Authorities Starting to Close In

One reason why the crisis that began to unfold in the spring of last year was inevitable -- and why it continues to worsen, contrary to the opinion of so-called "experts" (e.g., highly-paid Wall Street "strategists") -- was because a gargantuan house of cards rested on models, assumptions, and values that were, for the most part, baseless.

It was hard for the man on the street to know this, of course, because thoroughly-conflicted insiders, clueless academics, corrupt politicians, toothless regulators and various industry shills were running around claiming that they knew what was going on and that everything was on the up-and-up.

In reality, not only were they unaware of the many inherent flaws of this Wall Street-sanctioned Ponzi scheme, it has become become increasingly apparent that some of these operators had a role in helping to perpetuate the fraud. Based on the following report from Bloomberg, "'Large Number' of Banks Mis-Marked Assets, U.K. Regulator Says," it looks like the authorities are starting to close in on the miscreants (better late than never?).

Incorrect securities pricing found at Credit Suisse Group AG, Morgan Stanley and Lehman Brothers Holdings Inc. is more widespread and will be investigated, the U.K.'s financial regulator said today.

The Financial Services Authority said it will begin the probe next year after finding that securities valuations at a "large number" of London banks were "materially flawed or inadequate," the agency said. The problems may worsen if banks fire compliance and risk officers, the FSA said.

"We recommend that you consider carefully any headcount reduction exercises that will affect valuation-control functions at this sensitive time," FSA Chief Executive Officer Hector Sants wrote in a letter to CEOs last week and made public today.

Incorrect pricing on London trading desks has contributed to $2.8 billion of writedowns. The FSA letter comes a week after the U.K. operations of Credit Suisse, Switzerland's second-largest bank, was fined 5.6 million pounds ($10.6 million) for failing to properly oversee pricing of asset-backed securities.

Spokeswoman Teresa La Thangue declined to say how many mis-marking incidents the FSA has uncovered or name companies targeted. "The fact that we've sent a `Dear CEO' letter isn't unprecedented, but it's rare," La Thangue said. "It means that it's an issue we're taking very seriously."

The FSA will be visiting firms and "wielding a big stick," said Patrick Buckingham, a regulatory lawyer at Herbert Smith and a former Lehman Brothers in-house lawyer. "The FSA has been chomping at the bit to bring an enforcement case based on a lack of systems and controls."

'Negative Adjustments'

Credit Suisse joined at least three of its competitors in identifying incorrect pricing this year. The Zurich-based bank had to write down holdings by $2.65 billion when it discovered the mis-pricings.

Morgan Stanley suspended a credit trader and disclosed $120 million of ``negative adjustment'' in June relating to erroneous valuations of his positions. The New York-based firm said it was cooperating with authorities in London and conducting an internal review. The internal review is continuing, London-based spokesman Wesley McDade said today, declining to comment further.

Merrill Lynch & Co., the third-largest U.S. securities firm, said in May it was probing a trading desks in London and suspended a trader after discovering he may have overstated the value of some of the bank's equity derivatives.

Overstated

The trader, who Merrill declined to identify, traded derivatives based on individual stocks for the firm's own account, according to a person with direct knowledge of the matter. Merrill initially determined that he may have overstated the value of some holdings by less than 10 million pounds in April, when his marks were detected, the person said.

In March, Lehman Brothers, the fourth-largest U.S. securities firm, suspended two London-based equity traders after internal controls identified "issues" on share valuations. The sums involved were "not material," an official for the company said at the time.

The regulator hasn't yet investigated the banks. The fine levied on Credit Suisse was based the bank's own review.

The marking incidents reflect common traits, including poor oversight of traders and a lack of seniority for product-control staff, the FSA's letter said.

Securities firms in London and New York have slashed more than 100,000 jobs in the past year as investment-banking revenue fell. Job openings in London's financial-services industry declined for the seventh straight month in July, a survey released today by recruitment firm Morgan McKinley showed.

Difficult to Value

The FSA is particularly concerned that fair-value accounting, a process companies use to put a price on difficult-to-value assets, doesn't properly reflect the fluctuating value of complex and illiquid products such as collateralized-debt obligations, securities derived from a bundle of debt.

