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April 2010

Lehman’s illegal gimmicks

By Uday Chitale
Murtuza Vajihi
Chartered Accountants
Reading Time 5 mins

Accountant Abroad

A court-appointed United States bankruptcy examiner has concluded there are grounds for legal claims against top Lehman Brothers bosses and auditor for signing off misleading accounting statements in the run-up to the collapse of the Wall Street bank in 2008, which sparked the worst financial crisis since the Great Depression. A judge this week released a 2200-page forensic report by expert Anton Valukis into Lehman’s collapse that includes scathing criticism of accounting ‘gimmicks’ used by the failing bank to buy itself time. These included a contentious technique known as ‘Repo 105’ which temporarily boosted the bank’s balance sheet by as much as $ 50 billion.

The exhaustive account reveals that Barclays, which bought Lehman’s US businesses out of bankruptcy, got equipment and assets it was not entitled to. And it reveals that during Lehman’s final few hours, chief executive Dick Fuld tried to get British Prime Minister Gordon Brown involved to overrule Britain’s Financial Services Authority (FSA) when it refused to fast-track a rescue by Barclays. With Wall Street shaken by the demise of Bear Stearns in March 2008, Valukis said confidence in Lehman had been eroded : “To buy itself more time, to maintain that critical confidence, Lehman painted a misleading picture of its financial condition.” The examiner’s report found evidence to support ‘colorable claims’, meaning plausible claims, against Fuld and three successive chief financial officers.

Valukis said the bank tried to lower its leverage ratio, a key measure for credit-rating agencies, with Repo 105 — through which it temporarily sold assets, with an obligation to repurchase them days later, at the end of financial quarters, in order to get a temporary influx of cash. Lehman’s own financial staff described this as an ‘accounting gimmick’ and a ‘lazy way’ to meet balance-sheet targets. A senior Lehman vice-president, Matthew Lee, tried to blow the whistle by alerting top management and the auditors. But the auditing firm ‘took virtually no action to investigate’.

During the bank’s final hours in September 2008, Fuld tried desperately to strike a rescue deal with Barclays, but the FSA would not allow the British bank an exemption from seeking time-consuming shareholder approval. The British finance minister, Alistair Darling, declined to intervene and Fuld appealed to the US treasury secretary, Henry Paulson, to call Prime Minister Gordon Brown, but Paulson said he could not do that,” says the examiner’s report.

“Fuld asked Paulson to ask (then US) President George Bush to call Brown, but Paulson said he was working on other ideas. In a ‘brainstorming’ session, Fuld then suggested getting the president’s brother, Jeb Bush, who was a Lehman adviser, to get the White House to lean on Downing Street.

Barclays eventually bought the remnants of Lehman’s Wall Street operation from receivership for $ 1,75 billion — a sum that has enraged some bankruptcy creditors who believe it was a windfall for the British bank.

The examiner’s report finds grounds for claims against Barclays for taking assets it was not entitled to, including office equipment and client records belonging to a Lehman affiliate, although it says these were not of material value to the deal — the equipment was worth less than $ 10 million.

The report into the bank’s demise revealed last week a similar addiction to accounting hallucinogens like those seen in the Enron case. Until now, the big mystery was how the Wall Street giant could have been reporting healthy profits right up until the moment it keeled over and died — bringing most of the Western economy down with it. But the latest investigation reveals financial transactions known as Repo 105 and Repo 108, used to remove temporarily tens of billions of dollars of debt from the bank’s balance sheet at the end of every accounting period. As the banking crisis grew, so did Lehman’s addiction to such trickery. Executives even referred to Repo 105 as “another drug we’re on” in emails uncovered by the report.

A lawyer for Fuld has rejected the examiner’s findings. Patricia Hynes of the law firm Allen & Overy, said Fuld did not structure or negotiate the Repo 105 transactions, nor was he aware of their accounting treatment. She added that Fuld “throughout his career faithfully and diligently worked in the interests of Lehman and its stakeholders”. A spokesman for the London-headquartered auditors of Lehman told Reuters the firm had no immediate comment because it was yet to review the findings.

The capacity for Lehman to continue to shock after a year of books and revelations is itself a shock. But the biggest surprise is how little has changed since Enron and the scams of the last financial bubble. Regulators like to caution against simply addressing the specific causes of past scandals when trying to prevent future ones, but it is as if all the Wall Street rules introduced to clean up accounting have only encouraged finance directors to study the history books more closely for inspiration.

Edited version of the article by Andrew Clark

(Source : Mail & Guardian Online, 23-3-2010

Web address : http://www.mg.co.za

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