Barry Ritholtz at the Think Tank has 10 Interesting Points to make about the SEC case against Goldman Sachs.

I especially like:

7. This is a Complex Case: Again, no. Parts of it are a little more sophisticated than others, but this is a simple case of fraud/misrepresentation. The most difficult part of this case is likely to turn on what is a “material omission.” Paulson’s role in selecting mortgages may or may not be material — that is an issue of fact for a jury to determine. But complex? Not even close.

And also the final one:

10. I’m not a lawyer, but . . . Then you should not be ignorantly commenting on securities litigation. Why don’t you pour yourself a tall glass of STF up and go sit quietly in the corner.

The comments are quite good, too.

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Will Lehman be Ernst & Young’s Enron?

That is the question everyone is asking after the publication of investigator Anton Valukas’s report suggesting that Lehman may have used an, um, unusual accounting practice — Repo 105 — to make it look as if its leverage was much lower at each quarter-end that in fact it was. The effect of this was to make it appear financially stronger than it was.

Ernst & Young arguably did not meet professional standards, both in investigating whistleblower allegations about the use of Repo 105 and in connection with the audit and review of Lehman’s financial statements, claims Mr Valukas.

reports the FT, though it also offers the surprising comment that “Accounting experts say the Lehman report will not be “an Enron” for Ernst & Young, in part because, with only four big accounting firms remaining, clients do not have many options to move elsewhere.” Oh, so that’s all right then — no matter what they may have done (if anything — and that is not established at this point), they can’t go down because there aren’t enough other auditors in the world to fill the gap.

Bad signal.

The FT have a reasonable slideshow on Repo 105 here, And there’s a pretty good explanation of the matter here by Simon Watkins of the Mail (of all sources).

Lehmans couldn’t get a US firm to sign off on the legality of the practice, so they took advice from Linklaters, who said it was doable under English law. Linkies’ comment to the New York Times’ DealBook team was standard:

The U.S. examiner’s report into the failure of Lehman Brothers includes references to English Law opinions which Linklaters gave in relation to a number of Lehman transactions. The examiner – who did not contact the firm during his investigations – does not criticise those opinions or say or suggest that they were wrong or improper. We have reviewed the opinions and are not aware of any facts or circumstances which would justify any criticism.

However, what I really love is the Lehman’s internal e-mail exchange quoted at the end of the NYT piece:

* “It’s basically window-dressing.”

* “I see … so it’s legally do-able but doesn’t look good when we actually do it? Does the rest of the street do it? Also is that why we have so much BS [balance sheet] to Rates Europe?”

* “Yes, No and yes. :)”

So, it seems to be a one-off practice to Lehman (see answer 2 above). I think E&Y are in trouble on this one.

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The Serious Fraud Office has been investigating whether former Madoff Securities International Ltd. CEO, Stephen Raven, or any London employee of Madoff had knowledge of Madoff’s Ponzi scheme.

Those familiar with the investigation have commented that the U.K. is unlikely to prosecute anyone at Madoff’s London operation because the SFO does not currently have enough evidence to prove that any employee knew about the fraud. In addition, the SFO is currently probing whether anyone at London-based FIM Advisors LLP or 20.20 Medici AG Chair, Sonja Kohn, knew of Madoff’s scheme when they sent him money. FIM Advisors managed Kingate Global Fund Ltd., which invested $2.8 billion with Madoff.

Source: Bloomberg, via my NY colleagues.

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Last week I was a speaker at the Financial Institutions Insurance conference in Munich, sharing the platform with Dr. Philipp Wassenburg, Global Head of Casualty Treaty Global Clients/North America, and Alexander Stampf, 
Head of Financial Institutions, both of Munich Re.

Philipp and Alexander are both great guys and have that wonderful and particularly European sense of excitement, professionalism and curiousity about what they do–they are interested in their jobs, rather than simply getting through them. And so many of the younger people at the conference were cosmopolitan, multi-lingual and utterly clued-up about the world and the world they live in, in particular. It was a real buzz, and I came away feeling very invigorated.

After the talk–we were the final slot on Day 2–Alexander took me to the Seehaus in the Englischer Garten for beer, spargel (asparagus) and ham, before I had to hot-foot it back to the rail station to get back out to the airport. Alexander and I share a loathing of commuting and will shortly form the Anti-Commuting Club to encourage the greening of inner cities and an increased use of bikes, local shops, community etc. Or something like that.

The beer is good at the Seehaus, too.

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A quick round-up from the Guardian on 25 people who lead us down the road to ruin.

First up, no surprises — Alan Greenspan. His ideological heroine was the dubious Ayn Rand whose book, Atlas Shrugged, was influential on a range of businessmen such as Greenspan and which was condemned when first published over 50 years ago by both left (as embodying the “greed is good” credo) and right (as godless). And no, in this case such controversy does not signal a Good Thing.

Then there are various of the great, the good and the appalling (or all three). Odd to see no Tony Blair when there is a Gordon Brown. TB was surely just as much involved in the underlying social changes that lead to this position as his former ministerial colleague.

Hank is there, as is Dick Fuld, plus the American public, without whom none of this would have been possible.

