Lehman Brothers was the next Enron. There will be a next Lehman. It's just a matter of time.
Lehman Brothers collapsed in September 2008. Stock market hara-kiri ensued, with the FTSE plunging 212 points, 179 and 113 in three consecutive days of madness, mayhem and fear.
Late last week, a report into the collapse of the 158 year-old American investment bank was released. It was an eye-opening and damning summary of a multitude of alleged wrong-doings within Lehman Brothers, but also within the wider investment banking community, the bank's auditors and their legal advisors.
$50 Billion Gone Fishing
Here are just some of the alleged lowlights…
- Accounting tricks were used to hide debts. If you've never previously heard of a Repo 105, you're not alone. This accounting gimmick was used to give the appearance that Lehman was reducing its overall debt levels in 2008, when in reality it was not. We're talking $50 billion here, a not immaterial amount, even for investment bankers used to dealing in hundreds of millions every day.
- Auditors Ernst & Young (E&Y) could face legal claims for professional malpractice.
- A Lehman Brothers senior vice president wrote to two senior E&Y staff voicing his concerns about off-balance sheet accounting practices. It appears the whistle-blower's concerns were somehow brushed under the carpet.
- Leading London law firm Linklaters wrote an opinion letter in 2006 saying Repo 105 transactions were allowed under English law.
Enron, Anyone?
The word Enron springs to mind. Coming out of that collapse, big 5 (at the time) accounting firm Arthur Anderson bit the dust. The corporate world was subjected to the incredibly costly, bureaucratic and consultant heavy Sarbanes-Oxley Act. A fat lot of help that was though, when it came to Lehman Brothers.
Right now, Lehman Brothers executives, E&Y and Linklaters are saying they did nothing wrong. Legally, maybe, although I'm very surprised that the systematic massaging of Lehman's quarterly balance sheet didn't break some kind of law.
I'll Cover Your Back
There is plenty of back covering in the corporate world today. Linklaters have already said the report does not suggest their opinion on Repo 105 was wrong or improper. E&Y have said the report made no findings that Lehman's books were improperly valued or accounted for incorrectly.
Ex Lehman Brothers CEO Dick Fuld has said, through his lawyers, that he had no knowledge of Repo 105, his lawyer also adding Lehman's senior finance officers, legal counsel or E&Y did not raise any concerns about the use of Repo 105 with Fuld.
It gets even better. Fuld's lawyer told the enquiry Fuld did not use a computer and did not "have the ability to open attachments" on his Blackberry. One wonders why he had a Blackberry at all. A Nokia 101 might have saved the company.
Bad Eggs Ruin It For Everyone
The influential Lex column in the Financial Times thinks the Big 4 accountancy firms will make it through the scandal intact, albeit with a heavily dented reputation.
Most business people, lawyers and accountants are unscrupulously honest. As in all walks of life, there are some bad eggs. For whatever reason, but usually greed, these bad eggs turn a blind eye to highly questionable transactions. If a number of parties, working together, want to defraud the system, they can often get away with it, for a little while anyway.
If Bear Sterns hadn't collapsed, and the whole financial system hadn't sunk into a full-blown crisis of confidence, Lehman Brothers may just have gotten away with its highly questionable Repo 105 transactions.
The Next Lehman
More regulation is one solution. Deferring bonuses is another. The Financial Times comes up with a novel solution, saying auditors could be employed directly by the regulator (the FSA, for example), which would instantly remove the pressure for them to side with the client when difficult issues arise.
All have merit. But rest assured, whatever is done, and whatever the fallout, 'The Smartest Guys In The Room' -- as a movie about the collapse of Enron was called -- will work out a way around 'the problem' in order to line their own pockets.
Again, and again, and again. The next Enron was Lehman. The next Lehman is inevitable. It's just a matter of when.
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