Defaulting banks - where will it stop?

[Jan Klimkowski]

The "bond vigilantes", ugly parasites spawned by free market capitalism, amoral creatures driven by greed, creating nothing of value, just pain and misery, are back:

'Bond vigilantes' offload gilts as UK plunges into the red

• Investors spooked by £4.3bn rise in UK borrowing

• Fears of runaway budget deficit push bonds yield to 4.1

The financial community punished the pound and the gilt market after figures published today showed Britain had plunged further into the red by borrowing £4.3bn last month.

Investors took fright at the prospect of a runaway budget deficit and sold government bonds, or gilts, pushing the yield to 4.1%. That in turn makes government borrowing more expensive, and it also lifts the long-term
interest rates that Britons pay for mortgages, which are tied to gilt yields.

It also brought the issue back to the forefront of the political debate in Britain: the Conservatives are advocating tougher action to cut the deficit while the government backs a softer approach to protect the recession-hit economy.

"The market is upset about that – every*one wants to know what the government plans to do," said Jim Leaviss, head of fixed interest at M&G *Investments. "We need to do something, otherwise we're in big trouble."

Leaviss runs a website called Bond Vigilantes – reviving a term coined in the 1980s in the United States when activist investors sold bonds en masse, pushing yields up, and forcing cuts in the US deficit.

"The bond vigilantes are the most important people in the capital markets right now – they're back and they'll punish the weak," said Gary Jenkins, a credit analyst at Evolution Securities.

"The bond market… is the single most important market and will determine what the other markets will do: the key question is: will sovereign countries be able to finance themselves at a rate that's reasonable? If so, markets will develop. If not, everyone has a problem."

The bond vigilantes are punishing countries with high budget deficits, such as Britain, the US, Greece, Spain, Italy and Portugal, on concerns about their ability to recoup loans. Far from declaring themselves speculative opportunists, the punishment comes against "governments that have lost control of their public finances", Leaviss said, as he warned governments to get public spending under control.

"We're reflecting the reality that developed nations need to sort out their budget problems. Otherwise, there's potential default, or inflation," he said.

Investors criticise western governments for not using the boom years to run extra-large budget surpluses, as now they need extra billions of pounds to cope with an ageing population and the consequences of the credit crunch. The UK plans to raise £220bn this year.

"The solution is austerity," Leaviss said. "Governments will be forced to cut public sector wages and increase retirement ages. It's going to be fairly nasty for individuals who live in countries with debt problems – growth will be lower and standards of living will be eroded."

Investors are also losing faith in the politicians' ability to cut their debts to the levels they have promised. "With further strikes planned to hit Greece it still looks nigh on impossible to expect that it can shrink its budget deficit to 3% of GDP from 12.7% of GDP last year by the end of 2012," said Jane Foley, research director at Forex.com.

After a few days of calm, the cost of insuring British, Greek, Spanish and Portuguese debt against default rose again, according to data from Markit. Greek bond yields also leapt after a German official said that "not a penny" should be lent to Greece. The comments contrast with the EU's assurance last week that it would stand by the country.

"The EU politicians should speak in one voice if they want the bond market to calm down," Jenkins said.

[David Guyatt]

The "market" is trying to scare Brown's government into cutting spending, because, I imagine they believe they can clean up on the immense volatility this will cause.

It's quite sickening really. Not content with being saved from disaster, unable to say thank you, or even now acknowledge the self invoked and ruinous plight they brought on themselves, they now want to ruin the economy of those who saved them.

It truly is time for the government to prosecute some of these buggers for they fraud they were involved with. But that's my wishful thinking. The government doesn't dare do that.

