“Dick Fuld is going to be bankrupted and he’s going to spend the rest of his life in court fighting legal battles. There maybe others forced to do the same.”

-Dick Bove of Rochedale Securities. Bove had  all nine volumes of the examiner’s report printed and bound. (Barrons)


As it turned out, Lehman Brothers was the firm that deserve to die. The author of the book The Murder of Lehman Brothers asked me to do for a review of it — I politely declined, saying his title was wrong — it wasn’t murder, it was suicide.

Turns out that was more true than I realized.

In addition to tarnishing what little name Fuld had, the tentacles of the Valukas Report are reaching to the NY Fed and Geithner, Ernst & Young, even Linklaters, a law firm in the UK that blessed Repo 105 for the British subsidiary of LEH as kosher.

As you can see by the headlines below, the breadth of Lehman stories is rather substantial. If you want to delve deeper, these are as good a place to start digging:

• Lehman Brothers Holdings Inc. Chapter 11 Proceedings Examiner’s Report (Jenner & Block)

• Repos Played a Key Role in Lehman’s Demise (WSJ)

Video: Former 1999 Lehman CFO Brad Hintz on the off-balance-sheet transactions of Lehman Bros (Bloomberg)

• No, JPM and Citi Did Not Cause Lehman’s Collapse. (TBP)

This just in: short-sellers had nothing to do with the collapse of Lehman Brothers. (Jeff Matthews)

• Financial Crisis May Reach Auditors (WSJ)

• NY Fed Under Geithner Implicated in Lehman Accounting Fraud Allegation (naked capitalism)

• Insider Warned About Lehman Accounting  (WSJ)

• The “Repo 105″ Scam: How Lehman Fooled Everyone (Including Allegedly Dick Fuld) And How Other Banks Are Likely Doing This Right Now (Zero Hedge)

• Why It Doesn’t Matter If Lehman Round-Trip Sales Technically Complied With Accounting Rules  (Business Insider)

• Lehman Failed Its Stress Tests on at Least Three Occasions (Daily Finance)

• Lehman was a poorly-managed bank that operated an irresponsible business model (FT)

• Lehman’s Ghost Haunts California (WSJ)

• In Lehman’s Demise, Some Shades of Enron (Dealbook)

• Linklaters, Ernst & Young face action over Lehman Brothers collapse (Times Online)

• The Devil’s Casino: “Lehman was a culture of lies” (book/video)

Video: Lehman Brothers, the Next Enron? (MSNBC)

• Findings on Lehman Take Even Experts by Surprise (NYT)

Feel free to throw any other Lehman articles, analysis or commentary worth mentioning into comments.

Category: Bailouts, Legal, Regulation, Short Selling

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

43 Responses to “Lehman News Round Up”

  1. perra says:

    Lehman Brothers Q2 2008 Overview

    “A combination of balance sheet deleveraging, new equity issuanceand access to debt
    provides us with the flexibility to pursue market opportunities as they arise”


  2. Patricia Hurtado says:

    Lehman Report Points Way to Plaintiffs, Not Prison, Lawyers Say

    A 2,200-page bankruptcy report a year in the making may point the way for plaintiffs looking to sue former Lehman Brothers Holdings Inc. officials, lawyers said, rather than grand juries probing possible crimes.

    The report, filed by bankruptcy examiner Anton Valukas in Manhattan federal court on March 11, describes off-balance-sheet transactions Lehman used to hide debt in late 2007 and 2008, deceiving shareholders about its ability to withstand losses. The firm, which collapsed in September 2008, filed the biggest bankruptcy in U.S. history and helped trigger the financial crisis and resulting $700 billion government bailout.

    Within a month of its demise, three federal criminal probes began and at least 12 subpoenas were issued by prosecutors in New York and New Jersey, lead Lehman bankruptcy lawyer Harvey Miller said at the time. Since then, no major criminal cases have been brought over the bank’s failure. The new report is unlikely to change that, said attorney Jacob Frenkel.

    “There is language here that would validate there being no federal criminal case brought,” said Frenkel, a former Securities and Exchange Commission lawyer, of the Lehman report. “There would have been language of ‘intent’ or deliberately ignoring information.”

