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