Joe Stiglitz, who I much admire, told Gordon Brown in a private meeting not to fall for this market bullying and that he (Brown) may even need to create another tranche of debt in the short term, in order to secure the long term security of the economy.

http://www.dailymail.co.uk/news/article-...lans.html#

More than 60 top economists write letter to DEFEND Darling's plan to delay spending cuts



By Gerri Peev
Last updated at 10:14 AM on 19th February 2010


Support: Alistair Darling's strategy has been dubbed 'sensible' by economists
More than 60 economists have rallied behind Alistair Darling's strategy to delay spending cuts for fear of choking off a recovery.

They warned that the Tory call for immediate debt repayments is reckless.

Two separate letters in today's Financial Times reject the Tory warning that Britain's triple A credit rating is at risk if the government does not start cutting spending this year.

The emphasis should be on returning to 'robust economic growth', says one letter, signed among others by five former Bank of England interest rate-setters and a string of academics who normally shun political debate.

It was organised by crossbench peer Lord Skidelsky, the biographer of economist John Maynard Keynes.

Another letter backing slow cuts is signed by Nobel laureates Joseph Stiglitz and Robert Solow. They call Mr Darling's plan 'sensible', warning that 'with people's livelihoods at stake, a responsible government should avoid reckless actions'.

The double intervention follows a letter from 20 economists - published in the Sunday Times - which backed Shadow Chancellor George Osborne's warning that the UK had to start tackling its deficit immediately.

Tories claimed that this represented an 'economic consensus' supporting them, but the new letters challenge this.

David Blanchflower, a signatory of one FT letter and a former member of the Bank of England's Monetary Policy Committee, last night quoted Keynes arguing in 1932: 'The voices which, in such a conjuncture, tell us that the path of escape is to be found in strict economy and in refraining, wherever possible, from utilising the world's potential production, are the voices of fools and madmen.'

The world was plunged into the Great Depression after politicians ignored his warnings.

Tories and Labour are sharply divided over when to implement spending cuts. Labour wants to halve the deficit in four years but will not start cutting seriously until next year.

The Tories have said they will start immediately.

The letter organised by Lord Skidelsky asks how 'foreign creditors will react if implementing fierce spending cuts tips the economy back into recession'.

The economists argue that the deficit increase in the last two years was unavoidable, given that the UK has just experienced the most severe recession since the Second World War, forcing emergency government action to prevent the economy 'falling off a cliff.'

Lord Skidelsky said this morning that too swift a reduction in state spending would jeopardise the recovery.

'What the Sunday Times economists failed to explain is how a cut in the deficit will lead to a revival in private spending when the economy is as depressed as it is today.
We do risk jeopardising the not very green shoots of economic recovery we have seen so far,' he said.

'What particularly sticks in my gullet is the assumption that economic policy should always do what financial markets want us to - the very same markets that got us into the current pickle.

'The well-being of our people is not necessarily the same as the well-being of bond traders and I think the balance of risks favours going on with the present policy until we have very clear signs that an economic recovery is under way.'

The letter backing the hardline Tory approach - headed by another former MPC member, Tim Besley - said that 'to be credible' a Government should eliminate the deficit in one five-year Parliament, rather than halve it in four years as Labour have pledged.

Former trade minister and ex-head of the CBI Lord Jones said today that economic policy should not be seen as a 'black and white' choice between cuts and investment.
'Everybody knows that what we want is targeted management of taxpayers' money and that means some cuts and some investment,' he told BBC's Radio 4 Today show.

'At the end of the day, markets want to see the elected leaders and their advisers, such as economists, know what they are doing, have a plan and stick to it. That gives confidence.
'That plan might be promulgated this year for effect next year or it might say we are going to do this bit this year in certain areas - keeping skilled people in work would be a good idea - but on other things, we are going to wait another year.'

TUC general secretary Brendan Barber said: 'Today's letters firmly reject the call for early spending cuts and warn that it could tip the economy back into recession.

'The UK deficit is the result of vital Government action to keep the economy afloat and prevent the levels of unemployment, business closures and repossessions seen in previous recessions.

'Premature spending cuts will send the UK spiralling into a double-dip recession, with mass job losses, lower tax revenues and an even greater deficit. Prioritising economic growth is the best way to get people working, businesses flourishing and boost investor confidence.'

