Market Talk

- It shouldn’t come as a surprise that AIG’s reportedly considering suing Goldman Sachs (GS) and other Wall Street banks over soured mortgage assets, Yves Smith says. “Other shoes are starting to drop on the Goldman CDO front.”

- “The real scandal isn’t the Street’s unlawful acts (i.e., SEC vs. Goldman Sachs) but legal acts that have reaped the Street a bonanza and nearly sunk the rest of us,” former labor secretary Robert Reich writes.

- “The thing which struck me most about Goldman’s earnings call this morning was how guarded they were,” Felix Salmon says. “For a company which has happily been talking to the press and leaking the letters it sent to the SEC, no one on the call seemed to want to talk candidly.”

- Banks posting “favorable” earnings on lower loan-loss provisions isn’t necessarily cause for celebration, John Hussman writes. “Keep in mind that Enron and Worldcom were able to report outstanding earnings for a while by adjusting the manner by which revenues and expenses were accrued. I suspect that the US banking system has become a similar breeding ground for innovative accounting.”

- “For years, sophisticated investors and big financial institutions, all run by very well-paid individuals, invested huge sums of money on the basis of a few pearls of folk wisdom (‘housing prices never fall’) and the words of some highly conflicted players, like the ratings agencies,” James Surowiecki notes. “This was a recipe for disaster, and disaster was what we got.”

- “There are simply no social benefits to having banks with over $100 billion in total assets,” former IMF chief economist Simon Johnson asserts.

- Dept. of Transportation reports miles driven in February fell 2.9% from a year earlier. “If vehicle miles continues to decline on a year-over-year basis, it might suggest high gasoline prices are starting to impact the economy,” Calculated Risk says.

- “The key factor for a sustained recovery will be a continued improvement in job creation rates at existing firms and stabilization in the rate of new business formation,” Ellyn Terry writes on the Atlanta Fed’s macroblog.

- Citigroup shares once again toeing the $5 line.

- Lawmakers took aim at Lehman and federal regulators for the investment bank’s collapse, accusing the firm of manipulation and its watchdogs of negligence.

SEC and NY Fed just can’t catch a break lately. Former Merrill Lynch officials reportedly warned both agencies that Lehman was engaging in some saucy balance sheet manipulation as far back as March 2008, months before Lehman’s collapse. From the FT:

Former Merrill Lynch officials said they contacted regulators about the way Lehman measured its liquidity position for competitive reasons. The Merrill officials said they were coming under pressure from their trading partners and investors, who feared that Merrill was less ­liquid than Lehman.

The warnings take on a special significance after last week’s report by Anton Valukas, the Lehman bankruptcy court examiner, who found that Lehman had used questionable financing tools to flatter its balance sheet before its September 2008 collapse.

The findings raise questions over what federal regulators knew about Lehman’s accounting and when they knew it. In the account given by the Merrill officials, the SEC, the lead regulator, and the New York Federal Reserve were given warnings about Lehman’s balance sheet calculations as far back as March 2008.

The latest revelation shouldn’t come as a shock to anyone. But it also further compromises both agencies, because previously they could have argued they didn’t know how bad Lehman’s problems really were until it was too late. But now, knowing that rival firms were warning them months before the collapse, they’ll have a hard time making that one stick.

“So which theory is it: stunning bureaucratic incompetence, wishful thinking and denial or a cover up? Or a combination of the above?” Yves Smith ponders at naked capitalism. “No matter which theory or theories you subscribe to, the continuing revelations of how the SEC and perhaps more important, the New York Fed conducted themselves in the months before Lehman’s collapse paint an increasingly damning picture.”

Smith, who has been very critical of Geithner in the past, says this is further evidence that he shouldn’t remain Treasury secretary for much longer.

“This Financial Times story provides yet more confirmation that Geithner is not fit to serve as a regulator and should resign as Treasury Secretary,” Smith says. “But it may take Congress forcing a release of the Lehman-related e-mails and other correspondence by the New York Fed to bring about that outcome.”

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Would you let Lehman Brothers manage your assets?

So not only didn’t anybody seemed particularly perturbed by the Valukas report on Lehman Brothers’ nefarious book keeping, but reports today have the company, get this, reforming as an asset manager.

Yes, the people who brought you Repo 105 and other great hits want to transfer the company’s remaining assets to a reorganized asset manager, currently being called LAMCO (they couldn’t have squeezed an E in there after the M?)

