Thursday, March 11, 2010

Lehman Brothers : Examiner's report

Anton Valukas, Chairman of the law firm Jenner & Block is the examiner in the bankruptcy proceedings of Lehman Brothers Holdings Inc. He has now submitted his voluminous report in nine volumes containing in all 2,200 interesting pages. It is already getting described as "as absorbing as any bestseller".

The report finds Ernst and Young accountable for professional malpractice and negligence. Lehman Brothers, according to the report, has reasons to proceed against Lehman's erstwhile CEO Dick Fuld and three of its CFOs for breach of fiduciary duties.

In defense of Mr.Fuld, his lawyer has stated that throughout his career, he faithfully and diligently worked in the interests of Lehman and its stakeholders.

Mr.Lowitt, one of the CFOs indicted in the report, has, in the words of his lawyer "in the three months during which he held the job, worked diligently and faithfully to discharge all of his duties as Lehman's CFO."

Apparently there is no common understanding of "faithfulness" and "diligence" between the examiner and Lehman executives !

Another former  CFO, Ms.Erin Callan who is also an indictee has said in a different context, "I do not trust that any journalist ever truly captures the essence of the person or their story, and it is all filtered through someone else's lens." She adds philosophically, "Somehow everything that happened had its purpose and its reason. I try not to read anything about myself, and I have taken myself out of the environment that provided a constant reminder. I have changed my life in a very significant way, which I hope will be more fulfilling and worthwhile. It is difficult to have created such a hard line. But it is the way that, I have learned, is critical to moving forward." Words we don't expect from a corporate high-flier. Incidentally, Callan became Lehman's CFO at the age of 41 and had to be eased out in March 2008, six months before the firm imploded. She joined Credit Suisse and then left CS also and is now incommunicado.

The examiner's report brings out the risk management skills of Warren Buffett very clearly. When Dick Fuld approached him to invest in Lehman Brothers in early 2008, Buffett declined because 1) Lehman executives themselves were not interested in making investments in their firm, 2) Fuld was blaming short-sellers for his firm's distress and 3) Fuld was not transparent about a dud investment in Japan. Warren Buffett's risk-attuned antennae were sharp enough to sense even weak signals. The report is destined to be the subject of animated discussions in corporate corridors for some time to come.

The report points out that the firm was using an Enronesque accounting shenanigan nicknamed "Repo 105" to temporarily offload illiquid investments . This sleight of hand enabled Lehman to window-dress its Balance Sheet by showing reduced borrowings and therefore lowered leverage. This financial engineering resulted in 'disappearance' of investments and debts to the extent of $50 billion. The firm's equity in early 2008 was only around $25 billion and total asset size was $700 billion. By all accounts, the accounting gimmick was material and to a normal mind criminal also. But the report falls short of attributing mens rea.

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