Valukas Report On The Lehman Brothers Collapse

Lehman Brothers is back in the news in a big way after the report on the reasons for the investment bank's collapse in September 2008 submitted by Anton R. Valukas, the examiner appointed by the  US Bankruptcy Trustee, was released the other day. According to this website, the 2,200-page report took one year to prepare by a team of 70+ contract attorneys and cost $38 million.

There are quick summaries and detailed commentaries available from numerous financial news sites and blogs, if you don't particularly enjoy wading through a mean 9-volume report. Neither do I, but there's something about poring over the raw report and forming my own opinion therefrom that I find challenging, so I've started reading the Valukas report. I'll probably write something about my own take on this matter in a later post.

Now, for those of you who'd like to get a flavor of the original report, too, I've embedded below for your convenience the complete 9-volume report on Lehman Brothers' collapse which I found at Scribd.com. Here's a guide to the contents of each volume, to give you an overview of the report's coverage and help those who may want to skip sections and read selectively:

Volume 1- Sections I and II: Introduction, Executive Summary and Procedural Background 
               - Section III.A.1: Risk
Volume 2- Section III.A.2: Valuation
               - Section III.A.3: Survival
Volume 3- Section III.A.4: Repo 105
Volume 4- Section III.A.5: Secured Lenders
               - Section III.A.6: Government
Volume 5- Section III.B: Avoidance Actions
               - Section III.C: Barclays Transaction
Volume 6- Appendix 1
Volume 7- Appendices 2 - 7
Volume 8- Appendices 8 - 22
Volume 9- Appendices 23 - 34
Lehman Brothers Examiners Report COMBINED

Why Keynesianism Doesn’t Work: Part 1

Any economic theory faces the same tests as any other scientific theory. It isn’t good enough to say well, look, it worked this time but didn’t seem to that time. A theory needs to be able to explain all the evidence: one counter-example is enough to kill a theory.

And Keynesianism, or at least the crude type that is argued over in politics today, has failed just such a test as Don Boudreaux Russ Roberts reminds us.

According to that basic set of theories about how the economy works, there should have been a huge recession in 1946/1947. In both the UK and the US: all those returning servicemen with no jobs. All that huge amount of government borrowing to pay for the war stopping, there should have been a plunge in aggregate demand and thus something between a recession and another Depression.

And yes, economists like Paul Samuelson were predicting exactly that.

According to the prescription, the two governments should have borrowed vastly more, spent more again, in order to prevent such a failure of the economy. This isn’t arcane, this is just straight simple Keynesianism.

However, that’s not what actually happened. The soldiers came home, the governments reduced the borrowing and the spending (the UK actually ran budget surpluses for several years) and yet the economy boomed. There was no recession, certainly not a depression, unemployment did not soar.

We can argue until the cows come home about whether Roosevelt’s New Deal ended the Depression (I think not, it extended it, your view may differ), whether Obamanomics will lead us out of our current difficulties (I think not) But Keynesianism as Keynesianism faces a much sterner test than this.

What happened to the 1946/7 recession? If it’s not possible to explain that absence within the confines of the theory then the theory is wrong, or at least incomplete, whatever we might say about the other two periods we love to argue about.

Tim Worstall

United States Treasuries Snap Decline as Fed Plans to Purchase Notes Today

US Treasuries snapped a decline from yesterday as the Federal Reserve prepared to buy as much as $6 billion of U.S. debt today, after saying it intends to stick to its plan to purchase $600 billion of securities by June 30.

Yields have risen too far given that inflation is running slower than the Federal Reserve wants, according to Nikko Cordial Securities Inc., a unit of Sumitomo Mitsui Financial Group Inc., Japan’s third-largest publicly traded bank. The U.S. government is scheduled to sell $29 billion of seven-year debt today, the last of three note auctions this week.

“It will take a few quarters for inflation to pick up,” said Hiroki Shimazu, an economist at Nikko Cordial in Tokyo. “That will make Treasury yields fall in the next few months.”

Ten-year notes yielded 3.41 percent as of 6:51 a.m. in London, according to BGCantor Market Data. The 2.625 percent security maturing in November 2020 traded at 93 1/2. The yield increased eight basis points yesterday.

U.S. government securities have fluctuated between gains and losses for the past eight sessions. The 10-year rate will fall to 3 percent by March 31, Shimazu said.

The Fed will buy $4 billion to $6 billion of notes maturing from July 2012 to July 2013 today, according to its website.

The euro was near a two-month high versus the dollar before a German report forecast to show consumer prices rose at the fastest pace in two years. The 17-nation currency rose to $1.3722 yesterday, the strongest since Nov. 22.

Extra Yield

The extra yield investors demand to hold two-year German notes instead of similar-maturity Treasuries expanded to 70 basis points today, the most since January 2009.

The difference between 2- and 30-year rates was 3.96 percentage points. The spread widened to a record 3.98 percentage points on Jan. 20 based on closing levels, indicating investors have been demanding greater compensation for rising costs in the economy.

Ten-year Treasury Inflation Protected Securities show bondholders expect the consumer price index to increase 2.27 percentage points annually on average over the life of the debt. Economists surveyed by Bloomberg forecast an inflation rate this year of 1.7 percent.

Treasuries fell yesterday as the Fed maintained its bond- purchase program while saying the pace of economic expansion is insufficient to lower unemployment. The jobless rate has been more than 9 percent for 20 months.

Government securities also declined after the U.S. sold $35 billion of five-year notes and a report showed sales of new homes rose more in December than economists forecast.

‘Full Speed Ahead’

While commodities have risen, “longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward,” the central bank said in a statement yesterday after its two-day meeting.

The inflation gauge watched by the Fed, which excludes food and energy costs, increased 0.8 percent in the 12 months through November. The figure is below the 1.6 percent to 2 percent range central bank officials say is consistent with achieving their legislative mandate for stable prices.

Treasuries are heading for a fourth monthly decline on signs the economy is improving. U.S. debt has handed investors a 3 percent loss since the end of September, based on Bank of America Merrill Lynch data.

The MSCI All Country World Index of stocks returned 11 percent in the period, according to data compiled by Bloomberg. U.S. corporate bonds fell 0.2 percent, the BOA indexes show.

Durable Goods

Orders for U.S. durable goods and pending home sales both rose in December, economists said before government and industry reports today. At General Electric Co., the world’s biggest maker of jet engines, operating earnings will increase “nicely” this year, Chief Executive Officer Jeffrey Immelt said Jan. 21.

The Fed’s purchases of Treasuries and mortgage debt reduce the supply of those securities, according to Fidelity Investments, the Boston-based fund manager that oversees $1.6 trillion of assets.

“The corporate bond market is still reasonably attractive,” David Prothro, a debt fund manager at Fidelity, wrote in a report yesterday on the company’s website. “The U.S. economy is stabilizing.”

The seven-year notes being sold today yielded 2.77 percent in pre-auction trading, compared with 2.83 percent at the previous sale of the securities on Dec. 29.

Investors bid for 2.86 times the amount on offer last month, up from 2.63 times in November. Indirect bidders, the class of investors that includes foreign central banks, bought 64.2 percent of the debt, versus a 10-sale average of 50.9 percent.

--Editors: Nicholas Reynolds, Jonathan Annells

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.