Interestingly, picking up again from 2009 serves as a reminder of issues that were hot in the aftermath of the crisis that were not addressed adequately, if at all. Here, we discuss the mystery of the magnitude of Lehman’s losses. We pointed out that they are so large and impossible to explain that there had to be accounting fraud, but the bankruptcy overseer had its own reasons not go to there.
Note that this post was published eights months before Anton Valukus released his report on the Lehman bankruptcy, which described the Repo 105 ruse that allowed Lehman to hide over $50 billion of dodgy assets at quarter end and thus not include them in its financial reports. As
we wrote in March 2010:
Quite a few observers, including this blogger, have been stunned and frustrated at the refusal to investigate what was almost certain accounting fraud at Lehman.
Despite the bankruptcy administrator’s effort to blame the gaping hole in Lehman’s balance sheet on its disorderly collapse, the idea that the firm, which was by its own accounts solvent, would suddenly spring a roughly $130+ billion hole in its $660 balance sheet, is simply implausible on its face. Indeed, it was such common knowledge in the Lehman flailing about period that Lehman’s accounts were sus that Hank Paulson’s recent book mentions repeatedly that Lehman’s valuations were phony as if it were no big deal.
Well, it is folks, as a
newly-released examiner’s report by Anton Valukas in connection with the Lehman bankruptcy makes clear. The unraveling isn’t merely implicating Fuld and his recent succession of CFOs, or its accounting firm, Ernst & Young, as might be expected. It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations.
As we now know, the fact that so many well-placed people might be implicated if financial fraud at Lehman had been investigated meant it would never go further than the Valkas report. That analysis was generally regarded as taking the view that “this stuff might look stinky but it wasn’t actually fraud” given that the Repo 105 chicanery in particular had the blessing of a UK law firm, Linklaters. We argued that there was enough smoke that a deeper investigation was warranted. Oh, and for reference, we kept tabs on the Lehman black hole and it got bigger than as of the date of the post below.
This post first ran on July 10, 2009
The Lehman demise refuses to go away.
It has come out that the losses appear likely to be $130 billion on what was a roughly $660 billion balance sheet. That is an insanely high level.
What has caught my attention from the get-go is that blame was very quickly pinned on the disorderly bankruptcy. While I am sure that is a major factor, it is now being played up in the press as if it was the sole cause. I find it curious that Bryan Marsal, the president of Lehman and more important, co-chief executive officer of Alvarez & Marsal, the restructuring consultant for US bankruptcy, is taking the time to tell this story, per the CNBC clip below. There happens to be a piece in the
Financial Times: tonight on Lehman (hat tip reader Don B) as well as this video from last week via reader Hubert, which says there might be a bit of a PR effort afoot.
Reply With Quote