  3. Joshua Gallu says:

    Lehman’s Hidden Leverage ‘Shenanigans’ May Haunt Fuld

    Lehman Brothers Holdings Inc.’s Richard Fuld exuded confidence as he briefed analysts on June 16, 2008, four days after demoting his firm’s finance chief in the wake of a $2.8 billion quarterly loss.

    “I am the one who ultimately signs off and I’m comfortable with our valuations at the end of our second quarter,” then- Chief Executive Officer Fuld said on the conference call. “We have always had a rigorous internal process.”

    The rigor was based on a shaky foundation, according to a 2,200-page report about the firm’s demise by Anton Valukas, the examiner for the bankrupt firm. Lehman Brothers “reverse- engineered” a key measure of stability, masking the firm’s true financial condition, Valukas said. Some asset valuations were also “unreasonable,” he said.

  4. maynardGkeynes says:

    If Dick Fuld shouldn’t be prosecuted, why was the late Ken Lay prosecuted? They did the same thing, going out in public and pumping up their firm’s situation, allegedly to stop a run. Maybe this is wrong, maybe not. But, does Fuld get a pass because he’s a banker? Because he doesn’t live in Houston?

  5. Criminal prosecution requires that a specific criminal statute be violated.

    It appears that most of the accounting fraud laws are civil in nature — more like a contract violation than an assault

    That’s just the way it is

  6. flipspiceland says:

    So what if he’s “bankrupted”??

    He’s had a dozen years to hide assets all over the world and in plain sight. The son of a bitchin prick took down at least half a billion dollars for his crimes, for krissakes. And his partners in crime much more. He certainly didn’t act alone or just with the connivance of O’meara anbd Callin.

    If at all, and that is a very BIG IF with Gasbags like Charlie Gasparino already beginning the damage control PR for him, he’ll be ‘bankrupted’ on what they can find and that won’t amount to a fraction of what is already safe from confiscation.

    Some of these thieves, miscreants and frauds need to be executed, gangland style. Vigilante justice is the only thing that might restrore some sanity to snake pit of Wall Street and give notice to the members of The Tribe that thay are next due for extinction.

  7. souelle6 says:

    To tell you the truth I’m a little surprised at the degree of shock to which this weeks news seems to have created in people… I thought it had been pretty well documented especially in Andrew Ross Sorkin’s “Too Big To Fail” that Lehman Brothers had a terrible commercial real estate trade on which inevitably sunk the Firm… Joe Gregory who appears to have been the closest to the trades supposedly used classically bad trading judgement in not cutting a loser (like you have said many times Barry 10% stop on everything, after all we’re all monkeys) and furthermore removing anyone who drew attention to his bad judgement… Fuld’s sin was his faith in Gregory and his general mental absenteeism from what eneded up being the most important trade he had ever been associated to… While the “Murder of Lehman Brothers” may not have been carried out by the U.S government as the end of the book implied… The legendary great investment banking business was murdered by some executives who, in the end, bet the firm away

  8. hgordon says:

    Just to put it into perspective, how much time passed between various S&L failures and the indictments of fraudsters ? For example, Keating’s meetings with senators occurred in 1987, but it seems that fraud charges weren’t filed until 1989, and it seems that he wasn’t actually arrested until a full year later.

  9. Mr.E. says:

    “Criminal prosecution requires that a specific criminal statute be violated.

    It appears that most of the accounting fraud laws are civil in nature — more like a contract violation than an assault”


    I suspect the activities of key Lehman officers will be closely examined by the FBI for criminal activity, most likely fraud. Using the Enron case as precedent, Ken Lay was convicted on a number of counts of securities fraud. Jeffrey Skilling was similarly convicted of securities fraud, making false statements, and conspiracy.

    If I were Fuld or Callan I would surely have a criminal attorney on my team, and I would be very scared as well.

  10. Myr says:

    Lehman’s “Repo 105″ scam was common knowledge in the industry. That’s just a fact! I first heard about it in the late 90′s/early 2000′s when I worked as a head trader.

    The best way to find out about all sorts of highly questionable activities is simply to talk to experienced traders. I’ve seem much more “bad” behaviour from my competitors and customers…some of which was later uncovered and some that wasn’t. The person that heads the SEC should be someone with a trading background.

  11. judyo says:

    Just ran across this in Vanity Fair.

    “Snake Pit” comes to mind.