THE 60 ECONOMISTS WHO SUPPORT LABOUR


Lord Layard, Emeritus Professor of Economics, LSE; founder of the LSE Centre for Economic Performance

Chris Allsopp, Reader in Economic Policy, University of Oxford and former member of the MPC

Alan Blinder, Gordon S. Rentschler Memorial Professor of Economics and Public Affairs, Princeton University; former Vice Chairman of the Board of Governors of the Federal Reserve

Sir David Hendry, Professor of Economics, University of Oxford

Sir Andrew Large, Former Deputy Governor of the Bank of England and former member of the MPC

Rachel Lomax, Former Deputy Governor of the Bank of England and former member of the MPC

Robert Solow, Nobel Laureate and Emeritus Institute Professor of Economics, MIT

David Vines, Professor of Economics, University of Oxford, and Fellow of Balliol College

Sushil Wadhwani, CEO, Wadhwani Asset Management and former member of the MPC

Lord Skidelsky, Emeritus Professor of Political Economy, University of Warwick, UK

Marcus Miller, Professor of Economics, University of Warwick, UK

David Blanchflower, Bruce V. Rauner Professor of Economics, Dartmouth College, US and University of Stirling, UK

Kern Alexander, Professor of Law and Economics, University of Zurich, Switzerland

Martyn Andrews, Professor of Econometrics, University of Manchester, UK

David Bell, Professor of Economics, University of Stirling, UK

William Brown, Montague Burton Professor of Industrial Relations, University of Cambridge, UK

Mustafa Caglayan, Professor of Economics, University of Sheffield, UK

Victoria Chick, Emeritus Professor of Economics, University College London, UK

Christopher Cramer, Professor of Economics, SOAS, London, UK

Paul De Grauwe, Professor of Economics, K. U. Leuven, Belgium

Brad DeLong, Professor of Economics, U.C. Berkeley, US

Marina Della Giusta, Senior Lecturer in Economics, University of Reading, UK

Andy Dickerson, Professor in Economics, University of Sheffield, UK

John Driffill, Professor of Economics, Birkbeck College London, UK

Ciaran Driver, Professor of Economics, Imperial College London, UK

Sheila Dow, Emeritus Professor of Economics, University of Stirling, UK

Chris Edwards, Senior Fellow, Economics, University of East Anglia, UK

Peter Elias, Professor of Economics, University of Warwick, UK

Bob Elliot, Professor of Economics, University of Aberdeen, UK

Jean-Paul Fitoussi, Professor of Economics, Sciences-po, Paris, France

Giuseppe Fontana, Professor of Monetary Economics, University of Leeds, UK

Richard Freeman, Herbert Ascherman Chair in Economics, Harvard University, US

Francis Green, Professor of Economics, University of Kent, UK


G.C. Harcourt, Emeritus Reader, University of Cambridge, and Professor Emeritus, University of Adelaide, Australia

Peter Hammond, Marie Curie Professor, Department of Economics, University of Warwick, UK

Mark Hayes, Fellow in Economics, University of Cambridge, UK

David Held, Graham Wallas Professor of Political Science, LSE, UK

Jerome de Henau, Lecturer in Economics, Open University, UK

Susan Himmelweit, Professor of Economics, Open University, UK

Geoffrey Hodgson, Research Professor of Business Studies, University of Hertfordshire, UK

Jane Humphries, Professor of Economic History, University of Oxford, UK

Grazia Ietto-Gillies, Emeritus Professor of Economics, London South Bank University, UK

George Irvin, Professor of Economics, SOAS London, UK

Geraint Johnes, Professor of Economics and Dean of Graduate Studies, Lancaster University, UK

Mary Kaldor, Professor of Global Governance, LSE, UK

Alan Kirman, Professor Emeritus Universite Paul Cezanne, Ecole des Hautes Etudes en Sciences Sociales, Institut Universitaire de France

