Showing posts with label Lehman. Show all posts
Showing posts with label Lehman. Show all posts

Sunday, 24 April 2011

Lehman Examiner Finds Fraud, Probably

07:24 Jas

Should accounting tricks be added to the long list of things that caused the financial crisis? I'm not sure. Turns out Lehman was even more leveraged than we thought. A report out on Thursday by a court appointed examiner into what went wrong at Lehman Brothers finds that the firm towards the end of its existence regularly employed accounting tricks to gussy up its financial statements at quarter end. The report is 2,200 pages and you can find a good portion of it here. The firm hid as much as $50 billion in loans a quarter in order to look like it was less leveraged than it was.  The transactions were called "Repo 105" by the bank, and were used to move loans off its balance sheet for a few days at time. Conveniently, the days the loans went missing happened to always be the days that the firm had to report its books to the public.
This seems like fraud to me. The examiner calls it "actionable" and he says the moves open Lehman and its executives up to suits from shareholders who could claim, it appears rightly so, that they were mislead. Still I am not convinced accounting played as big a role in this crisis as past ones. Here's why:
Yes, Lehman does seem to have hid some of its loans. And that means other banks were probably using this trick as well. But how much did the trick distort Lehman's books. Not much. In fact, even if Lehman had made all of its loans available for everyone to see it's not clear that any investors would have cared, or the NY Fed would have spent one more minute thinking about the firm's solvency.
That's because the vast majority of its loans and illiquid investments were out there for all to see. In fact, if you add back in the $50 billion the firm was hiding the firm's net leverage ratio moves from 12.1 to a whopping 13.8. Merrill Lynch had a leverage ration of more than three times that.
What the moves did do was to shield the firm from criticism from the likes of short-sellers like David Einhorn who claimed the situation at Lehman was getting worse, but couldn't prove it. On the margin, Lehman's accounting trick made it look like its leverage ratio was either stable or improving. Nonetheless, people like Einhorn didn't need another reason to short Lehman Brothers. They already knew something smelled at Lehman. They just didn't know what they were smelling was slightly worse than they thought.
Perhaps the biggest takeaway from this is that Sarbanes-Oxley has again proven useless in preventing corporate fraud. Accounting fraud is exactly the type of thing Sarbox was supposed to stop by beefing up corporate boards and imposing new accounting oversight all the way up to the board level. But the Lehman examiner's report says the investment bank's executives were able to keep its board in the dark. The examiner says board members appear to have had no knowledge of the "Repo 105" accounting trick. Just another sign that the true failing that caused the financial crisis was at its heart a regulatory one.


Read more: http://curiouscapitalist.blogs.time.com/2010/03/12/lehman-examiner-finds-fraud-possibly/#ixzz1KRzdPZZ9

Lehman Brothers' 'Repo 105' Accounting Scandal

05:23 Jas

Accounting Gimmicks or Outright Fraud?

By Adam Sharp
Monday, March 15th, 2010
Nearly 18 months after the collapse of Lehman Brothers, it looks like we might finally get some answers.
The long-awaited bankruptcy examiner's report came out Friday — and it's a whopper — clocking in at 2200 pages. The examiner looked at 10 million e-mails and 20 million documents in the case.
The financial world is still digesting the report, but the first scandal is already emerging. The biggest revelation so far is that Lehman was cooking their books since at least 2007. In the final quarter before filing bankruptcy, accounting tricks boosted their balance sheet by $50 billion.

Let's Get Some Lipstick on This Pig
Insiders called the scheme a "Repo 105." And let me tell ya, Lehman took a page straight out of Enron's playbook with this one.
Here's how it worked: Lehman entered into repurchase agreements with banks in the Cayman Islands. Under the deal, Lehman would "sell" toxic assets to the other bank — with the understanding that they would buy them back in a short time.
The trick made Lehman Brothers look much healthier — on paper, at least. These guys were desperate to fool investors and credit rating agencies. They had screwed up on a truly collosal scale, and lined their pockets all the while.
If (or when) the truth got out, executives knew their careers and reputations would be at stake. But by engaging in this kind of book-cooking to cover it up, they could end up behind bars.
Banks use similar repo agreements all the time. But they mark them on the books as loans, because that's what they are. Lehman marked them as sales. That might not sound like a huge deal, but the effect was that Lehman had $50b more in cash on its books, and $50b less in toxic mortgage assets. 
This is complicated stuff, and that's not a mistake. Scams like this are complex by design. The goal is to confuse the mark. In this case, we were all the mark.

Accounting "Gimmicks," or Just Plain Fraud?
The examiner's report tip-toes around the f-word (fraud) using very careful language. Not one mention of fraud in sight. They refer to "gross negligence," but that's not necessarily a crime. And media outlets are reporting on Lehman's accounting "gimmicks," "tricks," or — my favorite — "shenanigans."
Let me get this straight: Lehman intentionally manipulated their accounting with the goal of deceiving investors, rating agencies, and possibly their regulators, leading to the largest corporate bankruptcy in U.S. history... And that's only considered "negligence"?
Being negligent means you lack concern or aren't paying attention when you should be. It doesn't mean willfully lying on your financial statements. What Lehman did sounds a whole lot more fraudulent than negligent. And this type of blatant manipulation is being referred to as a gimmick? Ridiculous.
The Repo 105 scandal is just getting started, but already the accusations are flying. Dick Fuld, former CEO, is denying knowledge of the Repo 105 transactions. Not true, according to COO Bart Mcdade. When interviewed by the bankruptcy examiner, Mcdade said, "Fuld knew about the accounting of Repo 105."
I'll be surprised if anyone actually goes to jail, but we should get much more information in the coming months. Expect a whole lot of "I do not recall having that conversations" when these guys are hauled up on Capitol Hill this time.
One of the biggest questions is this: Were any other banks using similar tricks? And are they still cooking the books today? 
We don't know yet, but it wouldn't surprise me one bit. These investment banks were notorious for stealing each other's ideas. And the fact that it all took place under Tim Geithner's nose — when he was president of the NY Fed — is also something that needs to be explored.
A Great Call
Our own Ian Cooper alerted Wealth Daily readers about a possible Lehman bankruptcy back in June 2008, when the stock was still trading around $30. He warned, "It's only a matter of time before Lehman (LEH) joins the latest list of casualties." He recommended buying October $25 puts. It proved to be quite a profitable call, banking profits of 180% gains in just over a month. Readers who held onto the puts made significantly more.
Just recently Ian uncovered another opportunity, and this time it's in the foreclosure market. You can read all about it and his service, Options Trading Pit, here.
Stay nimble out there,