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The Wall Street Journal Friday morning reported that Lehman Brothers (LEH) in recent weeks moved $2.8 billion in loans — including some risky leveraged buyout deals — into a newly created collateralized loan obligation. And (think old Shake ‘n Bake commercials) the Fed helped! So did the credit ratings agencies, which gave the new vehicle, dubbed “Freedom,” investment-grade credit ratings. The deal, in turn, gives Lehman cash.

“It’s a creative way for banks to get liquidity from assets they don’t want to sell at fire sale prices,” said one industry exec. Others called it “brilliant.”

Creative? Brilliant? The “C” word, as in “creative financing,” is what got us into trouble in the first place; it’s often another way of saying, “We’ve figured out yet another way to help you afford what you can’t.”

As for brilliant, one former head of asset-backed trading at a few big banks (whose name is being withheld to protect the innocent) says:

I think calling it “brilliant” is about the most jaded comment I have seen through this entire deleveraging fiasco. That’s like calling it “genius” for a teenager to have his Dad bail him out of jail after a drunk driving arrest by using a bail bondsman who only takes a 10% security deposit.

It used to be that banks were required to consolidate 100% of an issue on the balance sheet even if they held only a small “B” or first loss note. The rationale was that if you held the risk of the pool, even only, say $15 million of a $200 million issue, you had to show the entire balance as assets, because you still held the effective VaR (value at risk) of all of the loans, as nothing changed except your maximum loss, not your maximum probable loss (which is effectively the basis fo all bank risk management).

My point is that in a real world, if Lehman still holds the majority of the risk on balance sheet and merely has a loan against the balance, it doesn’t exactly warm the cockles to think they have somehow turned it into “cash (they) could use to finance its business.”

Like I said — dead end economic policy arbitrage. It’s actually kind of sickening. I wonder if the Fed would like to give me a non-recourse loan so I could go “finance my business” down in Atlantic City at the roulette table. I have a foolproof stochastic VaR model that predicts nothing but red numbers for a long time!

Of course, if it doesn’t go as planned, they can always blame it on the short-sellers.

Source: Lehman: ‘Creative’ Financing Rides Again