Dennis Leech, Professor of Economics, Warwick University, UK

Robert MacCulloch, Professor of Economics, Imperial College London, UK

Stephen Machin, Professor of Economics, University College London, UK

George Magnus, Senior Economic Adviser to UBS Investment Bank

Alan Manning, Professor of Economics, LSE, UK

Ron Martin, Professor of Economic Geography, University of Cambridge, UK

Simon Mohun, Professor of Political Economy, QML, UK

Phil Murphy, Professor of Economics, University of Swansea, UK

Robin Naylor, Professor of Economics, University of Warwick, UK

Alberto Paloni, Senior Lecturer in Economics, University of Glasgow, UK

Rick van der Ploeg, Professor of Economics, University of Oxford, UK

Lord Peston, Emeritus Professor of Economics, QML, London, UK

Robert Rowthorn, Emeritus Professor of Economics, University of Cambridge, UK

Malcolm Sawyer, Professor of Economics, University of Leeds, UK

Richard Smith, Professor of Econometric Theory and Economic Statistics, University of Cambridge, UK

Frances Stewart, Professor of Development Economics, University of Oxford, UK

Joseph Stiglitz, University Professor, Columbia University, US

Andrew Trigg, Senior Lecturer in Economics, Open University, UK

John Van Reenen, Professor of Economics, LSE, UK

Roberto Veneziani, Senior Lecturer in Economics, QML, UK

John Weeks, Professor Emeritus Professor of Economics, SOAS, London, UK

[Jan Klimkowski]

Well, just when it couldn't get any more corrupt, Zero Hedge has just posted a long article, based on an official report seen and noted in 2001 by the Council of Foreign Relations, which strongly suggests that the economies of many major European countries are based on counterparty swaps and Enron-style accounting.

The magician ("Counterpart N") who conjured money quite literally out of thin air being most probably none other than Goldman Sachs.

Here are some excerpts from the Zero Hedge article:

Disclosures made in this report forced the Council of Foreign Relations to make an explicit comparison between Italy and the greatest corporate fraud of the early 2000's: Enron.

The parallel with the Enron transactions is uncanny. Like Enron, Italy took on debt but chose to represent it as a hedge for a yen bond it had issued in May 1995, which matured in September 1998. As with Enron, the hedge explanation was clearly misleading. If it had been a hedge, the exchange rate used would simply have been the market rate at the time the swap transaction was entered into. Off-market rate swaps were clearly selected for the purpose of producing interest revenue in 1997, with euro entry as the goal.

In other words, cooking the public debt books in the EU started not with Greece and Goldman in 2001, but with Italy and Counteparty N in 1995; we are fully confident that many more examples will emerge shortly.

How widespread is this sort of financial chicanery among sovereign borrowers? It is very difficult to know, since these deals are done over the counter with no public paper trail. Gustavo Piga, author of the ISMA/ CFR report, uncovered the Italian transaction quite accidentally. But there are powerful reasons for concern.

First, governments have clear incentives to cook the books. The EU continues to impose fiscal expenditure restrictions on eurozone governments, violation of which can result in censure and fines. The International Monetary Fund imposes fiscal conditionality on its client governments, which naturally have a strong incentive to keep the Fund from closing the money spigot. Derivatives can be used to shuffle cash flows through time in ways that current accounting rules do not prevent.

Second, banks are only too willing to market derivatives tricks to their big client governments, particularly when it puts them at the front of the queue for future bond issues and privatisations.

Third, if the integrity of government financial data is fatally undermined, the damage to stock and bond markets will dwarf the "Enron effect" that has recently pummelled the Dow.

