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Felix Salmon submits: John Cassidy has very little patience for Ben Bernanke’s latest attempt, in front of the FCIC, to explain how Lehman Brothers was allowed to fail so catastrophically. Bernanke is now saying that Lehman was in such bad shape that it would have failed whether or not the Fed had stepped in to guarantee its debts; like Cassidy, I’m very suspicious of that argument, since a Fed guarantee would have stopped any bank run cold in its tracks. So what does Bernanke mean when he says that “the view was that failure was essentially certain in either case”? My feeling is that Bernanke, along with Hank Paulson, had an unnecessarily binary idea of what exactly “failure” meant. They were faced with a choice between the chaotic collapse that we saw, on the one hand, and a much more orderly failure, on the other; and they utterly failed to grok how much worse the first option was than the second.Complete Story »

Karl Smith submits:

In the interesting exchange between Will Wilkinson and Matt Steinglass on Democracy in America, Matt writes: Through the 1990s and early 2000s,Congress progressively raised targets it set for the GSEs to securitise loans coming from low-income neighborhoods. To the extent that I understand what Mr. Rajan is talking about, I think he may be talking about this. Mr. Jaffee argues that it wasn’t relevant, because the GSEs tended to ignore Congress’s targets, and when they did meet them it was because everyone in the world, including private securitisers, were falling over each other to buy up subprime loans, since everyone had convinced themselves they’d be profitable.Complete Story »

• Valeant merges with Biovail. Specialty pharmaceutical companies Valeant Pharmaceuticals International (VRX) and Biovail (BVF) agreed to merge to expand their presence and focus on neurological products, dermatology and generic medicines in Canada and emerging markets. The deal's terms represent a 15% premium for Biovail stockholders, based on the stock's last 10 trading days. Premarket: VRX +0.8% (7:00 ET).
• Corn Products buys National Starch. Corn Products International (CPO) agreed to buy AkzoNobel's (AKZOY.PK) National Starch business for $1.3B in cash. For Corn Products, the deal will create a new sugars-and-starch giant with $5B in revenues, and will be the company's first major deal since its aborted attempt to sell itself two years ago. AkzoNobel plans to use the proceeds "for both selective acquisitions and organic growth."
• BP: Lawsuits, liability caps, and a new pointman. BP (BP) Managing Director Bob Dudley will take over as point man on BP's spill response, ostensibly to let CEO Tony Hayward focus on running the company but more likely because of Hayward's disastrous public relations gaffes, including his attendance at a yachting race over the weekend. Responding to a media report that BP plans to sue Anadarko (APC), a minority partner in the leaking Gulf well, for shirking responsibility for its share of the liabilities, BP said it hasn't yet reached a decision (though Anadarko is said to be considering a counter-suit already). According to a separate media report, BP is apparently preparing to raise $50B from a bond sale, asset sales and from banks to help cover spill costs, which continue to rise along with estimates of the spill's size (costs to date at $2B, and the spill rate as high as 100,000 barrels of oil per day according to BP's worst-case scenario). Ken Feinberg, the independent administrator of BP's newly created $20B fund, said investors should take some comfort from the fund's existence, as it partially limits the company's liability and is "a way for BP to avoid lawsuits in the end." Premarket: BP -3.4% (7:00 ET).
• China pledges yuan flexibility. On Saturday, ahead of this week's G-20 summit, China released a statement pledging to "increase the renminbi’s exchange-rate flexibility" following an improvement in the economy. China didn't set a timeline for the change, and ruled out a one-off revaluation, saying there is no basis for “large-scale appreciation." The announcement should buy China some time, effectively shifting the focus of the G-20 meeting from currency policy to the burgeoning budget deficits of developed nations. Asian stocks climbed the most in seven months in today's trading (see below), on speculation that a more flexible yuan will help boost China's growth, while the yuan rose the most in five years, though the reference rate for the day's trading remained the same as Friday's.
• BASF ready to move on Cognis. Chemical giant BASF (BASFY.PK) is said to be poised to buy German specialty chemicals maker Cognis for at least €3.3B ($4.1B), after Cognis reportedly rejected a higher offer from Lubrizol (LZ) over the weekend. A deal, which is expected to be announced this week, would be BASF's biggest since September 2008, and comes as deal-making in Europe begins to recover from the global slowdown. Cognis is owned by Goldman Sachs (GS) and Permira Advisors.
• Liberty Media to spin off units. Liberty Media (LINTA) plans to spin off two of its units, partly in response to criticism that its structure is too opaque. The units are investment arm Liberty Capital (LCAPA) and pay TV and Hollywood studio unit Liberty Starz (LSTZA), and the goal of the spin-off is to create more transparency and to help the company "better pursue our strategic objectives, including acquisitions using stock."
• China, Australia load up on commercial deals. China and Australia signed commercial deals worth more than $8.8B today. Australian Prime Minister Kevin Rudd noted that as the majority of the deals are in the mining sector, Australia's controversial new mining tax has obviously not deterred investments. "It is important to separate the facts of what's going on from some of the fear that is being pushed by some companies who object to paying a bit more tax," said Rudd.
• JPMorgan in talks on Brazilian fund. JPMorgan (JPM) is said to be in advanced talks to buy Brazilian hedge fund and private equity group Gavea Investimentos. The deal for Gavea could still collapse, but the fact that JPMorgan is pursuing the deal at all signals its confidence that the final financial reform bill won't prevent banks from owning hedge funds. An announcement could come as soon as next month.
• Saudi news helps boost gold. News that Saudi Arabia's central bank is holding nearly twice as much gold as previously thought helped lift the metal to a fresh high of almost $1,265 per troy ounce. Though analysts suggested that an accounting revision is partially responsible for the rise in Saudi Arabia's holdings to 322.9M tons compared to the 143M tons reported in March, the disclosure comes as emerging economies are increasingly adding gold to their reserves and private investors are piling into the metal.
• Barclays execs testify in Lehman suit. Barclays' (BCS) top two executives, John Varley and Bob Diamond, will take the stand today in a lawsuit brought against the British bank by Lehman Brothers (LEHMQ.PK). Lehman claims that Barclays underpaid by at least $11B for its North American brokerage. Lehman is also suing former clearing agent JPMorgan (JPM), as the failed bank tries to recover the $50B-75B of value it claims was lost during its chaotic winddown.
• Friday's failure. A bank closure in Nevada brings this year's total failures to 83 so far. The closure will cost the FDIC's insurance fund an estimated $80.9M.

