From
examiner’s report, Lehman’s business model was based on excessive risk taking,
assets were long live and liabilities were less than a year. Lehman never
publicly disclosed its use of Repo 105 transaction, its accounting treatment of
these transactions. Unlike other repos, the value of securities Lehman pledged
in Repo 105 transaction were worth 105 percent of the cash it received. In
other words, the firm was already taking haircut on the transactions. And when
Lehman eventually repaid the cash it received from its counterparties, it did
so with interest, making it expensive technique.
According
to Lehman adviser Linklaters, the firm could book the transactions as a “sale”
rather than “financing” as most repos are regarded. By the end of fourth
quarter 2007 Lehman could shuffle off tens of billions of dollars in assets to
appear more financially healthy than it really was.
Lehman
failed to disclose its Repo 105 practice even though Kelly (former Global
Financial Controller) believed “that the
only purpose or motive for the transactions was reduction in balance sheet”;
felt that “there was no substance to the transactions”; and expressed concerns
with Lehman’s Repo 105 program to two consecutive Lehman Chief Financial
Officers – Erin Callan and Ian Lowitt – advising them that the lack of economic
substance to Repo 105 transactions meant “reputational risk” to Lehman if the
firm’s use of the transactions became known to the public.
Charles
Perkins, a spokesman for Ernst &
Young, said in an e-mailed statement: “Our last audit of the
company was for the fiscal year ending Nov. 30, 2007. 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.”
Mr. Valukas
was appointed by the United States Trustee in the case in January 2009 to
investigate the causes of the Lehman bankruptcy, as well as to find out if any
fraud or misconduct took place.
Mr. Valukas
writes in the report that “colorable claims” could be made against some former
Lehman executives and Ernst & Young, meaning that enough evidence existed
that could lead to the awarding of damages in a trial. He added that Lehman’s
directors were not aware of the accounting engineering.
By
his reckoning, Lehman managed to “shed” about $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 the second quarter. At that time, Lehman
sought to reassure the public that its finances were fine — despite pressure
from short-sellers like the hedge fund manager David Einhorn.
Lehman
had one of the best policy and training procedures but still faced difficult
situation. So just having good policy and training programmes doesn’t solve the
purpose of the company, Control is must.
