Report: Lehman execs manipulated data
A bankruptcy examiner report has found that negligence and manipulation on the part of top executives at Lehman Brothers contributed to the firm's collapse. Amy Scott reports on a piece of accounting chicanery known as "Repo 105."
A Lehman Brothers sign at the company's annex office in New York City. (Chris Hondros/Getty Images)
More on America's Financial Crisis
Links
- Weekly Wrap: Lehman report fallout
For more analysis of the Lehman Brothers examiner's report, check out our Weekly Wrap. - Read the Lehman Brothers examiner's report
TEXT OF STORY
KAI RYSSDAL: In the 18 months or so since it went under, Lehman Brothers has come to symbolize all that was wrong with Wall Street -- wretched excess, hubris and greed, and a sense that the regular rules just don't apply. Them, of course, is fighting words.
But the report out today from a federal bank examiner backs 'em up. It says negligence and even fiddling with the books by Lehman executives contributed to its demise. As I mentioned, the report runs well over 2,000 pages. But if I could recommend just a single section to you, it would be Volume Three, about a nifty piece of accounting chicanery called "Repo 105."
Our New York bureau chief Amy Scott explains.
Amy Scott: Before we get to Repo 105, let's talk about the plain old repo. It stands for "repurchase agreement," and it's a common way that Wall Street firms fund their business. They lend securities in exchange for cash, with an agreement to repurchase those securities -- often the next day.
Jack Ciesielski: Securities lending arrangements are common. They're almost like breathing for brokerage firms.
Jack Ciesielski publishes the Analyst's Accounting Observer. He says there's nothing wrong with repos.
Ciesielski: It's when you're stretching the truth to get to a certain kind of accounting treatment that you've got something to worry about.
And that brings us to Repo 105. The bankruptcy examiner's report says Lehman dreamed up a repurchase agreement -- with a twist. By putting up securities worth 105 percent of the cash it received, Lehman could call the transaction a sale rather than a regular repo, which is more like a loan. And why would it want to do that?
Ciesielski: If you call it a sale, it's not on your balance sheet anymore.
And back in 2007 and 2008, Lehman Brothers' balance sheet was under a lot of scrutiny. Analysts and investors were worried the firm had taken on too much debt.
Christopher Whalen is with Institutional Risk Analytics. He says Lehman's accounting gimmick made it look like the firm was addressing those concerns.
Christopher Whalen: The net effect was to hide debt. And they were using the same techniques as Enron and WorldCom to falsify their assets.
The report says Lehman managed to hide $50 billion worth of assets in 2008. A lawyer for former CEO Dick Fuld says he didn't know what those transactions were. But other executives clearly did. In an e-mail, one of them referred to the accounting tricks as "another drug we r on."
In New York, I'm Amy Scott for Marketplace.
Comments
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From Atlanta, GA, 03/15/2010
Dick Fuld better hire some good lawyers.
Jonathan Lovelace made a very intersting point. Isn't Repo 105 essentially what the US government is doing when it issues IOU's to Social Security and Medicare and then doesn't keep those debts on "the" books.?
From RIchmond, TX, 03/14/2010
Looking at both this story and the "weekly wrap", it is all a little strange. The idea that the REPO105 is unique to just one investment bank is ... well... either nonsense, naive, or an attempt to snow the American public that reform is not needed.
The concept of moving things off the books has been around for a while... Many manufacturing firms that used multiple locations to complete a complex process often show the goods leaving the first plant as being sold and generating revenue, then they come in the door of the next plant as raw materials. Its a way of piling profit on top of profit, avoiding inventory costs, in some cases avoiding taxes, and otherwise making the books of each location look good.
For those who have read the book "House of Cards" which is about the downfall of Bearstearns just a few weeks earlier, the author predicts the events at Lehman.
Basically this all a very eliquant theaft of the tax payers money. Eliquent in that the participants feel entitled and.... an many cases... sadly broke no laws...
03/14/2010
America swapped, a while ago, to making finance schemes rather than making consumer products. So, you see the government now, protecting finance like it used to protect US Steel with tariffs, or Chrysler with bailouts, etc etc.
What, indeed, if we actually regulated things? Sen. Chris Dodd may not need to propose an independant organization to protect America's economy from more disasters like this one or the Savings and Loan. What if gov't inspectors couldn't just quit, go to work for the private financiers, then come back to work as a regulator--or, chuckle, become head of the Fed like we have now--then return to the henhouse they used to oversee?
Well, maybe they'd go to countries like Greece, hide the country's debt in credit default swaps, and then bet on the failure, like Goldman Sachs just did.
But how the hell is it, we are ready to go to war in Iran over its potential nuclear power, and don't consider the damage that actually happens to every American when the macro economic situation undergoes these damage done by these derivitive creations and other tomfoolery of the ledgers?
From Medina, OH, 03/13/2010
@GeneM
I think you're confusing public school education with an ivy league education. I'd say that a firm staffed with beneficiaries of a budget education would have had more sense of the common variety and perhaps a bit less of the esoteric (non)sense. Blaming public schools for things privately educated students did is just plain silly.
03/13/2010
Should Fuld be living with Madoff? In 2006 Fuld received a 17 percent salary raise to bring his yearly total to $40.5 million. This income included $6.3 million cash bonus, $10.9 million of restricted stock, $10 million in options, $750,000 in salary, and $12.5 million from a vested portion of a long-term incentive plan. Lehman Brothers gave out bonuses of $5.7 billion in 2007, with Fuld receiving $35 million. Fuld’s five-year compensation total, excluding this latest bonus, is nearly $312 million. In addition, starting in 2007, Lehman pledged to pay Fuld $180 million in stock over the next 10 years provided he stays with the firm (Onaran,2007). After telling investors Lehman had survived the housing credit crisis, the bank reported losses of $2.8 billion in the first quarter of 2008, Fuld gave what many consider to be a feeble response, and he demoted two top executives. In September, 2008, Lehman filed for bankruptcy, and Barclays bank purchased its core assets for $2 billion. In 2008-09 Barclays terminated 4,600 jobs and Fuld was out. In the 8 years leading up to the demise of Lehman Brothers Fuld made $541 million while most investors who held onto their Lehman investments lost everything.
From Milan, MI, 03/13/2010
If you think this is bad, look at the federal budget.
From FL, 03/12/2010
Guys, this Lehman story is just the tip of the iceberg. I do not buy your comments earlier today on PBR that 'other firms are not doing this'. The big problem in the USA is that a public school education is a recipe for ignorance. We have allowed economics to become a black art and that is the way Wall street likes it. The solution to this problem is to give every public school student a robust education in Macro & Micro Economics along with financial instruments. When was the last time you used those classes you took on Ponce DeLeon?! However, you are confronted with economics and economic crooks on a daily basis in a capitalist society. They can't evaporate your 401K if you know how they do that!!!
GeneM
Florida
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