Lord Rees Mogg: Let the cat out of the bag

Lord William Rees Mogg

Lets The Cat Out of The Bag

by Matthias Chang

Exposé of FASB Accounting Fraud In 10th Red Alert

Corroborated By Former Adviser to Margaret Thatcher

Lord Rees Mogg

For those who have not heard of Lord William Rees Mogg, please study his background. He was a former Adviser to the Iron Lady, Prime Minister Margaret Thatcher.  He is a leading financial consultant whose advice is sought by heads of states and governments. He was also the former Editor-in-Chief of the Times of London. He wrote the best seller, The Great Reckoning. He is the chairman of the Zurich Club.


So we should listen to him!


Recap – the 10th Red Alert

Another Simple Truth

There are only two types of assets – genuine or fraudulent. Plain and simple!


We can say without fear of contradiction, that all the “Paper Assets” that have been traded off-balance sheet are fraudulent and worthless. Whatever “On the Books assets” owned by banks valued in the billions are insufficient to meet the liabilities of the aforesaid-mentioned banks and other financial institutions measured in the US$ Trillions.




That is why I am saying that the FASB (Federal Accounting Standards Board) new accounting rulings that “assets” be categorised into three levels, namely: Level 1 – assets that can be priced by the market, Level 2 – assets not priced by the market, but its value can somewhat be ascertained and Level 3 – Toilet Paper, assets marked to model or myth, is a scam.


Any honest first year accounting student can see through the scam, because these new “rules” allow the banks and financial institutions to subjectively allocate their toilet paper to whatever “Levels of Valuation”.


The distinction between Level 2 and Level 3 is so grey that it matters not, BUT TO THE COLLAPSING BANKS, IT AFFORDS THEM A TIME LAG TO HIDE A CHUNK OF THE TOILET PAPERS UNDER LEVEL 2 AND ONLY DECLARE THE VERY OBVIOUS FRAUDS TO LEVEL 3. It is now impossible to hide the plain and obvious fraudulent transactions. Therefore these papers will be allocated to Level 3 and written off. Big deal! WHEN THE BANKS HAVE DONE THIS, THEY CAN THEN DUMP OR UNLOAD LEVEL 2 “ASSETS” to other SUCKERS. Unlike Level 3 “assets” Level 2 “assets” are worth maybe 10 to 20 cents to the dollar. It is still fraudulent (as they have been rated AAA) but at least they have some residual value – chicken feed.


Back to Lord William Rees Mogg

In a recent article, published by the Times of London, “Why FAS 157 strikes dread into bankers” Lord Rees Mogg wrote:


1. The risk of a worldwide banking crisis – one that is particularly damaging to mortgages, private equity, hedge funds and the banks themselves – is higher than it was a month ago, and the storm is rising.


2. Yet this, as important as it could be, is not the biggest threat. Few non-bankers have heard of FAS 157 and 159, yet these are the regulations that will set the terms on which the banks will value their assets. The trouble with FAS 157 and 159 is that they are perfectly reasonable regulations in themselves which could have disastrous, though unintended, consequences.


3. The new rules divide bank assets into three “levels”, according to the freedom with with which they can be bought or sold. Level-one assets, which are easy to value or trade, have to have quoted prices in active markets such as US government bonds or gold bullion. Level two is an intermediate stage; these assets are not as fully marketable as level one, but still sufficiently tradeable to have a definite value.

4. Level-three assets – usually artificial financial instruments – are the problem. They do not have quoted prices in active markets. They have to be valued by reference to the bank’s own models. According to the analyst Martin Hutchinson, who had analysed some of the US banks, the holdings of level-three assets are substantial. Lehman has $22 billion; Bear Stearns $20 billion; JP Morgan Chase $60 billion. Even these figures may be understated, since the banks have themselves decided whether assets belong to level three or the more acceptable level two, and they have an interest in placing as little in level three and as much in level two as they reasonably can.


5. It is far too late to cancel FAS 157 and 159, even if that were desirable. The concept of different levels for bank assets has been introduced to the banking system and the defaults on sub-prime mortgages have lowered the acceptability of all level-three assets. No one knows what they are worth and hardly anyone wants them.