We urge everyone to reread the last sentence as many times as needed, until the truth sinks in.

when one grasps the extent and severity of such swap transactions, one realizes the massive opportunity for conflict of interest, of mutual blackmail, of the desire for secrecy, and of counterparty risk, which is why Goldman is and has always been the preferred party of interest - just how many other such deals is Goldman on the hook for? Were Hank Paulson to have allowed Goldman to implode, it is likely that most if not all European governments, which one guesses currently have numerous other comparable secret arrangements with "Counterpart N", would have all suffered massive and irreparable losses on existing swap arrangements. This is merely yet another way in which the Federal Reserve-Goldman Sachs complex bailed out the world, however this time using the threat of the unravelling of completely confidential swap arrangements, which were known to at most several high level bureaucrats, and of course Lloyd Blankfein (and Hank Paulson, and Jon Corzine prior).

The stunning revelation: Goldman would come to the rescue again and again, likely extracting many pounds of flesh to wave its magice wand and allow countries to not only enter the EU, but to subsequently mooch billions of dollars off of its various structural funds. Without Goldman's assistance Italy would not have been let into the eurozone. And Goldman did some critical window dressing not just Italy and Greece, but very likely most of Europe! We, for one, can't wait for disclosure of all the heretofore confidential swap agreements underwritten by Goldman.

If Greece and Italy are any indication, it only took a phone call by any of these governments to former Goldman CEOs Jon Corzine (latter part of 90's) and Hank Paulson (Goldman CEO until 2006), to arrange the same kind of non-standard, off-market swaps as has now been evidenced were used by both Greece and Italy. After all, keep in mind, the whole purposes of these "Goldman" swaps is to merely reduce public debt interest payment to align with EU and EMU artificially low fiscal requirements, at the expense of debt notional, which is not as constrictive an economic barrier according to Maastricht and other supervisory requirements. When the truth finally comes out that all of Europe's finances over the past 10 years have been a sham, covered up and facilitated very legally by Goldman Sachs, the Euro was (will) collapse under the weight of the decade of lies that have made it seem that the eurozone is an economically viable construct.

As for Mr. Piga's report, on second thought we may have been too harsh on EuroStat. In 2001, Euromoney reported that:

ISMA was concerned enough to cancel a press conference with Gustavo Piga, the author of the report, because it said his safety was not certain.

It is thus very likely that most if not all may have missed it. After all, it was caught by just a few publications at the time, the CFR, which went so far as to claim Italy is Europe's Enron, being, of course, one of them. Yet inquiring minds would be very curious to uncover whether the danger to Mr. Piga's life came from representatives of Country M or Countepart N. If in the distant 2001 disclosure of facts about shady involvements of countries such as Italy and their counterparties such as Goldman Sachs, raised the specter of a threat on a person's life, we dread to imagine just how much other recent facts have been "silenced" over the past 2 years.

http://www.zerohedge.com/article/step-as...r-minus-16

If major European government have totally fictitious balance sheets, then those economies will collapse. Twentieth Century European history suggests the results will be horrendous, as Bertolt Brecht prophesied:

Do not rejoice in his defeat, you men. For though the world has stood up and stopped the bastard, the bitch that bore him is in heat again.

[Jan Klimkowski]

Reading the tea leaves...

OK - so Goldman (former CEOs Paulson and Rubin) is the likely counterparty/hustler for European governments.

Meanwhile, JP Morgan CEO Jamie Dimon gloats (implicitly) at Goldman in the article below, whilst revealing that JP Morgan is likely a major counterparty/hustler on mainland America.

Cue yet more attempts at dumping the toxic debt on taxpayers whilst insisting that governments (eg Greece) and states (eg California) slash spending and institute "austerity measures" - ie "Shock Therapy" in Naomi Klein's important sense:

California is a greater risk than Greece, warns JP Morgan chief

Jamie Dimon, chairman of JP Morgan Chase, has warned American investors should be more worried about the risk of default of the state of California than of Greece's current debt woes.

