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.

Why I Really Don't Care About Lehman's Repo 105

The financial media from blogger to mainstream has found something they all want to focus on, Lehman's use of a dodgy accounting technique that Lehman called "Repo 105's". Lehman's use of this accounting gimmick was first brought to light by Lehman's bankruptcy examiner, Anton Valukas, in his 2,200 page report. NYT explains a Repo 105 here.

The problem with this focus is that it is a great misdirection. It takes the focus away from the Federal Reserve, which was the core factor in the financial crisis. Without Federal Reserve money printing, the financial crisis would not have happened.

Yes, Repo 105 is a stretch of accounting standards beyond stretches, and should be debated and discussed by accountants whenever they have conventions, but that should be the beginning an end.

What I am waiting for is an Anton Valukas 5,500 page report on what is going on at the Fed.