Fair value is the price at which an asset could be bought or sold in the current market. Assets have to be given a fair value on balance sheets, even if companies intend to hold them to maturity. Policy makers globally are grappling with how assets can be given a fair value in illiquid markets.

Comments

[s]

I am shocked, SHOCKED, to find lying cheating and stealing going on here.

[Justin]

Michael I want to thank you for your continued dedication to revealing the true state of things. I've been reading your blog for quite a few months now. I was wondering what your opinion of the following is. Thank you.
http://new.goldmau.com/article.php?id=516
http://new.goldmau.com/article.php?id=532
http://new.goldmau.com/article.php?id=544

[roger]

THE MOTHER OF ALL DELUSIONS. It's called Capitalism with a capital C,some call it Capitalism sauvage.It has a very intimidating effect on the mind,kind of like those marble columns you find at the entrance of very important buildings,for clarification purpose I'd rather call it the accumulation system,does it not promote unlimited growth,does it not glorify obscene salaries does it not promote profits over the welfare of mother nature?is not intelligence measured by your wealth? does it not promote competition over co operation?And how about the Mother of all Delusions that if you allow Capitalism to work we'll all get rich.SO WHY SHOCKED at the results.

[Fu]

Ahhh... funny how those Rogue Traders never seem to pop up on the up-cycle.

[Fu]

Hollywood pawn shop
http://www.cnn.com/video/#/video/living/2008/04/11/hollywood.pawn.shop.cnn

[Bartman]

As the great gangster, Lucky Luchiano, said after he toured the floor of the NYSE for the first time, "I joined the wrong mob!"

[B]

So fair value is not good when you have a loss ... but when you have a gain you can increase leverage? I sincerely hope that the accounting rules are not changed to be more lax. The accounting rules should become even more conservative. The accounting practices and legislation to prevent many of these derivative instruments which seem to frequently be valued poorly should be ratcheted up, in a most American fashion, to the other extreme and all but ban them. If the banks don't know the value of what they are buying or selling what kind of stable economy is that?

The classic story of "it's the model, stupid", what about due diligence? What about personal accountability, if the model tells you to jump off a bridge... I can't wait for the trials and white collar perp walks.

[Truesincerity]

Keep calling them out! These jokers are still trying to call bottoms, a year into this already and credit spreads have tightened once again.

[tim]

when the twin towers were attacked,we went into iraq. who are we going to attack now that freddie mac and fannie mae are getting blown up? taxpayers?

[joebhed]

Now, now, let's not over-react here.

This just means that ALL of the bankers have been lying to each other, pretty much on an equal basis.

This doesn't mean that any particular banker or trader is any more crooked than all the other bankers and traders out there.

So, what's the big deal?

The bankers all knew they were lying to each other, they just didn't know how much.

The biggest liars gained the most on the way up - what with all that leveraging and suchwhat.

So, you know, you better get out of their way coming down.

And, let's be honest about this.

Investment banking is unregulated.
It is designed to reward those who "cheat" a little bit by juicing up their position.
There are no repercussions to the cheaters.
Oh, you're fired.
Ha, Ha, Ha.

So, we're not surprised, really, except maybe that it took so long to find out.

Business as usual.
Those who survive will be shortly planning the nest bubble.

Bring back the Chicago Plan.

[joebhed]

Now, now, let's not over-react here.

This just means that ALL of the bankers have been lying to each other, pretty much on an equal basis.

This doesn't mean that any particular banker or trader is any more crooked than all the other bankers and traders out there.

So, what's the big deal?

The bankers all knew they were lying to each other, they just didn't know how much.

The biggest liars gained the most on the way up - what with all that leveraging and suchwhat.

So, you know, you better get out of their way coming down.

And, let's be honest about this.

Investment banking is unregulated.
It is designed to reward those who "cheat" a little bit by juicing up their position.
There are no repercussions to the cheaters.
Oh, you're fired.
Ha, Ha, Ha.

So, we're not surprised, really, except maybe that it took so long to find out.

Business as usual.
Those who survive will be shortly planning the nest bubble.

Bring back the Chicago Plan.