6. Commercial banking, with its large customer base, is in better shape than investment banking, but will also be affected. FAS 157 may prove an historic regulatory blunder.


The Corroboration

The underlined words in paragraph 4 above corroborates in material particular, my contention that assets declared in Level 3 will be understated, since the banks have themselves decided whether assets belong to level three or the more acceptable level two, and they have an interest in placing as little in level three and as much in level two as they reasonably can.”

Although, Lord Rees Mogg appreciates the potential of mischief and abuse by the Banks in subjectively allocating what toxic waste should be assigned to which FAS “Levels of Assets”, thereby covering up the true extent of the mess, he would rather have the said regulations cancelled. 

This is evident from the following:

Let me start by drawing your attention to paragraph 6 above, specifically the underlined words. If the regulation is a “historic blunder” it implies that if the said regulation was not in existence, there would not be a need for the banks to make such disclosures.

In paragraph 5, Lord Rees Mogg says, “It is far too late to cancel FAS 157 and 159”.

The Implications

The problem is that the Fed and other Central Banks must come up with a solution to the marketing of the toilet papers which the investors has refused to accept since June 2007.

Using FAS 157 and 159 was considered a short term solution (to instil some level of confidence that the losses are not that bad, as it is only in the US$ billions and not in trillions) but as I had pointed out, it was not a solution but a clever attempt at covering up and to stop the fear and panic that has spread throughout the global markets.

But if we were to accept Lord Rees Mogg’s admission that in actual fact FAS 157 and 159 is a historic blunder, and to let the state of affairs to continue, then we are back at square one, as the banks will not be able to come up with even some semblance of valuation of the “assets” that are now being rejected by the market. No proper valuation or rating = no buyers or investors for these kind of securities.

Synthetic Currency

It is only a matter of time that this scam would be exposed for what it is and that Banks will have to conjure more confidence tricks to cover up their fraud.

Lo and behold, Barclays Capital has now proposed a new synthetic currency, the European Borrowing Unit – EBU (a basket of short and long positions in 10 currencies versus the Euro). The EBU carries 0% interest rate.

This scheme is introduced to provide liquidity to the present credit crisis as a result of the abovementioned toxic waste frauds.

These guys at Barclays Capital must be nuts to think that they can get away with it. Is this not another version of the Yen Carry Trade, which at this very moment is unravelling????

Andy Kauffmann, co-head of FX Structuring at Barclays Capital expects the first EBU denominated borrowings to hit the market in a matter of weeks.

If anyone still needs evidence that the Barclays Banking Group is in deep shit, this is it!!!!


More Lies from the Fed

I am indebted to Mr John Lee of www.goldmau.com for highlighting Bernanke’s stupid lie that the “total losses from subprime mortgages would be about US$150 billion…”

As I have stated in the 10th Red Alert, these crooks are hell bent to cover up the losses within the range of US$ billions and confine the losses to strictly Level 3 assets. Once that exercise is completed, the Fed and all the other key Central Banks can then declare that the worse is over and usher a new Bull Market in the first quarter of 2008.

Day dreaming!!!!!!!!

Fortunately we have people like John Lee who can smell these rotten rats miles away. This is what he wrote and I quote him in extenso:

Given that the Fed and European Central Bank have already injected well over US $150 billion since August, Bernanke obviously lied about his ballpark figure. But just how big is this subprime mess?

To measure subprime losses, we have to first find out the size of the subprime market. Fed data pegs the total US residential value at US $20 trillion and the US residential mortgage market at US $10 trillion. This number is substantial, as it eclipses the US treasury market of US $9 trillion.

Of the US $10 trillion mortgage market, GSE (Government Sponsored Enterprises) hold about $1.5 trillion, leaving $8.5 trillion in private hands. Within this US $8.5 trillion, we have various grades and categories, with grades ranging from AAA, AA, Alt-A, BBB, and categories such as the traditional 30 year fixed, and non-traditional ARM, ARM with teaser rate, interest only, and negative-amortization.

We follow the ABX index published by Markit.com, which is the basket of derivatives linked to subprime securities. As financial tools go, this index is far from perfect, since it is barely two years old, and tends to be thinly traded.