By James Quinn, US Business Editor in New York
Published: 8:20PM GMT 26 Feb 2010

Mr Dimon told investors at the Wall Street bank's annual meeting that "there could be contagion" if a state the size of California, the biggest of the United States, had problems making debt repayments. "Greece itself would not be an issue for this company, nor would any other country," said Mr Dimon. "We don't really foresee the European Union coming apart." The senior banker said that JP Morgan Chase and other US rivals are largely immune from the European debt crisis, as the risks have largely been hedged.

California however poses more of a risk, given the state's $20bn (£13.1bn) budget deficit, which Governor Arnold Schwarzenegger is desperately trying to reduce.

Earlier this week, the state's legislature passed bills that will cut the deficit by $2.8bn through budget cuts and other measures. However the former Hollywood film star turned politician is looking for $8.9bn of cuts over the next 16 months, and is also hoping for as much as $7bn of handouts from the federal government.

Earlier this week, John Chiang, the state's controller, said that if a workable plan to reduce the deficit and increase cash levels is not reached soon, he will have to return to issuing IOU's, forcing state workers to take additional unpaid leave and potentially freezing spending.

Last summer, California issued $3bn of IOU's to creditors including residents owed tax refunds as a way of staving off a cash crisis.

"I can't write checks without money; that's against the law. My main goal is to keep the state afloat, but I won't be able to do it without the help of new legislation," said Mr Chiang.

http://www.telegraph.co.uk/finance/finan...chief.html

[Jan Klimkowski]

Goldman Sucks - a brief and engaging spin thru their life and crimes:

http://www.youtube.com/watch?v=7SFywA_LQuU

[David Guyatt]

http://news.sky.com/skynews/Home/Busines...ave_Losses

Iceland Rejects Icesave Bank Payback Plan
11:40pm UK, Saturday March 06, 2010
Hazel Tyldesley, Sky News Online
Icelanders have rejected a plan to pay back the British Government for money it lost over the collapse of the Icesave bank in 2008.


Reykjavik protesters: many resent the idea of paying to compensate wealthy investors
Over 93% percent of voters cast ballots opposing the £3.5bn deal to compensate the British and the Dutch state, initial results showed.
Both nations reimbursed citizens who lost money when Landsbanki and its internet banking scheme Icesave folded.
"This result is no surprise," Prime Minister Johanna Sigurdardottir said.
"Now we must turn to the task of finishing the negotiations on Icesave."

The propsed deal would require each person to pay around £90 a month for eight years, and many Icelandic taxpayers say they cannot afford it.

However, the rejection of the deal could jeopardise Iceland's credit ratings, making it harder to access much-needed funding to fuel an economic recovery.
The island is grappling with a 9% unemployment rate, a 7% annual inflation rate and an economy that is still shrinking.

Icesave online bank folded in 2008
It was unclear how many of the 230,000 registered voters cast a ballot, but public television reported a turnout rate of around 55% an hour before polls closed.
Meanwhile, around 1,000 protesters gathered in downtown Reykjavik to demand a better say over the plans.
Last-minute talks broke down this week, despite Britain and the UK saying they had offered more favourable terms, including a significant cut on the interest rate in the original deal.
Despite stalled talks and the rejection in the referendum, Iceland's government said it still believed it could strike a deal.
"The government of Iceland is confident that a solution acceptable to all parties can be achieved," it said in a statement.

(my italics). £90 a month for 8 years...

[Jan Klimkowski]

Democracy in action.

93% of Icelanders tell the IMF and bankers in general to go fuck themselves. :thefinger:

Given a vote, working people will simply refuse to allow the bankers to dump their losses on ordinary folk.

Retaliation from the IMF and EU govts is inevitable. Given that Gordon Brown has already abused anti-terror legislation to seize Icelandic assets, it will be revealing to see what sort of financial Shock Therapy is applied.

The people of Greece, Italy, Portugal and Ireland, indeed working people everywhere, will be watching carefully...

[Magda Hassan]

93% is quite definitive isn't it? It's the banks problem not the people's problem. They'll just have to wear it. And it suits them well.

