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9:00 AM EST Friday, May 30, 2008: You buy or sell what grabs you. There isn't much that "grabs" me at present, except....

How Lehman Brothers cooks its own books. I've been mulling on a Wall Street Journal piece for the past few days.. The story is headlined "A Shorter Slams Lehman." In it are these sentences:

In attacking Lehman, David Einhorn took issue with large, unrealized gains the firm booked in the first quarter from marking up equity positions that don't trade in public markets. Like other brokers, Lehman has large amounts of illiquid assets that it values using management-driven financial models.

In the quarter, Lehman said it had a pretax gain of $695 million related to hard-to-value equities. In the previous four quarters, the average, unrealized gain from such holdings was $69 million.

The $695 million is a net number made up of roughly $1 billion of gross gains and offsetting losses, according to Lehman. The $1 billion included an unrealized gain from writing up the value of an equity investment in an Asian power company, which the firm declined to name.

In his speech, Mr. Einhorn said the company was India-based KSK Energy Ventures and that Lehman told him it booked a $400 million to $600 million gain on KSK in the first quarter. The manager said Ms. Erin Callan (Lehman's CFO) told him Lehman marked up its holding because a new investor had taken a stake in KSK at a valuation above Lehman's.

Ms. Callan said this other investment was part of a financing round in anticipation of an initial public offering, according to Mr. Einhorn. After Mr. Einhorn further questioned the valuation process, he says Lehman changed its story.

Lehman emailed him, he said, saying the firm had revalued its KSK stake based on an "expected" pre-IPO financing as well as other factors.

I actually have a degree in accounting and a certificate to prove it. My thesis was how little you could believe published financials. I delved into things like depreciation, amortization, etc. But never in my wildest imagination, could I have imagined that a respectable public company would totally fake up its earnings by giving itself profits it never earned.

To "earn" $695 million, it didn't sell anything. It simply picked a number out of the air. Well, not exactly. Had it not given itself the $695 million in faked-up "profits,its net income for the last quarter would have been a loss. According to the Wall Street Journal's online site, Lehman reported only $663 million in net income before taxes. Had it not faked up the $695 million, it would have lost $32 million. And its stock would be thoroughly in the toilet -- where I suspect it's going.

It gets better. According to the Journal, Mr. Einhorn also questioned the values Lehman put on many other financial assets. In particular, he said Lehman hadn't sufficiently written down $6.5 billion of complex debt securities called collateralized debt obligations, or CDOs. He added that these holdings were only recently disclosed, even though other banks and Wall Street firms disclosed similar holdings months ago and took massive write-downs on them. Mr. Einhorn noted that write-downs taken by Lehman in the first quarter on the $6.5 billion of CDOs were only about $200 million. Yet, in an April filing about the first quarter, Lehman disclosed that about 25% of the CDOs were rated BB+ or lower, which is a junk rating.

"I asked them how they could justify only a $200 million write-down on any $6.5 billion pool of CDOs that included $1.6 billion of below-investment-grade pieces," he said. He added that Ms. Callan declined to explain the size of the write-down, but she added that "Lehman 'would expect to recognize further losses' in its second quarter."

David Eihorn's thoughts on Lehman are in a speech he gave to the Ira W. Sohn Investment Conference.

My previous "no-brainer" short was First Solar (FSLR) and it has worked out nicely. Lehman Brothers (LEH) sure looks like a solid short.

More on ARPS: From a reader:

Barry Silbert's righthand man (at Fieldstone Securities) confirms for me that most closed-end muni bond funds are selling for 90-91 cents on the dollar. That's up from 82 cents on the dollar about 6 weeks ago. Three weeks ago it was 85-86 cents.

You could sell your $3.5 million of Nuveen funds possibly for 91 cents on the dollar. Then you can go to arbitration for the 9 cents on the dollar you're out.