But right now it has the unfortunate distinction of being the only tool easily available to measure sentiment in the opaque subprime securities world. And in the past couple of weeks, the message emerging from this measure has started to look utterly dire, as it shows subprime mortgages are changing hands at 25 cents on the dollar.

Please refer to Mark It ABX indeces

This 80% haircut applies to potentially $2 trillion worth of mortgages if investors of those mortgages were to exit today. The loss is not $150 billion, but more like $1.6 trillion.

John Lee also pointed out that since September 2007, the Value of AAA mortgages (the highest rated) has begun to crater, and now trades at a stunning 70m cents on the dollar. This means if all AAA and Alt-A mortgage portfolios were to be marked down to market, to reflect their correct values, the loss would amount to another US$ 2 trillion!!!! 

There is therefore a gigantic loss of at least UD$3.6 trillion.

What is the future scenario?

The Financial Times on 1st November 2007 wrote:

…the experience of living through the Enron scandals earlier this decade means that the audit industry is now terrified that it could face lawsuits if it is perceived to be too lax towards its clients. So some now appear to be demanding that their banking clients reprice their mortgage assets according to the only visible market tool – namely the ABX. It is thus little wonder that some banks have suddenly been forced to increase their writedowns in recent weeks. Indeed, I would wager that the pernicious combination of ABX and the “Enron factor” is a key reason for the recent shocks emanating from Merrill Lynch.

However, the rub is that while auditors at some Wall Street banks are becoming quasi-evangelical about the need to reprice subprime assets, there are still other, vast swathes of the financial system which have not been touched by the full blast of transparency yet. Moreover, many financiers outside the world of Wall Street banks remain very wary of rewriting their mortgage assets to current ABX price levels, due to a lingering hope that the recent ABX slump will remain temporary.


John Lee shares my optimism for Gold. He said, “To us gold’s run has just gotten started, the Emperor is now naked for all to see.”


Matthias Chang

Kuala Lumpur

15th November 2007


Published in: on November 16, 2007 at 00:22  Comments (5)  

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5 CommentsLeave a comment

  1. […] here for the on-going unfolding story of the world’s biggest financial institutions melt-down […]

  2. Thanks Biggum for the posting.

    Bro, gold price is shooting through the roof, shouldn’t you be adjusting your value to accurately reflect your self-worth? 😉

    Here’s a lesson you can emulate of the mainstream media guys – just add or minus a zero – to the sum as you deem fit. LOL!

    Anyway, either way, it seems you’ll be better-protected than any of us when the contagion hits. LOL, again.

  3. […] is a follow up article to the earlier posting, here and here, which is very related. An earlier article pertaining to the price hike imminence should be […]

  4. Thanks. Haven’t finished reading it yet, a bit deep for me. I sometimes read to see what the rich and greedy are up to, and googled Lord Rees-Mogg to find out if he had a first name, or Lord was it. Read his best seller in the ’80s about how to deal with ‘the coming depression’. Very revealing.

    He said, as an investor he has to be a student of human nature. Knows what makes people tick and how to handle it; they want what you have, will steal it, freeload, lazy, “won’t do what they don’t have to”. And that’s what got my goat and still has it.

    I believe in seeking lowest possible denominators. Won’t do what they don’t have to? Student of human nature? Learned this how? Experience? What experience: having been raised by a nanny, descended from generations of nanny products, ‘raising’ his own the same way? Ask the nannies about human nature. Not the Lords.

    Who makes a baby learn to stand up? Who forces him to walk? Why do they fall, stand back up, laugh and go again? The lowest conceivable common denominator I can discern. How could Lord R-M possibly know?

    I worked with people in manufacturing plants and found that the more I trusted them; the more they’d trust me and the better we’d do. Lord knows, the Lord will never learn.

    Thanks again and the best of luck,
    virgil thomas

  5. […] | https://bigdogdotcom.wordpress.com/2007/11/16/lord-rees-mogg-let-the-cat-out-of-the-bag/ To measure subprime losses, we have to first find out the size of the subprime market. Fed data […]

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