  12. VennData says:

    So the no. 16 employer of MBAs with approx. 95% of their mangers with MBAs from “top schools.”


    Are you telling me rudimentary algebra, of few Harvard Business School cases about Ford moving to Egypt and lap top computer skills don’t qualify you to manager a global financial services firm? Are you kidding’ me?

  13. philipat says:

    Can someone explain who was the counter party to these transactions or did the cash never actually exist? I can’t imagine who would provide Lehman with $50 Billion in cash at that point in time. Or was the transaction entirely ficticious? Would that not have a material impact on supporting claims of criminal intent?

  14. Mr.E. says:

    While I am not a fan of Eliot Spitzer, the segment he did with Ratigan [see Video: Lehman Brothers, the Next Enron? (MSNBC) ] is quite interesting. Spitzer, in his comments, implicates both the US Dept. of Treasury and the Fed, and names both Geithner and Bernanke for their responsibilities in their Federal Reserve Bank roles (no specific names at Treasury).

    Resolution of the Lehman debacle notwithstanding, by this time have we not had enough be it misfeasance, nonfeasance or simple negligence from these two distinguished gentlemen? There should be official resignations from both in POTUS’s hands tomorrow. I doubt there is anything that could be as effective in restoring long-term investor confidence in U.S. markets and our financial system.

  15. greenback says:

    The counterparty was getting collateral worth 105% of the cash they provided. I don’t know the details here, but repos are pretty standard, and I would guess the collateral was closer to Treasuries than subprime CDOs, and even if it was junk, the cash provided should be based on real market values rather than based on Lehman’s cost accounting. So I believe the counterparty was an over-secured creditor in effect.

  16. Andy T says:

    So, then, the “gist” of the Lehman retrospective is that astute market participants were better at sussing out the sham than the regulators?

    So, then, taking it one step further….why do we need more regulators and regulations when it seems that the market “nailed” the problem accurately and the “word” got out without any regulators becoming involved.

    Vive la laissez-faire.

  17. bsneath says:

    Florida may have been hurt more than any other State by the Lehman debacle. You don’t suppose this has anything to do with it?

    Jeb Bush: Lehman’s Secret Weapon

  18. Winston Munn says:

    I don’t see what would prevent a racketeering charge under RICO with the two specified crimes being fraud and securities fraud.

  19. philipat says:


    My point being that, by mid-2008, I can’t imagine that anyone with the wherewithall to pony up $50 Billion cash would risk it with LEH. As you say, it must have been (Over?) collateralised with high quality and liquid paper. Not something that LEH was renowned for at that point in time? After all, if they actually possessed $50 Billion in Treasuries and leverage was an issue that had to be addressed, why not make a true actuall sale and fix the balance sheet once and for all?

  20. philipat says:


    Is the moniker an abreviation of Ayn Rand?

  21. Blurtman says:

    So it appears likely that Lehman principles committed financial fraud, and likely felonies at that. The Lehman bankruptcy auditor stated numerous times that Lehman claimed they had informed the NYFRB of their actions to hide the $50 billion off balance sheet. As Geithner did not act on this information, he committed fraud. I hope you see where this is going. Barack Obama is engaged in a cover-up of epic financial fraud. The poor sap will wind up holding the bag for Bush and Paulson.

    Imagine if this were oil or nuclear energy or Toyotas. A cabinet official colludes with industry to hide crimes. His boss the president knows, but engages in a cover-up. Rosemary Woods, where are you????

  22. DL says:

    I certainly hope that they do to Dick Fuld what they did to Bernie Ebbers.

  23. greenback says:


    I can see it from the counterparty side. Suppose you run a non-finance company and you have a lot of cash on hand. You’re a widget maker and you really aren’t interested in buying semi-liquid $xx million bonds. You expect to get a couple of days worth of excess interest and the worst-case scenario is Lehman goes under, and you permanently get a semi-liquid A-rated (legit A-rated) bond at a 5% discount to market. That’s a headache, but you’re getting a premium for it.

    As for Lehman’s side, it’s a good question, why manipulate when they can just sell. That’s a good question about repos in general though. The little bit I’ve talked to traders, they think they can make a little extra money through these short-term maneuvers.

  24. scharfy says:

    For the life of me I cannot fathom why, oh why , the public had to come to the rescue of this giant poker game.