TiVo software improves dramatically: I've made two great investments -- a lifetime membership in American Airlines' Admirals Club and a lifetime subscription to TiVo. I'm fond of both, especially the new improvements TiVo has made. I like TiVo and its service much better than than the boxes your local cable provides.

Why oil will rise further. There are two basic reasons oil will rise -- rising consumption by the new rich and falling production by old oil. There is one other reason -- our own dumbness. And that includes the latest "dumbness" -- moves by Congress' tighten up oil "market manipulation" (whatever that is).

Barry Ritholtz pens The Big Picture, billing itself as "the macro perspective on the capital markets, economy, geopolitics, technology and digital media." This week he discussed how absurd US energy policy is.

The United States is heavily dependent on fossil fuels (>80%), most of which come from places we would rather not send our money to. We consume 26% of the world's energy, with only 3% of the world’s known oil reserves.

It turns out that for the past three decades, we've had a George Costanza Energy policy -- every decision we have made as a country has worked to drive energy prices higher. Had we made the opposite decisions, Crude Oil prices would be much lower than they are today ($130.17 as I type this). What follows is a list of energy-related policies of the United States. On many of these, I have no opinion -- but I wanted to list as many as I could to demonstrate why Oil is where it is.

US Policies with an impact on Energy:

1. Limited areas available for offshore drilling;

2. Stopped the rise of CAFE standards for automobiles;

3. Restricted nuclear power generation of electrical;

4. Federal Reserve policies since 2001 led to a very weak US dollar (raising Oil prices);

5. Energy conservation policies? None.

6. Iraq and Afghanistan wars contributing to Middle East tensions.

7. No major United States funding for R&D on energy;

8. Kept CAFE standards for light trucks/SUVs much lower than autos;

9. Failed to raise efficiency standards for appliances for decades.;

10. Provided no tax incentives for consumer purchases of hybrid automobiles;

11. Suburban Sprawl: Americans, on average, live further from where they work than Europeans do;

12. Mass transit system not a high priority;

13. Allowed tax credits for residential solar power to expire;

14. No special capital gains treatment for VC alternative energy investment

15. Ridiculous corn ethanol policy helped drive food prices higher also;

16. Amongst the lowest gasoline taxes in the developed world;

17. No special capital gains tax treatment for clean energy technology development;

18. Created a tax incentive (ADCS) that encouraged purchases of large inefficient vehicles;

19. Game changing breakthroughs over the past decades in solar, battery, or energy generation technologies? None

20. Exempted light trucks, SUVs, and pickups from gas-guzzler tax;

21. Discouraged clean coal, including gas liquefaction from coal;

22. Limited (or non-existent) state tax incentives for building energy efficient homes;

23. Failed to aggressively promote compact fluorescent light bulb;

24. Limited hydroelectric power generation;

25. Aggressive tax incentives for battery technology development? None

26. Failed to aggressively promote efficiency improvements for residential energy use, transmission of power, or consumption;

27. No new oil refineries built in the USA over the past 25 years.

And that's just off the top of my head. Some of the above is being responded to by the private sector. With Oil at $130+, there are significant price incentives for these technologies.

However, markets develop solutions only AFTER the economics of it are feasible. This means we are starting R&D with Oil at previously unthinkable levels. Imagine if we had had some form of energy leadership 10 or 20 years ago when oil was $8.

As I mentioned on the show last night, whoever is elected President in November should put together a blue ribbon panel, and develop a real energy policy. Otherwise, we will revisit this post in a few years with Oil at $200 . . .

Manufacturing a Food Crisis: Wondering why there are food riots worldwide? Here's the beginning of an important piece from The Nation magazine:

When tens of thousands of people staged demonstrations in Mexico last year to protest a 60 percent increase in the price of tortillas, many analysts pointed to biofuel as the culprit. Because of US government subsidies, American farmers were devoting more and more acreage to corn for ethanol than for food, which sparked a steep rise in corn prices. The diversion of corn from tortillas to biofuel was certainly one cause of skyrocketing prices, though speculation on biofuel demand by transnational middlemen may have played a bigger role. However, an intriguing question escaped many observers: how on earth did Mexicans, who live in the land where corn was domesticated, become dependent on US imports in the first place?

