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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

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

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

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

Edited version of the article
by Andrew Clark

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

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