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Report: Lehman used fuzzy accounting
People walking behind a Lehman Brothers sign
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TEXT OF INTERVIEW
Steve Chiotakis: A bankruptcy examiner in the Lehman Brothers case has officially outlined the final days of that firm. The report was filed late yesterday in Manhattan Federal Court and details the reasons behind the firm's collapse and what laid the groundwork for the financial crisis. Marketplace's Alisa Roth joins us live from our studio in New York to talk about what it says. Good morning, Alisa.
Alisa Roth: Good morning.
Chiotakis: 2,200 pages worth of reasons for Lehman's collapse. I know you can't give me all of them, but what are the big ones?
Roth: As you say, a lot of different issues came together to take down Lehman Brothers. Like a lot of other institutions, the company was holding too many bad mortgages. The report also says that some of Lehmans' rivals -- namely JPMorgan and Citigroup -- sped up its failure. Those other banks insisted that Lehman put up more collateral on loans, which in turn starved the company for cash. But probably the most scathing accusations are that Lehman manipulated its balance sheets. The exact words are that Lehman used "materially misleading" accounting tricks.
Chiotakis: Does the report name names?
Roth: Oh it does indeed. Richard Fuld, the ex-CEO of Lehman, reportedly signed off on the fuzzy accounting. The report accuses him of being "at least grossly negligent." The report also says Lehman's accountants, Ernst & Young, knew about the creative bookkeeping.
Chiotakis: So what happens now? Can we expect another big round of white-collar trials, like we had post-Enron?
Roth: I think that's a safe bet. The question will be how far anybody can prove the responsibility extended. The report says "colorable claims" could be made against some Lehman execs and against Ernst & Young, the accountants. And by colorable claims, it means evidence that's strong enough to potentially get a jury to award damages.
Chiotakis: Marketplace's Alisa Roth, reporting from New York. Alisa, thanks.
Roth: You're welcome.
to Capt. Renault: "Your winnings, sir."
from
The Savings and Loan Crisis: Unresolved Policy Issues
R. Dan Brumbaugh Jr. et.al.
"Savings and loans reported to regulators on the basis of Regulatory Accounting Principles (RAP) and Genrally Accepted Accounting Principles (GAAP).
"By year-end 1980 the market value of the industry's fixed-rate mortgage portfolio was approximately negative 12 percent, growing to negative 18 percent by year-end 1981. At that time, based on the market value of their mortgage portfolios, almost every savings and loan in the U.S. was insolvent.
"From the very beginning, however, negative market-values were not publicly reported. Given the structure of the industry's assets, it was clear that the reported net-worth of the industry bore no resemblance to the actual negative market-value net worth of the industry. The Bank Board and the entire regulatory apparatus, however, were well aware of the actual condition of the industry. As the chairman of the Bank Board testified in the early 1980s, 'By 1982, the real capital positions of all thrift institutions had been completely eroded, and virtually all thrift institutions had large negative net worth when their assets and liabilities were valued at actual market rates' (Pratt, 1988).
"Savings and loans were required to meet specified minimum net worth requirements. For the purpose of calculating minimum net worth requirements, RAP was used. ... Likewise, the decision of whether to close an institution on the basis of insolvency was made on the basis of RAP. ...on the whole, the industry met its minimum net-worth requirement in 1980, despite the fact that the entire industry was substantially insolvent based on market values."