The Mexican food crisis cannot be fully understood without taking into account the fact that in the years preceding the tortilla crisis, the homeland of corn had been converted to a corn-importing economy by "free market" policies promoted by the International Monetary Fund (IMF), the World Bank and Washington. The process began with the early 1980s debt crisis. One of the two largest developing-country debtors, Mexico was forced to beg for money from the Bank and IMF to service its debt to international commercial banks. The quid pro quo for a multibillion-dollar bailout was what a member of the World Bank executive board described as "unprecedented thoroughgoing interventionism" designed to eliminate high tariffs, state regulations and government support institutions, which neoliberal doctrine identified as barriers to economic efficiency.

Interest payments rose from 19 percent of total government expenditures in 1982 to 57 percent in 1988, while capital expenditures dropped from an already low 19.3 percent to 4.4 percent. The contraction of government spending translated into the dismantling of state credit, government-subsidized agricultural inputs, price supports, state marketing boards and extension services. Unilateral liberalization of agricultural trade pushed by the IMF and World Bank also contributed to the destabilization of peasant producers.

This blow to peasant agriculture was followed by an even larger one in 1994, when the North American Free Trade Agreement went into effect. Although NAFTA had a fifteen-year phaseout of tariff protection for agricultural products, including corn, highly subsidized US corn quickly flooded in, reducing prices by half and plunging the corn sector into chronic crisis. Largely as a result of this agreement, Mexico's status as a net food importer has now been firmly established.

With the shutting down of the state marketing agency for corn, distribution of US corn imports and Mexican grain has come to be monopolized by a few transnational traders, like US-owned Cargill and partly US-owned Maseca, operating on both sides of the border. This has given them tremendous power to speculate on trade trends, so that movements in biofuel demand can be manipulated and magnified many times over. At the same time, monopoly control of domestic trade has ensured that a rise in international corn prices does not translate into significantly higher prices paid to small producers.

It has become increasingly difficult for Mexican corn farmers to avoid the fate of many of their fellow corn cultivators and other smallholders in sectors such as rice, beef, poultry and pork, who have gone under because of the advantages conferred by NAFTA on subsidized US producers. According to a 2003 Carnegie Endowment report, imports of US agricultural products threw at least 1.3 million farmers out of work -- many of whom have since found their way to the United States.

Prospects are not good, since the Mexican government continues to be controlled by neoliberals who are systematically dismantling the peasant support system, a key legacy of the Mexican Revolution. As Food First executive director Eric Holt-Giménez sees it, "It will take time and effort to recover smallholder capacity, and there does not appear to be any political will for this -- to say nothing of the fact that NAFTA would have to be renegotiated."

That the global food crisis stems mainly from free-market restructuring of agriculture is clearer in the case of rice. Unlike corn, less than 10 percent of world rice production is traded. Moreover, there has been no diversion of rice from food consumption to biofuels. Yet this year alone, prices nearly tripled, from $380 a ton in January to more than $1,000 in April. Undoubtedly the inflation stems partly from speculation by wholesaler cartels at a time of tightening supplies. However, as with Mexico and corn, the big puzzle is why a number of formerly self-sufficient rice-consuming countries have become severely dependent on imports.

The Philippines provides a grim example of how neoliberal economic restructuring transforms a country from a net food exporter to a net food importer. The Philippines is the world's largest importer of rice. Manila's desperate effort to secure supplies at any price has become front-page news, and pictures of soldiers providing security for rice distribution in poor communities have become emblematic of the global crisis. ...

