Wednesday, March 17, 2010

Repo 105: “Like, whatever”

Felix Salmon highlights comments by three former Lehman executives, originally quoted by Max Ableson:
It’s just not that big of an event… They just want to be mad and don’t know what they’re talking about and want to be outraged.”

“These firms clearly shop jurisdictions all the time for the most favorable rule set, and there’s nothing wrong with that.”

The only people who would worry about using an old trick to reduce leverage from 13.9 to 12.1, the second executive said, are “yappers who don’t know anything.”...

The idea, a year and a half after the biggest bankruptcy in American history began, is that criticism of the firm is the domain of unsophisticates. “When I read this, I giggle a little bit. Because $50 billion is a shitload of money, but in the grand scheme of things,” said a third source, a former managing director in England—where the accounting gimmick, named Repo 105, was given a legal endorsement that it couldn’t get here, “$50 billion is a drop in the ocean.”…

The former managing director in London said that Repo 105 was an open secret there, if it was a secret at all. “Yeah, yeah, yeah. In Europe, people just generically talk about it. It’s funny, for nonprofessionals, you can try to make it a smoking gun,” the source said, “I’m like, whatever.”
These thoughts fall in line a bit with my post, Why I Really Don't Care About Lehman's Repo 105

What I don't think the average guy on the street gets is that Wall Street and corporate America shop for absurd edges, whether it is accounting rules or tax rules.In the heyday of Citibank, under Walter Wriston, it was common knowledge among the elite that Wriston sat down every year with his top execs and decided how much Citi was going to pay in taxes. They then told the accountants, who figured out how to make the tax payment come out that way.

Focusing on this stuff in an attempt to change the regulations is just going to suffocate the little guy even more. The elite will already have loopholes built in, and some lawyer while sitting on the can and reading the reg will come up with even more. The only real solution is less regulation and free markets, where business compete for consumers instead of tyring to use government force to edge out competitors.

Salmon writes:
These shops deliberately go out to hire psychopaths, and then they fire the ones who go soft, while promoting the most aggressive assholes, keeping a few smooth-talking client-relationship types on hand to preserve some semblance of a respectable public face.
This in a sense is true, BUT that is only because that's what dealing in a highly regulated environment calls for.

Naively, Salmon goes on:
This is something that regulatory reform can’t even come close to addressing, unless it deals head-on with the question of compensation.
Does Salmon seriously think these characters won't figure out away around compensation regs?

The only way to shutdown these monsters is to shutdown the mother of monsters that allows them to survive, the Federal Reserve.  Without the capturing of the regulatory bodies, and  the Fed, by these guys, they are nothing. Who the hell would put money with them? Who would deal with any of them, Goldman Sachs and JPMorgan Chase, included? They would be out competed and bankrupt within hours, if regulator and Fed support wasn't there. In fact, that's exactly what happened to Lehman when Hank Paulson, as Treasury Secretary,  decided he didn't want Lehman in the club anymore.

Repo 105? Pfft.

As the former-Lehman exec says, it is a sideshow for the clueless yappers.

The real game is much bigger. And the big players don't mind anybody yapping about Repo 105.

1 comment:

  1. Bob -

    Exactly...repo schmepo -

    20 years ago it was MIPS (another off book hussle), then with Enron it was SIVs and SPCs.
    Each time, they pretend to swoon, go and create another layer of regulation and bureaucracy, and then game them...and then bust the game..and then swoon...and then create another layer..while snickering up their sleeves.

    It's political theater.

    Notice that Lehman didn't shove the illiquid assets into repo 105 until AFTER the market collapsed and mainly with the connivance and tacit acceptance of the government.

    No tears for Fuld, but in 2001, they weren't doing anything wrong with was only in 2008.
    It's like the CDS drama..sound and fury.

    This guy made stupid business decisions,and then compounded them with reckless and possible illegal behavior, like ALL the managers, but it's hard to make the case he stood out of criminality, when you look at the whole picture.

    Repo 105 is like the AIG bonuses - strictly a side-show.