Today's Markets

• In Asia, Japan +2.4% to 10238. Hong Kong +3.1% to 20912. China +2.9% to 2586. India +1.7% to 17877.
• In Europe, at midday, London +1.1%. Paris +1.6%. Frankfurt +1.5%.
• Futures: Dow +1.3%. S&P +1.5%. Nasdaq +1.5%. Crude +1.75% to $78.53. Gold +0.1% to $1259.50.

Monday's Economic Calendar

• 10:00 Quarterly Retail Trade Report

Seeking Alpha's Market Currents team contributed to this post.Complete Story »

John Lounsbury submits:Definition from Wikipedia: Check kiting is the illegal act of taking advantage of the float to make use of non-existent funds in a checking or other bank account. It is commonly defined as writing a check from one bank knowingly with non-sufficient funds, then writing a check to another bank, also with non-sufficient funds, in order to cover the absence. The purpose of check kiting is to falsely inflate the balance of a checking account in order to allow checks that have been written that would otherwise bounce to clear.Complete Story »

Brenda Jubin submits: Over the weekend I read Vicky Ward’s The Devil’s Casino: Friendship, Betrayal, and the High-Stakes Games Played Inside Lehman Brothers (Wiley, 2010). Ward, who started off her career in England as a gossip columnist and is now a contributing editor for Vanity Fair, focuses on the people who ran Lehman (LEHMQ.PK) and the culture they instilled. It’s harder to mourn the demise of the firm after reading this book.Take, for instance, the chapter entitled “Lehman’s Desperate Housewives.” The wives of the top brass at Lehman were expected to attend countless corporate and social events, they were told what charities they were expected to donate to and how much they were expected to give, they were expected to dress appropriately for every occasion, and they were expected to attend the annual summer get-together at the Fulds’ ranch in Sun Valley, Idaho, where (among other things) they were expected to hike. One wife hated the rigorous hike up Bald Mountain so much that she arrived in Sun Valley with a fake cast on her leg. Unfortunately her scheme failed because another wife, higher up in the pecking order, arrived with a real broken leg and announced that, broken leg or not, she planned to climb.Complete Story »

