Fallout: The Financial Crisis

Report: Lehman execs manipulated data

Amy Scott Mar 12, 2010
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Fallout: The Financial Crisis

Report: Lehman execs manipulated data

Amy Scott Mar 12, 2010
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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.

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