Thursday, March 18, 2010

Lehman Brothers engaged in Fraudulent Accounting


There are a great many people who are enamored with the conceit that all that was needed to be done to save the world from the Great Recession, was simply for the US government to have bailed Lehman Brothers out.  The explanations offered by former Lehman Chairman Richard Fuld, was that the bank was undermined by external agents who engaged in rumors, short selling, and stock manipulation that lead to an needless loss of confidence by clients and trading partners.  Such fanciful narratives hold little water now that a court appointed examiner’s report, to determine whether there was any fraud or other wrongdoing before Lehman’s bankruptcy filing, has been issued.  The conclusions are severe.

It is clear that the weapon of choice, as it has been in the past two decades when dealing with massive corporate fraud and malfeasance, has been management's willingness to utilize accounting gimmickry to conceal the actual health of their business.  In the case of Lehman Brothers, the company was already in bad shape by 2007 and as a result "the firm became addicted to a form of repurchase agreement known as Repo-105."

The report, by Anton R. Valukas, clears the air as to the inevitability of the Great-Recession by stating “Lehman was more the consequence than the cause of a deteriorating economic climate.”   Michael Hiltzek of the LA Times in his 17-March article points out:
Government rescue of Lehman, a la Bear Stearns or AIG, was never in the cards -- the firm couldn't find a willing buyer as Bear Stearns had, and unlike AIG it lacked the assets and collateral needed to fund a government bailout loan.
The examiner said Lehman used accounting gimmicks and had been insolvent for weeks before it filed for bankruptcy in September 2008.

The facts that have emerged to the public in the past week reveal a management structure that was either woefully incompetent or despite protestations, colluded with their independent accountants (i.e. Ernst & Young) to introduce an accounting maneuver, in the form of Repo-105’s, that hid more than $50 Billion.  In a conventional scenario, these assets would remain on a company’s books; however, Lehman’s booked them as a sale.  The reason for their actions was simple.  Pressured by investors and regulators to substantially reduce the company’s overall leverage, they repeatedly engaged in these clandestine manipulations to stave off collapse. 

In the end, Lehman Brothers was not destroyed by external forces, but by pre-eminent hubris.  Lehman’s had procedures and rules that would limit the company’s exposure to risk; however, when these obstacles were encountered it is clear they were simply ignored.  Furthermore, when Matthew Lee, Senior VP Finance Division, who was in charge of global balance sheet and legal entity accounting, brought up these irregularities with management and Ernst & Young accountants, he was quickly terminated.

Hiltzek draws a circle around the most egregious practices and malcontents in this sordid exhibition of capitalistic cannibalism:
One is the folly of relying on self-discipline and self-regulation in the financial markets. The credit-rating firms were utterly useless in appraising Lehman's true condition. Ernst & Young's dereliction seems so extreme that it deserves harsh punishment, maybe even extinction.
Since the markets have returned to their 2008 highs and no real reform has been legislated or implemented, everything is fine and there clearly is no need for the public to be further disturbed by the criminality of the perpetual fraud-mongers of Wall Street.

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