It is the Wall Street equivalent of a coroner’s report — a 2,200-page document that lays out, in new and startling detail, how Lehman Brothers used accounting sleight of hand to conceal the bad investments that led to its undoing.
The report, compiled by an examiner for the bank, now bankrupt, concluded, that the 158-year-old firm died from multiple causes. Among them were bad mortgage holdings and demands by rivals such as JPMorgan and Citigroup, that the bank post collateral against loans.
But examiner Anton R. Valukas also laid out what the report characterised as “materially misleading” accounting gimmicks that Lehman used to mask the perilous state of its finances. The bank’s bankruptcy, the largest in American history, shook the financial world.
According to the report, Lehman used what amounted to financial engineering to temporarily shuffle $50 billion of troubled assets off its books in the months before its collapse in September 2008 to conceal its dependence on leverage, or borrowed money. Lehman executives, as well as the bank's accountants at Ernst & Young, were aware of the moves, according to Valukas, the chairman of the law firm Jenner & Block and a former federal prosecutor, who filed the report in connection with Lehman’s bankruptcy case.
Richard S. Fuld Jr., Lehman’s former chief executive, certified the misleading accounts, the report said.
“Unbeknownst to the investing public, rating agencies, government regulators, and Lehman’s board of directors, Lehman reverse engineered the firm’s net leverage ratio for public consumption,” Valukas wrote.
Lehman executives engaged in what the report characterised as “actionable balance sheet manipulation,” and “nonculpable errors of business judgment.”
A large portion of the nine-volume report centres on the accounting maneuvers, known inside Lehman as “Repo 105.” First used in 2001, long before the crisis struck, Repo 105 involved transactions that secretly moved billions of dollars off Lehman’s books at a time when the bank was under heavy scrutiny. According to Valukas, Fuld ordered Lehman executives to reduce the bank’s debt levels, and senior officials sought repeatedly to apply Repo 105 to dress up the firm’s results.
Thus, Lehman managed to “shed” $39 billion from its balance sheet at the end of the fourth quarter of 2007, $49 billion in the first quarter of 2008 and $50 billion in second quarter.