Saturday, March 20, 2010
Lehman Bros. an Example of Massive Wall St. Fraud
Lehman Brothers' bankruptcy examiner Anton Valukas has issued a damning report revealing just how corrupt the now bankrupt Wall St. institution really was.
Apparently, fraud, cheating, lying and the manipulation of its books were simply a way of life at Lehman. The once-venerable investment bank was institutionally corrupt, and likely an example of just how routine illicit business practices have become on Wall St.
The examiner's exhaustive 2,200-page report illustrates the unethical (perhaps illegal) practices of former Lehman executives, as well as its auditor, Ernst & Young.
The whole affair is entirely reminiscent of the Enron scandal, in which its accounting firm, Arthur Andersen, cooked the books and helped the energy giant cover up its absolutely massive and historic fraud.
The new report reveals a brazenly fraudulent accounting practice, known as Repo 105.
Using this scam, assets were shifted off Leman's books at the end of each quarter in exchange for cash. This was done via a clever accounting maneuver that made its leverage levels look lower than they really were. Then Lehman would bring the assets back onto its balance sheet days after issuing its earnings report.
Lehman was determined to make its quarterly reports look more appealing.
To create the appearance that its leverage levels were within reason, Lehman would “sell” assets (typically highly liquid government securities) to another firm in exchange for cash, which it would then use to pay down its debt. The assets were typically worth 105 percent of the cash Lehman received. Several days later, after reporting its earnings, it would subsequently repurchase the assets.
Normally, this would be considered a loan, or repurchase agreement, but instead it was booked as a sale.
Massive sums of money were flowing in and out of Lehman in successive quarters.
According to the examiner’s report, “Lehman reduced its net balance sheet at quarter-end through its Repo 105 practice by approximately $38.6 billion in fourth quarter 2007, $49.1 billion in first quarter 2008, and $50.38 billion in second quarter 2008.”
The latter were the final two quarters before the investment bank's inevitable collapse.
What is now clear is that Lehman was engaged in an institutional practice of deception. The well-crafted ruse was designed to fool investors and creditors about the investment bank's health.
According to Valukas' report, Lehman executives used "materially misleading" accounting gimmicks, and former CEO Richard Fuld was "at least grossly negligent in causing Lehman Brothers to file misleading periodic reports."
But what is most stunning about the report is that a team of officials from the Securities and Exchange Commission and the Federal Reserve Bank of New York had moved into Lehman Brothers' headquarters while this scam was being perpetuated. And they were either so inept as not to notice, or they willingly looked the other way.
How's that for regulation?
At any given moment, there were as many as a dozen government officials inside Lehman’s offices, with access to all of Lehman’s books and records.
And yet they found nothing until June 2008, when a lower-level executive sent a letter to management taking issue with the firm’s practices. Despite being ensconced inside Lehman's headquarters, the S.E.C. and Fed officials found nothing amiss.
If nothing else, this is a reminder of the corruption on Wall St, and why it cannot be trusted. Its valuations seem to be nothing more than pure fantasy.
And the notion of regulation is equally fantastical. After all, Lehman perpetuated this fraud right under the noses of supposed government regulators.
Perhaps these government agencies cannot be trusted either.
It's worth noting that current Treasury Secretary Tim Geithner was heading the New York Reserve Bank at the time. And it was Geithner that sent his "regulators" into Lehman, as well as Goldman Sachs, Morgan Stanley, Merrill Lynch, and others.
Who knows what else we still don't know?
The question is this; were government regulators inept, or complicit? Were these officials useless buffoons, or criminal participants in a massive fraud? Either answer effectively ruins their credibility, as well as any previous faith the public may have had in these regulatory agencies.
With all of this in mind, it's good that the unethical Lehman collapsed, a victim of its own lies and excess.
And the other Wall St. firms, likely equally fraudulent and wracked by their own excess, should have been allowed to collapse along with it, just like Bear Stearns.