“The concept is we built an enterprise. The idea is can we capitalize on it? The answer may be no or it may be yes,” said John Suckow, Lehman’s president. The point of the new company would be to manage the assets in order to pay off the $875 billion in creditor claims.

The company didn’t put a value on its assets, but if they’re having trouble making their numbers, we’re sure they’ll come up with something creative to bridge the gap.

The plan needs to be approved by the bankruptcy court. It doesn’t appear that LameCo, er, LamCo, would be looking to drum up new business. At least, we hope not.

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Repo 105? Yeah, let's do 105. And 106, and 107, and 108, and 109...

So I had some things I wanted to write about, Jon Kyl’s pathetic bashing of the unemployed, the parallels between Greece and the states of the United States, the continued foot-dragging on financial reform, but this Lehman report thing, well it’s jumped to the top of the charts — with a bullet. There are so many things to talk about with this report it’s hard to know where to start.

Let’s start with the five W’s:

A scathing report by a U.S. bankruptcy-court examiner investigating the collapse of Lehman Brothers Holdings Inc. blames senior executives and auditor Ernst & Young for serious lapses that led to the largest bankruptcy in U.S. history and the worst financial crisis since the Great Depression.

Accounting fraud? Off-balance-sheet debt? Lies? Deceict? Auditor negligence? What are we talking about here, Lehman Brothers or Enron? Congress should repeal Sarbanes-Oxley and start over, because this report makes it fully, painfully obvious that we learned absolutely nothing from Enron’s collapse (we did get a hit Broadway show out of it, though, so it’s not a total loss.) We allowed the same exact kinds of fraud that eventually sank Enron to remain on the scene, and get picked up by other players eager for a quick buck, despite the much despised Sarbox rules.

Al Capone kept cleaner books than these guys. And ask yourself this: do you really think Lehman Brothers and Enron were the only two companies that did this stuff? Who’s being naive now, Kay? The report also makes clear, because clearly it wasn’t clear to some interested parties, that the accounting rules need to be part and parcel, and a big part and parcel, of any and all financial reform.

This report is a daisy cutter through all the self-serving defenses for saving the banks, and more than one reputation is likely to be ruined by it. The financial meltdown wasn’t some hundred-year storm, and it wasn’t a crisis of confidence, and it wasn’t an attack of short sellers. It was a willful, conscious, mad dash for money, come hell or high water. Both eventually showed up.

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- Believe it or not, orders for durable goods are on the rise. “Yes, the overall durable goods trend is encouraging,” James Picerno says. “But even if we take this at face value, we can’t ignore that it’s a jobless recovery so far. As long as that qualification remains, the bullish aura surrounding leading indicators is suspect.”

- Financial Armageddon blogger Michael Panzner sifts through latest durable goods data and finds a growing trend throughout last few years: increasing impact of public spending on the overall total.

- Credit-default swaps didn’t destroy Lehman, Bear Stearns and almost topple AIG, Barry Ritholtz argues. Instead it was the “inordinate amount of highly leverage risk” that nearly crippled AIG, he says. Yet some people still don’t understand this concept. “The CDS argument is a variation of the ‘Shorts are killing our company’ nonsense that so many money-losing firms hide behind.”

- CBO insists stimulus has helped the economy, even if it isn’t obvious to the millions of unemployed Americans. “‘It could have been worse’ may not be the world’s catchiest slogan, but it’s the best selling point that stimulus supporters have,” NYT’s Economix blog says.

- Housing’s still the economy’s best leading indicator, Calculated Risk says.

- Paul Kedrosky isn’t pleased with all the media attention surrounding Intel (INTC) and 24 VC firms pledging to invest $3.5B in US companies throughout next two years. “Saying that you’ll heroically and patriotically do what you were likely going to do anyway shouldn’t get press.”

- Barbara Kiviat lists four smart things President Obama said about job creation.

- “Uncertainty remains the name of the game and uncertainty is rarely good for a market,” Pragmatic Capitalist says. “For now, the macro trends of global rate increases, weak jobs, sovereign debt, regulation and the death of the reflation trade (thanks to the Euro) will dominate any short-term moves.”

- Apple (AAPL) boasts about selling its 10 billionth song from iTunes only seven years after online store’s launch. It has also bragged that more than 3B apps have been downloaded. “But you won’t hear Apple boast about how much money it’s making from iTunes,” Peter Kafka says. “Because it’s not.”

- Denise E. O’Donnell, the official who supervises New York State Police, has resigned amid reports of intervention into a domestic-assault case against a senior aide to Governor Paterson, NYT reports.