[Peter Lemkin]

Lehman Brothers' former heads criticised for lapses [BBC]
Lehman Brothers collapsed in September 2008
A report into the collapse of Lehman Brothers criticises senior executives and auditor Ernst & Young for serious lapses that led to the firm's collapse.

The report says Lehman was insolvent for weeks before it went bankrupt, sparking a global financial meltdown.

It accuses management of "actionable balance sheet manipulation" and using accounting tricks to hide debts.

Ernst & Young said that its last audit of Lehman was "fairly presented" according to accounting rules.

The collapse of the 158-year-old investment bank in September 2008 was the world's largest bankruptcy.

Wall Street, the City of London, and the US and UK governments tried to organise a rescue, fearing - rightly - that Lehman's failure would set off a chain reaction around the globe.

Possible claims

Friday's 2,200-page forensic analysis into what went wrong says there could be grounds for legal action against former executives.

Lawyer Anton Valukas, who led the inquiry, stops short of saying that there was systematic wrong-doing at the firm.

And he pointed out that senior executives had used their business judgment and were largely not liable for the firm's collapse.

Nevertheless, Mr Valukas said creditors could have grounds for legal action for negligence or breach of fiduciary duty against its former chief executive Dick Fuld and chief financial officers Chris O'Meara, Erin Callan and Ian Lowitt.

Mr Valukas said there was also sufficient evidence to support a possible claim that Ernst & Young had been "negligent" and that Lehman's liquidators could pursue claims against the firm for "professional malpractice".

Much of the report, which took evidence from all the major parties involved in Lehman's collapse and attempts to rescue the firm, contains allegations about an accounting "gimmick" known as "Repo 105".

This is a legal accounting device that involves shifting around assets to reduce the size of a company's balance sheet, and effectively give the appearance that debts have been cut.

It was a gimmick that Lehman used increasingly as its problems mounted.

Mr Valukas said Repo 105 was used to "give the appearance that Lehman was reducing its overall debt" levels in 2008 when in reality it was not.

The report estimates that Lehman used the practice to temporarily remove $50bn of assets from its balance sheet in 2008 alone.

Lehman began using Repo 105 in 2001, but the practice was "dramatically" ramped up from late 2007, the report said.

An e-mail from Bart McDade, former head of equities, suggested Lehman was addicted to Repo 105. "I am very aware... it is another drug we're on," he wrote.

London appears to have played a key role in approving Lehman's use of Repo 105. The report says Lehman at first tried to find a US law firm that would approve its shifting around of assets.

Unable to get US clearance, Lehman turned to London law firm Linklaters, which advised that the practice was allowed under UK law.

So, assets Lehman wanted to "hide" were transferred to the London operation, which would "conduct the [Repo] transaction on their behalf," the report said.

Wall Street's role

The report says that Lehman had received warnings about the accounting device from Martin Kelly, the firm's former global financial controller.

Yet, "certain of Lehman's officers breached their fiduciary duties by exposing Lehman to potential liability for filing materially misleading periodic reports, and Ernst & Young was professionally negligent in allowing those reports to go unchallenged," the report said.

An attorney for Mr Fuld said on Thursday that the former Lehman boss "did not know what those [Repo] transactions were".

"He didn't structure them or negotiate them, nor was he aware of their accounting treatment," his attorney Patricia Hynes said.

Ernst & Young said in a statement: "Our last audit of the company was for the fiscal year ending November 30, 2007. Our opinion indicated that Lehman's financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view."

A Linklaters spokesperson said: "The US 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."

[Jan Klimkowski]

Lehman's books were a lie and completely fraudulent.

Lehman's corruption is an entirely logical end result of a society which encourages greed, rewards the lies and failure of bankers, and tries to dump the lossses incurred by financial "masters of the universe" on ordinary taxpayers.

I'm happy to stand with the 93% of Icelanders and the Greek protestors who are telling the IMF and bankers where to shove it.