So why did Lehman Brothers collapse? A 2,000-page bank examiner’s report released yesterday places a lot of the blame on plain old fraud:
The examiner, Anton R. Valukas, also for the first time, laid out what the report characterized as “materially misleading” accounting gimmicks that Lehman used to mask the perilous state of its finances….According to the report, Lehman used what amounted to financial engineering to temporarily shuffle $50 billion of troubled assets off its books in the months before its collapse in September 2008 to conceal its dependence on leverage, or borrowed money.
….A large portion of the nine-volume report centers on the accounting maneuvers, known inside Lehman as “Repo 105.” First used in 2001, long before the crisis struck, Repo 105 involved transactions that secretly moved billions of dollars off Lehman’s books at a time when the bank was under heavy scrutiny.
According to Mr. Valukas, Mr. Fuld ordered Lehman executives to reduce the bank’s debt levels, and senior officials sought repeatedly to apply Repo 105 to dress up the firm’s results. Other executives named in the examiner’s report in connection with the use of the accounting tool include three former Lehman chief financial officers: Christopher O’Meara, Erin Callan and Ian Lowitt.
More here from the Wall Street Journal and here from Reuters’ Antony Currie. And just for some additional background fun, here’s a short document on the general subject of “control fraud” written by Bill Black. He wrote the book on the subject (literally: you can buy it here) and handed out this short summary at a conference I attended last year. Enjoy.