And my favourite is Angelo Mozilo, formerly head of Countrywide Financial, and known as “The Orange One” allegedly on account of the strangely coloured perma-hue of his skin.

Finally, the piece names a few of the good guys — people who saw it coming and who, in some cases, made a mint out of the downturn, including Buffett, Stephen Eismann and Dr Doom, aka Professor Nouriel Roubini.

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From the WSJ via Clusterstock, it seems that even investors who cashed out of Madoff’s schemes ahead of time may have to divvy up.

[B]ecause Madoff is thought to have run a Ponzi scheme, investors could get money back from other Madoff investors who already took money out,” said Brad Alford, who runs Atlanta-based investment adviser Alpha Capital Management LLC.

The bankruptcy court charged with the similar Bayou case held this year that investors who had pulled their money out of Bayou had to pay to give back profits — sometimes even some of their initial investments — to help offset losses by other duped investors.

The innocent paying for the sins of the guilty. A leitmotif for our times.

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CEO Jacques Aigrain told Swiss daily NZZ that rates in the reinsurance market are picking up again — “We are seeing that the conditions and margins in the actual reinsurance business are improving.” However, “lower returns on investment should be expected” he went on to say, though perhaps that didn’t really need spelling out.

Swiss Re recently posted a Q3 loss as it wrote down almost USD500m on investments for the quarter and reported a USD250m or so unrealised mark-to-market loss on credit default swaps.

There is some speculation that Swiss Re was more actively involved in some innovative products than competitors and it seems to have been hurt more than its competitors by the financial crisis. The very fact that
Aigrain said that CDS and financial guarantee business was not being continued tends to reinforce that view.

One wonders what further news may come out of the giant.

Source: Reuters.

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In an article called Can the US Do An IMF On Itself? Hellasious posits the global financial systems in terms of fire brigade HQs.

Picture the US as the Global Fire Department (GFD). In the last ten years or so the GFD became extremely irresponsible. It ignored the fire safety of its own firehouse, which became choked with highly flammable material (i.e. debt and derivatives), and relaxed the rules about the health and fitness of its firemen (i.e. oversight and regulation were greatly weakened).

Seeing this, the good citizens of the neighborhood (i.e. other western nations) also adopted the same attitude. And why not? If the fire department itself didn’t care about all that dead wood and turpentine piling up in its own back yard, why should they? A whole raft of nations from the UK and Australia, to Bulgaria, Poland, Iceland and Romania bought the same highly flammable “growth” model. Borrow – spend – inflate assets – borrow.

It was only a matter of time until a fire started somewhere. Unfortunately, it started in the worst possible place: the GFD firehouse itself. Predictably, the unfit firemen could not contain it and the fire quickly spread to the rest of the town. So, who’s going to put it out and how?

And he goes on to say that “the current plan is to take all that dry firewood and turpentine and stow it someplace else“. But there is no ’someplace else’ — everyone is up to their necks in it. In times past, the IMF would take some of the debt of, say, Mexico or the Argentine and parcel it up and shove it off into the economies of the richer countries, principally the US. But the IMF can’t do that now because essentially that lender of last resort is no longer able to lend.

What we need is to get rid of the debt. Globally.

But how, eh? Answers on a postcard to the President-Elect.

(Via Sudden Debt.)

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This just in on the e-mail:

Somali Pirates in Discussions to Acquire Citigroup. November 20 (Bloomberg) — The Somali pirates, renegade Somalis known for hijacking ships for ransom in the Gulf of Aden, are negotiating a purchase of Citigroup. The pirates would buy Citigroup with new debt and their existing cash stockpiles, earned from hijacking numerous ships, including most recently a $200 million Saudi Arabian oil tanker. The Somali pirates are offering up to $0.10 per share for Citigroup, pirate spokesman Sugule Ali said earlier today. The negotiations have entered the finale, Ali said. “You may not like our price, but we are not in the business of paying for things. Be happy we are in the mood to offer the shareholders anything,” said Ali. The pirates will finance part of the purchase by selling new Pirate Ransom Backed Securities (PRBS). The PRBS’s are backed by the cash flows from future ransom payments from hijackings in the Gulf of Aden. Moody’s and S&P are reportedly prepared to issue their top investment grade ratings for the PRBS’s.

It reminds me of Little Bonaparte addressing the Lovers of Italian Opera: “In duh lass fiscal year we made a hundred an’ twelve million dollars before taxes – only we din’t pay no taxes!”

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This article from the NYT does not make happy reading for D&O carriers.

It’s about a mortgage underwriter at WaMu, and is a telling, salutory tale (like so many that are emerging) of corporate greed and, more to the point, stupidity.

“If a loan came from a top loan officer, they didn’t care what the
situation was, you had to make that loan work,” she says. “You were
like a bad person if you declined a loan.”

One loan file was
filled with so many discrepancies that she felt certain it involved
mortgage fraud. She turned the loan down, she says, only to be scolded
by her supervisor.

“She told me, ‘This broker has closed over
$1 million with us and there is no reason you cannot make this loan
work,’ ” Ms. Cooper says. “I explained to her the loan was not good at
all, but she said I had to sign it.”

Uh-oh.

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