Felix Salmon submits: Dick Fuld said under oath that he was paid less than $310 million from 2000 through 2007, and that he held, rather than sold, the “vast majority” of his shares, if not all of them. But it’s becoming increasingly clear that he was lying. The latest bombshells come from former Lehman lawyer Oliver Budde, who spent many years drafting the bank’s compensation disclosures and hiding the restricted stock unit (RSU) component of Fuld’s pay. Lehman (LEHMQ.PK) had to change that after Budde left, but it didn’t: Budde calculated that while Lehman reported Fuld’s RSUs as worth $146 million, the real figure, based on the Section 16 reports, was $409.5 million. Lehman had counted just 2 of 15 RSU awards…Complete Story »

Richard Suttmeier submits: Treasury Secretary Geithner’s Bullet Points on the Financial Meltdown:

• Our financial system allowed risk to move towards areas where regulations were most lenient.
• In the lead-up to this crisis, we saw a complete breakdown in basic checks and balances in the system.
• Credit rating agencies failed to do an adequate job of assessing the risks in structure credit products and disclosing their ratings methodologies.
• Boards of directors failed to exercise critical judgment and address critical weaknesses in risk management.
• Accounting and disclosure regimes did not adequately inform investors of material risks in a timely fashion.
• Executive compensation rewarded short-term gains with little attention to the risk of long-term loss.
• The derivatives market, operating largely in the dark without oversight, grew to enormous scale, with firms able to write hundreds of billions of dollars in commitments without the capital needed to back them up. (Is this not the same risks today?)

The primary dealer status should have given the regulators and hence the economy an orderly unwinding of Lehman Brothers (LEHMQ.PK). In my opinion the NY Fed could have figured out a way to use the Primary Dealer Credit Facility to help Lehman. My market call remains; “Sell Strength,” raise cash to 75%, as the Dow is headed for 8,500 before 11,500.Geithner tells us that “when we saw when firms mismanage themselves to the edge of failure, the government had limited ability to step in and protect the rest of the financial system.” This is where I differ with regard to Lehman Brothers. Lehman was a primary dealer and hence a customer of the Federal Open Market Desk, which Geithner ran when he was President of the NY Fed. In my judgment the Fed had access to give Lehman the credit they needed to gradually liquidate, rather than just letting the firm fail.Instead, Geithner says, “It certainly didn't have any ability - as we do with banks – to step in and - in an orderly and safe way - wind down major investment banks like Lehman or major insurance companies like AIG (AIG). The Fed and the other banking regulators could have used the facilities that were used to address the Bear Stearns situation.Geithner says: Failure is inevitable in financial systems. The challenge for government is to design a system in which failures of private firms cannot cause catastrophic damage to the economy.Complete Story »

Karl Denninger submits: Giving that House Financial Services is having a hearing today on the Valukas report on the Lehman (LEHMQ.PK) collapse, I thought I'd put forward the questions I would ask if I was a member of the committee. In no particular order:Complete Story »

Craig Pirrong submits: Today was chock full of derivatives-related news. One big story was that Senate Ag Committee Chair Blanche Lincoln is apparently going to propose a derivatives regulation bill that can best be described as the Dodd bill on steroids, with very few end user exemptions and a strict exchange trading requirement. You can guess my appraisal of those ideas, but I’ll defer my analysis until something official is released. I will say now, though, that it is evident that the administration is going full bore with a derivatives crack down. Obama spoke out on the issue personally today, and Treasury people have been very vocal. Ugh. The other big story was that an un-redacted version of the Valukas report was released, revealing the names of the winning bidders for Lehman’s CME positions, and the payments to them. According to the report, the winning bidders received consideration worth about $1.2 billion dollars more than the liabilities that they assumed. Valukas argues that the Lehman estate could have a claim against the CME for forcing the liquidation of the positions, and against the winning bidders.Complete Story »

Felix Salmon submits: John Hempton is the kind of guy who compares the numbers for quarter-by-quarter average assets in Bank of America’s (BAC) annual reports with the numbers for total quarter-end assets in its quarterly reports. And guess what — if you look at the year 2006, BofA’s total assets were always substantially lower at the end of the quarter than they were over the course of the quarter as a whole.Remind you of anyone?Complete Story »