NEW YORK—It has been almost two years since one of the nation’s biggest investment banks, Lehman Brothers Holdings Inc., collapsed. But fallout from the Lehman collapse has just begun, several days after an examiner’s report surrounding the collapse was released last Thursday by lawyer Anton Valukas.
Central to the company’s demise was its usage of an obscure accounting trick called “Repo 105,” which Lehman employed near the end of each quarter to artificially decrease the heft of its balance sheet to lower its net leverage ratios, which lenders use as one gauge to assess the credit-worthiness of the firm.
At the end of the second quarter 2008, Lehman used “Repo 105” to hide some $50 billion of assets off of its balance sheet. Valukas’s report noted that a senior accountant at the firm, Matthew Lee, had written to Financial Controller Gerald Reilly regarding his concerns over the firm’s usage of “Repo 105” to mislead investors and analysts.
In a Tuesday report in the Wall Street Journal, the paper learned that Lehman fired Lee just weeks after he raised red flags regarding the company’s accounting practices. Lee, who had worked at the firm for 14 years, was let go in June 2008 after raising his concerns to management and Lehman’s external auditors, Ernst & Young LLP.
Where Were the Fed, Auditors?
Valukas’s report questioned the role of Ernst & Young (EY), and Lehman’s auditors, in the “Repo 105” fiasco. According to the report, EY was tasked with investigating Lee’s allegations regarding accounting improprieties. EY did interview Lee, but failed to raise the issue with the firm’s audit committee even after requested by the chairman of the audit committee to reveal all of Lee’s allegations.
In addition, several experts also wondered whether the Federal Reserve Bank of New York and the U.S. Securities and Exchange Commission (SEC) are also responsible for their failure to see Lehman’s impending collapse.
Shortly after the near-collapse of Bear Stearns in March 2008, the Fed and the SEC sent representatives to all the major investment banks—Lehman included—to monitor their liquidity and financial health. The federal government representatives had access to all of Lehman’s accounts and records, including the raw financials that were not subject to “Repo 105” doctoring.
Central to the company’s demise was its usage of an obscure accounting trick called “Repo 105,” which Lehman employed near the end of each quarter to artificially decrease the heft of its balance sheet to lower its net leverage ratios, which lenders use as one gauge to assess the credit-worthiness of the firm.
At the end of the second quarter 2008, Lehman used “Repo 105” to hide some $50 billion of assets off of its balance sheet. Valukas’s report noted that a senior accountant at the firm, Matthew Lee, had written to Financial Controller Gerald Reilly regarding his concerns over the firm’s usage of “Repo 105” to mislead investors and analysts.
In a Tuesday report in the Wall Street Journal, the paper learned that Lehman fired Lee just weeks after he raised red flags regarding the company’s accounting practices. Lee, who had worked at the firm for 14 years, was let go in June 2008 after raising his concerns to management and Lehman’s external auditors, Ernst & Young LLP.
Where Were the Fed, Auditors?
Valukas’s report questioned the role of Ernst & Young (EY), and Lehman’s auditors, in the “Repo 105” fiasco. According to the report, EY was tasked with investigating Lee’s allegations regarding accounting improprieties. EY did interview Lee, but failed to raise the issue with the firm’s audit committee even after requested by the chairman of the audit committee to reveal all of Lee’s allegations.In addition, several experts also wondered whether the Federal Reserve Bank of New York and the U.S. Securities and Exchange Commission (SEC) are also responsible for their failure to see Lehman’s impending collapse.
Shortly after the near-collapse of Bear Stearns in March 2008, the Fed and the SEC sent representatives to all the major investment banks—Lehman included—to monitor their liquidity and financial health. The federal government representatives had access to all of Lehman’s accounts and records, including the raw financials that were not subject to “Repo 105” doctoring.
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