By David Caploe PhD, Chief Political Economist, http://www.economywatch.com/
Even for freaks like us, a nine-volume, 2200 page report – like the one analyzing the Black September 2008 collapse of Lehman Bros, compiled under the direction of court-appointed Bankruptcy Trustee Anton Valukas, former Federal prosecutor & chair of the Chicago corporate law firm Jenner & Block – is a bit much to swallow in one bite.
Especially when media from all over the world – not just the US, but notably Britain, where, interestingly enough, several crucial “evaluative decisions” in the Lehman case were made – are frothing at the mouth attempting to make sense of it for their various, often niche, readers.
So though it’s going to take a bit until every juicy morsel can be fully digested, certain facets of the situation have already become painfully evident, while one aspect – so glaringly obvious to us we couldn’t believe it didn’t come up anywhere in a Google © search conducted around 2 am Monday morning Singapore time – seems to have escaped everyone’s attention.
Before we get to that, however, let’s quickly review the relatively un-controversial themes that have already emerged.
1) Most of the senior leadership at Lehman – including former airline pilot and chair Dick Fuld [amusingly pronounced Fooled] are in for a lot of legal problems.
Whether these will be criminal or merely civil remains to be determined, but already both Wall Street lapdog Securites & Exchange Commission [SEC] and the Department of Justice “have indicated Valukas’ work is going to speed up completion of their own reports.”
2) Lehman’s alleged watchdogs – notably Big Four accounting firm Ernst & Young [E&Y], but also every Federal body supposedly overseeing such matters, above all the SEC – consistently and over a long period of time failed miserably at “carrying out their appointed rounds.”
Indeed, several sources immediately started comparing E&Y’s failure to be of similar magnitude to that of the extinct-as-a-
3) In that context, it’s fascinating to see how many of the key “opinions”
In fact, the crucial legal opinion that allowed Lehman to keep on pulling “fast ones” at the end of every quarter came from the so-called “Magic Circle” City of London – UK equivalent to Wall Street – law firm Linklater’s, which gave the thumbs up to an accounting practice that NO American firm was willing to certify as legitimate.
Which gives us Americans at least SOMETHING to be proud of in the generally sordid mess we have made of the US and – because the world political economy is and will remain for the foreseeable future “American-
4) So what was this little “magic formula” the geniuses at Lehman came up with – with which E&Y eventually became “quite comfortable,”
The now-in-famous Repo 105.
We’ve been having all the fun so far, so let’s let the ever-reliable – and very right-wing – Telegraph of London, appropriately enough, give an overview of how this little maneuver worked:
Repo 105 was the name used at Lehman for what its own staff called an "accounting gimmick".
The bank had used the trick since 2001, but what started as "a lazy way of managing the balance sheet" became crucial as the bank tried to survive the credit crisis.
At the end of each quarter, Lehman sold some of its loans and investments temporarily to other financial institutions for cash using short-term repurchase (or "repo") agreements and then bought them back a few days later.
Ordinarily the assets would still be included on the bank's balance sheet, but because they were valued at 105pc or more of the cash received, the transactions counted as a "sale" under accounting rules and Lehman was able to report a less risky balance sheet.
The bank stuck roughly to a limit of $25bn of Repo 105 until early 2007 but increased its use so that in the first and second quarters of 2008 Lehman was hiding $50bn of assets from investors, the government, rating agencies and regulators.
For the second quarter, Lehman reported a net leverage ratio of 12.1 when the true figure was 13.9 - and a difference of 0.1 was regarded as material [which means a gap of 1.8 was near-astronomical.]
In Mr Valukas’s words, Lehman was “trumpeting”
The interesting and legally-oriented JD Supra clearly explains at a more specific level how the Repo 105 maneuver was so useful for Lehman:
By recharacterizing the Repo 105 as a “sale,” Lehman removed the item from its balance sheet, thereby reducing their publicly reported net leverage. Its periodic report did not disclose the cash borrowing from the Repo 105 transaction – i.e., although Lehman had in fact borrowed tens of billions of dollars in these transactions, they did not disclose the known obligation to pay the debt. Lehman used the cash from the Repo 105 transactions to pay down other liabilities, thereby reducing both the liabilities and the total assets reported on its balance sheet, and lowering its leverage ratios. Lehman never publicly disclosed its use of Repo 105 transactions, nor its accounting treatment of these transactions.
To read the rest of this report at http://www.economywatch.com/
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