picture of the firm’s financial condition in late 2007 and 2008.
Lehman would swap certain of its assets for cash in the final days of each quarter, so that these assets would appear to be cash (and not dodgy securities). This swap would improve the company’s “leverage ratio,” protect its credit rating and project “an image of balance sheet strength totally incongruous with reality,” says the advisory.
The hidden assets would then magically reappear at the start of the new quarter. Lehman would borrow the necessary funds to repay the cash borrowed plus interest, repurchase the securities and restore them to the balance sheet.
Ultimately, of course, this magic trick failed and Lehman went bust. Mr. Valukas and others are now investigating whether or not this practice was in wider use. There’s plenty of evidence that it was, says the advisory.
Many investors have not yet recovered from the implosion of those once-hidden toxic assets. But many on Wall Street have.
There is another difference between the kid and the Wall Street bankers. When the kid was caught, he was punished.
|
E-mail this article
Printer-Friendly
