The report on the collapse of Lehman Brothers has come out and it has blamed the company’s executives, its auditors and its rivals of wrong doing. The 158 year old Wall Street bank went bankrupt in 2008, triggering a huge financial crisis.
Anton R. Valukas, who was appointed by the court as an examiner to understand what went wrong in the last few days of the company authored a 2,200 page report detailing his findings. He claims that the senior management of the company indulged in balance sheet manipulation to hide its insolvency.
The company used an accounting gimmick known as Repo 105 to take $50 billion worth of troubled assets off its books. This helped in reassuring the market that the company was in a stable condition, even though its amount of leverage was dangerously high. Repos are short term loans extended by large banks to each other in exchange of assets. These are usually only for a few days, and it appears Lehman fabricated such transactions to hide its troubles real estate assets.
Valukas clarified that there was no other systematic fraud taking place in the company on a sustained basis. He also said that although misrepresentation of the company’s financial health did take place, they did not contribute to its bankruptcy.
Fingers are also being pointed at Lehman’s auditors, Ernst and Young, who certified its accounts. Ernst and Young has issued a statement saying that the company’s last audit took place at the end of 2007 and in that audit the firm’s financial situation was reported accurately.
Valukas’ report also blamed Lehman’s rivals JPMorgan Chase and Citigroup for asking for almost $16 billion in collateral when the company was in desperate need of a short term debt. This could have hastened the demise of the Wall Street giant. Valukas said that the company, which is currently being liquidated to repay the creditors, can pursue claims against the two rival banks. However, he did not find any evidence that the directors of Lehman Brothers had failed to fulfill their duty.
The attorney for Dick Fuld, Lehman’s chief executive just before its collapse, said in a statement that Mr. Fuld was not aware of any accounting transactions that would have misrepresented the company’s situation.
In the next few days, most of the blame for the fiasco would fall on the company’s chief financial officer, but Mr. Fuld might have to defend himself in civil lawsuits.