    The ‘global collapse’ they warned of may just have been a giant simultaneous haircut (in civil court) for all the big players. DEALS would have gotten made. Life would have gone on. But yes, John Paulson might have only made 75% of what he had on paper. Thats the nature of poker, why cash games are just that – cash games.

    Can you imagine if Doyle Brunson was playing a guy ( he’s a fish – playing on credit) in the high stakes poker room, busted him, and then asked the old ladies playin 2 dollar slots to backstop the guy?

    They’d be like ” Fuck you!” – you should’ve checked into his creditworthiness before you made million dollar bets with him.

    Either way, the guys upstairs all were playing with borrowed money (leverage), and now that one or more got exposed, the winners (hedge fund clients, IB traders, foriegn clients) went to the proletariat to make ‘em good.

    Morally wrong, pragmatically wrong, and just plain wrong.

  25. philipat says:

    1. Why would I not be surprised if we subsequently learn that the transactions were either wholly or partly fictitious?
    2. I can’t see any legitimate reason why any financial institution would want, and more importantly be allowed, to do anything “Off Balance Sheet”.

  26. solanic says:

    Civil schmivil.

    IF the law was changed for so called white collar crime that kicked in at some magical threshold, say $500,000 – the perp goes to prison. As in, the same prison with murderers, rapists, bank robbers, etc.

    Fantastic links in this entire post btw.

  27. MICHAEL J. de la MERCED says:

    Auditor Could Face Liability in Lehman Case

    Lehman Brothers may have collapsed a year and a half ago, but fallout from its demise has created a potential legal liability for its former accounting firm, Ernst & Young.

    A 2,200-page report by a court-appointed examiner, Anton R. Valukas, on Lehman’s collapse has plenty of criticism for various players involved with the investment bank. But some of his harshest words are reserved for Ernst & Young and the accounting maneuvers it permitted.

    Mr. Valukas writes that he found enough evidence to support at least three claims against the accounting firm for not looking more closely into Lehman’s use of questionable accounting. Lehman used the tactics, known inside the bank as Repo 105, to hide as much as $50 billion off its balance sheet to temporarily reduce its debt levels.

    His report concludes that sufficient evidence exists to bring claims of malpractice against the accounting firm on the grounds of failing to disclose or investigate the technique. Legal and accounting experts say that Ernst & Young could now face potentially damaging civil litigation by private plaintiffs or the Securities and Exchange Commission — or even criminal charges by the Justice Department

  28. Tony says:

    Does Sarbanes-Oxley add any legal jeopardy since Fuld was required to sign off on quarterly reports?

  29. troubled times says:

    60 minutes had Michael Lewis on last night discussing he new book ” The Big Short ” . I thought it was good. Novastar was mentioned and of course they didn’t mention Leslie Stahl’s piece .

  30. Perhaps SarBox is where he gets his in the end . . .

  31. Mr.E. says:

    Sarbanes–Oxley Section 802: Criminal penalties for violation

    Section 802(a) of 18 U.S.C. § 1519:

    >p>Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.

  32. Could Lehman be Ernst & Young’s Enron?

    Ernst & Young became the latest auditor to come under
    fire this week after the court-appointed examiner in the Lehman Brothers Holdings Inc bankruptcy said
    the audit firm did not challenge accounting gimmicks that allowed Lehman to hide some $50 billion in
    assets in 2008, while claiming it had reduced its overall leverage levels…

  33. Further Lehmans revelations blocked by Barclays

    Further damaging revelations about the collapse of Lehman Brothers are being held up in the US courts by Barclays…

    A court hearing will take place soon, possibly as soon as April 1, in which the examiner’s team is expected to argue for the release of these “underlying documents”….

    The other party objecting to publication of the underlying documents is the US Office of Thrift Supervision (OTS), a federal bank regulator established in 1989 in response to another financial crisis – the savings and loans disaster, is also seeking redactions, arguing that the information was handed over initially on the understanding that it remain confidential.

    Mr Valukas’ report exposes concerns expressed by the OTS concerning Lehman’s liquidity. After Lehman acquired and financed the $23.6 billion buyout of Archstone-Smith Real Estate Investment Trust in May 2007, along with the property company Tishman Speyer, the OTS noted that Lehman exceeded its own risk appetite limits. It criticised Lehman for being “materially over-exposed to commercial property and for entering into the Archstone deal without sound risk management practices”.

