Failings by Lehman Brothers executives and its auditor led to the bank collapse that unleashed the worst of the financial crisis, according to a report by court-appointed investigator.
Lehman “repeatedly exceeded its own internal risk limits and controls,” and a wide range of bad calls by its management led to the bank’s failure, the report says.
The conduct of Lehman executives “ranged from serious but non-culpable errors of business judgment to actionable balance sheet manipulation,” examiner Anton Valukas wrote in the report.
Valukas, of New York law firm Jenner & Block, was appointed in January 2009 by the U.S. Bankruptcy Court for the Southern District of New York to examine the causes of Lehman’s failure.
The fall of a Wall Street high -flier
Lehman’s bankruptcy filing on Sept. 15, 2008 — the largest Chapter 11 filing in financial history — capped a 95% slide in the firm’s stock price and unleashed a crisis of confidence that threw financial markets worldwide into turmoil, sparking the worst crisis since the Great Depression.
As a credit squeeze caused investor confidence to falter in the fall of 2008 Lehman tried to stave off collapse by painting a misleading picture of its financial condition, the report claims.
Repo 105
In particular, the examiner’s report criticizes Lehman’s failure to disclose its use of an accounting device called “Repo 105″ to make its books look better. Lehman used this device to strip some $50 billion of undesirable assets from its balance sheet at the end of the first and second quarters of 2008, instead of selling those assets at a loss, according to the report.
Accounting rules permitted Lehman to treat this transaction as sales instead of financings, “so that the assets could be removed from the balance sheet,” according to the report.
The examiner’s report included e-mails from Lehman’s global financial controller confirming that “the only purpose or motive for [Repo 105] transactions was reduction in the balance sheet,” adding that “there was no substance to the transactions.”
The report accused Lehman of not disclosing its use of Repo 105, let alone its “significant magnitude,” to government regulators, rating agencies, investors or its board of directors.
The auditor Ernst & Young was aware of the use of Repo 105, but it did not challenge or question it, according to the report, which runs more than 2,200 pages.
The report is highly critical of Lehman’s executives. It says: “Lehman should have done more, done better.”
But it says responsibility for its collapse is shared. A flawed business model that rewarded excessive risk and leverage exacerbated the bank’s problems, as did government agencies.
Lehman’s plight “was more the consequence than the cause of a deteriorating economic climate,” Valukas wrote.
‘Unprecedented events’
Ernst & Young spokesman Charlie Perkins deflected blame from his company, saying that the Lehman’s bankruptcy “was the result of a series of unprecedented adverse events in the financial markets.”
2008 financial crisis: Where are they now?
Perkins, in a statement, noted that his Ernst & Young conducted its last audit of Lehman for the fiscal year ended Nov. 30, 2007, more than nine months before the Chapter 11 filing.
“Our opinion indicated that Lehman’s financial statements for that year were fairly presented in accordance with generally accepted accounting principles [GAAP] and we remain of that view,” he said.
Efforts to reach the attorney for former Lehman CEO Richard Fuld were not immediately successful.
In congressional testimony on Oct. 6, 2008, Fuld said, “I wake up every single night thinking, ‘What could I have done differently?’ ”
Posted by dereglata on Mar 12th, 2010 and filed under General News. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry
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