The experience of Mexico and the Philippines was paralleled in one country after another subjected to the ministrations of the IMF and the WTO. A study of fourteen countries by the UN's Food and Agricultural Organization found that the levels of food imports in 1995-98 exceeded those in 1990-94. This was not surprising, since one of the main goals of the WTO's Agreement on Agriculture was to open up markets in developing countries so they could absorb surplus production in the North. As then-US Agriculture Secretary John Block put it in 1986, "The idea that developing countries should feed themselves is an anachronism from a bygone era. They could better ensure their food security by relying on US agricultural products, which are available in most cases at lower cost."

What Block did not say was that the lower cost of US products stemmed from subsidies, which became more massive with each passing year despite the fact that the WTO was supposed to phase them out. From $367 billion in 1995, the total amount of agricultural subsidies provided by developed-country governments rose to $388 billion in 2004. Since the late 1990s subsidies have accounted for 40 percent of the value of agricultural production in the European Union and 25 percent in the United States.

The apostles of the free market and the defenders of dumping may seem to be at different ends of the spectrum, but the policies they advocate are bringing about the same result: a globalized capitalist industrial agriculture. Developing countries are being integrated into a system where export-oriented production of meat and grain is dominated by large industrial farms like those run by the Thai multinational CP and where technology is continually upgraded by advances in genetic engineering from firms like Monsanto. And the elimination of tariff and nontariff barriers is facilitating a global agricultural supermarket of elite and middle-class consumers serviced by grain-trading corporations like Cargill and Archer Daniels Midland and transnational food retailers like the British-owned Tesco and the French-owned Carrefour. ...

At the time of decolonization, in the 1960s, Africa was actually a net food exporter. Today the continent imports 25 percent of its food; almost every country is a net importer. Hunger and famine have become recurrent phenomena, with the past three years alone seeing food emergencies break out in the Horn of Africa, the Sahel, and Southern and Central Africa.

Agriculture in Africa is in deep crisis, and the causes range from wars to bad governance, lack of agricultural technology and the spread of HIV/AIDS. However, as in Mexico and the Philippines, an important part of the explanation is the phasing out of government controls and support mechanisms under the IMF and World Bank structural adjustment programs imposed as the price for assistance in servicing external debt.

You can read entire depressing piece in the June 2 of The Nation.

Solve Windows problems: Windows Sysinternals are tools that help you manage, troubleshoot and diagnose your Windows systems and applications. There are two web sites: Microsoft's and the software itself. Use Internet Explorer, not Firefox.

Enthusiasm for xobni. I mentioned this Outlook plug-in yesterday. As I use it more, I like it more. The new, free plug-in is called xobni. The software has two big pluses -- lightning fast searching, and threaded conversations.

Another reminder to have your children and grandchildren watch this video. Shimon Peres, current President of Israel, gives advice to kids about their future. Peres served twice as Prime Minister of Israel and has written 11 books. This is a seriously super talk. Click here.

The French Tennis Open continues. Watch it in high definition (HD). The quality is mind-blowing. HD is the only way to watch sports. The Tennis Channel is 455 on Time Warner Manhattan and 217 on DirecTV. ESPN is 209 on DirecTV and 29 and 729 (HD) on Time Warner. Your channels will be different.

Bad good lawyer jokes
Have you heard about the lawyers' word processor?
No matter What font you select, everything come out in fine print.

What can a goose do, a duck can't, and a lawyer should?
Stick his bill up his ass.

They're replacing rats with lawyers in lab experiments:
1. They breed faster.
2. They are less messy.
3. You don't get personally attached to them.
4. There are some things rats just won't do.

Why does New Jersey have more toxic waste dumps while California has more lawyers?
New Jersey got first choice.

A man asked a lawyer for his fee. He was told it was $1000 for three questions.
Isn't that awfully high? "Yes," the lawyer replied. "Now what is your final question?

A newly deceased lawyer goes to heaven and complains that at 52 he's too young to die.
"That's strange," says St. Peter, according to your time sheets, you're 105.

What do you need when you have three lawyers up to the necks in concrete?
Answer: More concrete.

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.
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