  34. V says:

    A timely reminder about “Research Analysts”:

    including an investment lesson from David Einhorn:
    “I don’t have to sit here today and say where do I think the stock will be, all I have to do I’ve got one decision today the stock’s at $31 or wherever it is, do I want to be long it, do I want to be short it, or do I want to be out of it, and right now I want to be short it”

  35. bsneath says:

    Barry Ritholtz Says:
    March 15th, 2010 at 6:06 am
    “Perhaps SarBox is where he gets his in the end . . .”

    Are you referring to in due time, anatomically, or both?

  36. Sisyphus says:

    Is there anybody out there who understands how these Repo 105s worked?
    I used to be an accountant and none of the reporting of these transactions that I have read adds up.
    The basics of a repo is that you sell a security at market price and agree to buy it back at a price equal to your sale price plus an amount corresponding to interest on the proceeds of your original sale. Because the substance of this transaction is a financing it is accounted for as a secured financing i.e the securities stay on the balance sheet and the proceeds are shown as a liability (“Securities sold under agreements to repurchase” in bank parlance).
    The reporting says the securities sold were 105% of the proceeds received so that this was a “true sale” under English law, and that they were accounted for as sales rather than secured financing.The proceeds were than applied ,it is reported, to pay down debt to reduce the leverage ratio. I have seen it reported that the securities in question were high quality (Treasuries, Government of Canadias) but also that they were CDOs.
    If you account for the transaction as described as a sale you remove the securities from the balance,book a loss on sale and reduce the debt that has been paid off. Assuming the securities repo’d were being carried at market value, the loss on a $50bn portfolio repo’d like this would be $2.38 bn. Presumably losses of this magnitude were not being booked so where did the loss go? Deferred because of the repurchase commitment? Not possible in sale accounting.
    And if good quality paper was involved, why not just sell that to reduce leverage legitimately.
    And what has English law got to do with anything. Even if the transactions were “true sales” in the U.S. wouldn’t U.S. GAAP require that they be accounted for in accordance with their substance (secured lending) not their legal form (sale).

  37. farmera1 says:


    Not sure if this helps but here is another attempt to explain the Fuld shuffle.

    Repo 105: Lehman’s ‘Accounting Gimmick’ Explained


    I’m not an accountant and wouldn’t try to explain this shuffle. But here’s a thought, you maybe paying to close attention to GAAP, and instead you need to move on to how can I move money around to obfuscate, confuse and hide the truth. Less about what has to be done to meet the “rules” and even what makes sense to how can I manipulate this puppy to look better.

    PS: I have read Lehman was out of good paper and had moved on to raising money from dodgy assets.
    Also Lehman had to go to Europe to find a law firm that would put their stamp on this puppy, and then the law firm approved only if it was done in Europe.

  38. philipat says:


    See my earlier posts of March 14th at 09:17, 10:03 and 11:20.

    Where your post leaves off goes back to my original issue. If it was, as I suspect, not Treasuries or other high quality paper but a bunch of junk, who at that part in time would pony up $50 Billion in cash for LEH? Who was the counterparty(ies). Follow the money?

  39. Sisyphus says:

    I can see the transactions being done as reported i.e a counterparty buying a security at 95.2% of its market value (assuming they are comfortable with the MV). They have adequate security. And I am sure E&Y needed at least a fig leaf of support from US GAAP for their position. Stories like the NPR one are typical of the reporting on this (and most financial issues) i.e the reporters don’t understand the issues well enough to see they are leaving unanswered gaping holes in their stories.

  40. Marc P says:

    Barry, the question is whether the other “banks” were doing the same thing, or perhaps similar things.

    Perhaps if the others went bankrupt we would see similar uncovering of misdeeds. It seems to me the difference with Lehman is that it didn’t get huge taxpayer gifts that papered over all the shenanigans.

    Let’s not forget that it was Lehman’s biggest rival, Goldman, that delivered the final killing stab. Paulson made the decision. Is there a chance that he was triply smart:

    > Paulson took out Goldman’s biggest rival;
    > Paulson created another scapegoat for the TBTF financial firms (along with AIG);
    > Paulson created a bright shiny object to distract the press for a couple of years.

  41. [...] quite Repo 105, but close . . . > click for interactive graphic courtesy of [...]