Lehman Bankrutpcy: ‘Repo 105,’ Bank’s ‘Accounting Gimick,’ Was Like ‘A Drug,’ Emails Show

Ryan McCarthy, Huffington Post

The arcane “accounting gimmick” employed by Lehman Brothers as the firm failed in 2007 and 2008, was, in fact, like “a drug” propelling the bank to conceal the true nature of its financial health, according to bankruptcy documents released yesterday.

As news organizations pour through the 2,200 documents released by Anton Valukas, the examiner in charge of sifting through the most expensive bankruptcy in history, new details have surfaced about possible criminal actions among Lehman executives.

An executive referred by Lehman execs as the firm’s “balance sheet” czar –who later went on to become the firm’s COO — The New York Timesnotes, likely had knowledge of the firm’s highly creative accounting maneuvers. Here’s the NYT:

“I am very aware … it is another drug we r on,” Herbert McDale wrote in an April 2008 e-mail cited by the examiner’s report. At other times, he is described as calling for a limit to the number of Repo 105 transactions.

At the center of the controversy is a technique called “Repo 105,” under which Lehman was able to move $50 billion off of its balance sheet in the second quarter of 2008 alone, MarketWatch reports. Here’s more from Market Watch:

[Repo 105 is] essentially a type of secured loan and is booked that way in the accounts — leading to an increase in both assets and liabilities.

Lehman’s trick was to use a clause in the accounting rules to classify the deal as a sale, even though it was still obliged to repurchase the assets at a later date. That meant the assets disappeared from the balance sheet, and it could use the cash it received to temporarily pay down other liabilities…. [Repo 105] was crucial for maintaining the group’s credit rating as rating agencies and investors began to focus more on leverage and demanded lower risk.

Here’s the NYT with another seemingly incriminating email:

In a series of e-mail messages cited by the examiner, one Lehman executive writes of Repo 105: “It’s basically window-dressing.” Another responds: “I see … so it’s legally do-able but doesn’t look good when we actually do it? Does the rest of the street do it? Also is that why we have so much BS [balance sheet] to Rates Europe?” The first executive replies: “Yes, No and yes. ”

Read more here: http://www.huffingtonpost.com/2010/03/12/lehman-bankrutpcy-repo-10_n_496463.html

Lehman Top Officials Manipulated Balance Sheets, JPMorgan And Citi Contributed To Collapse

Shahien Nasiripour, Huffington Post

The examiner in charge of investigating the collapse of venerable Wall Street investment house Lehman Brothers, the most expensive bankruptcy in U.S. history, said in a report publicly released Thursday that senior officials failed to disclose key practices, opening them up to legal claims, and that JPMorgan Chase and Citigroup contributed to the firm’s collapse. In addition, the report concludes that the firm’s auditor, Ernst & Young, failed to meet “professional standards.”

The exhaustive report was unsealed today by Judge James M. Peck, who said the report reads “like a best-seller.”

The examiner, Anton Valukas, also found that parties have claims to pursue against JPMorgan Chase and Citibank in connection with their behavior regarding the modification of agreements with Lehman and their increasing collateral demands in Lehman’s final days. These demands had a “direct impact” on Lehman’s diminishing liquidity — its cash on hand — which was a prime reason behind the firm’s demise.

“Citi is reviewing the report, which is over 2,000 pages long, but notes that, based on its preliminary review, the examiner has not identified any wrongdoing on Citi’s part — or anything that would suggest that Citigroup helped cause Lehman’s collapse,” said Danielle Romero-Apsilos, director of corporate affairs for Citi Institutional Clients Group.

Read more here: http://www.huffingtonpost.com/2010/03/11/lehman-bankruptcy-report_n_495668.html

Lehman Brothers’ former heads criticised for lapses

A report into the collapse of Lehman Brothers criticises senior executives and auditor Ernst & Young for serious lapses that led to the firm’s collapse.

The report says Lehman was insolvent for weeks before it went bankrupt, sparking a global financial meltdown.

It accuses management of “actionable balance sheet manipulation” and using accounting tricks to hide debts.

Ernst & Young said that its last audit of Lehman was “fairly presented” according to accounting rules.

The collapse of the 158-year-old investment bank in September 2008 was the world’s largest bankruptcy.

Wall Street, the City of London, and the US and UK governments tried to organise a rescue, fearing – rightly – that Lehman’s failure would set off a chain reaction around the globe.

Possible claims

Friday’s 2,200-page forensic analysis into what went wrong says there could be grounds for legal action against former executives.

Lawyer Anton Valukas, who led the inquiry, stops short of saying that there was systematic wrong-doing at the firm.

Read more here: http://news.bbc.co.uk/2/hi/business/8563604.stm

Fed Shoulders AIG Loan Losses of $450Million to Ease Sale to MetLife

By Hugh Son

March 11 (Bloomberg) — The Federal Reserve Bank of New York and American International Group Inc. agreed to shoulder as much as $450 million in losses tied to the insurer’s Japan real estate bets as part of the sale of a division to MetLife Inc.

MetLife won an accord to split most declines on $1 billion in commercial mortgages included in the $15.5 billion purchase of the AIG unit, according to a MetLife regulatory filing and the company’s chief financial officer. A corporate vehicle owned by the Fed and New York-based AIG will use MetLife stock gained in the sale to pay for future real estate losses, reducing the assets left to repay taxpayers, said two people with knowledge of the arrangement.

AIG’s Japan mortgage holdings were deemed a “more troubled asset” by MetLife, which is also indemnified from losses on one of the U.K. businesses it will acquire in the purchase of American Life Insurance Co. AIG said March 8 it is divesting Alico, which operates in more than 50 countries including Japan, to pay down bailout debts on a $60 billion Fed credit line.

“You have to ask yourself, ‘does the American taxpayer have any hope of getting their money back any other way besides selling this business?’” said William Cohan, a former JPMorgan Chase & Co. banker and author of “House of Cards,” about the financial crisis. An agreement for one side to retain some risk is typical in deals “when the buyer and seller have a difference of opinion about an asset,” he said.

Read more here:  http://www.businessweek.com/news/2010-03-11/fed-shoulders-aig-loan-losses-to-ease-sale-of-unit-to-metlife.html

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