It's mid-afternoon, and the topic for today's post became obvious a few hours ago.
Among, I am sure, others, this piece in yesterday's New York Times, co-authored by Andrew Ross Sorkin, details the evolving mess now catching up with Lehman's ex-CEO, Dick Fuld. A similar article appeared on the Wall Street Journal's front page this morning, as well.
The dead bank's examiner has uncovered Lehman's use of a structure known as 'Repo 105.' This was a sale/repurchase agreement which delivered 105% of the assets' value to Lehman's balance sheet during the term of the sale.
Similar in effect to the once-derided SIVs at Citigroup, these assets were moved off of Lehman's balance sheet, thus dressing it up as healthier than it actually was.
As you might expect, Fuld's attorney stated that he
“did not know what those transactions were — he didn’t structure or negotiate them, nor was he aware of their accounting treatment.”
However, Bart McDade, one of Fuld's hand-picked lieutenants, was cited in the Journal and the NY Times as having explicitly briefed the ex-CEO on the particulars of the structure.
Bottom line, Fuld is going to have one hell of a time wiggling out of this one. McDade will have no reason to perjure himself on Fuld's behalf, and Fuld's public statements, and declarations to a Congressional Committee will probably now look suspect.
Looked at from the vantage point of a later date, with more pieces to the puzzle now publicly available, it sure looks like Dick Fuld consciously directed Lehman's financial balance sheet moves to disguise the firm's problems, then asserted there were none.
Was it not Greenlight Capital's David Einhorn who pursued this like a terrier during the summer of 2008? Dogging then-CFO Erin Callan?
Seems he was onto something, doesn't it? Perhaps more than he knew. This examiner's report should set the stage for quite the trial if/when Fuld is charged with violating Sarbanes-Oxley regulations regarding the accounting maneuvers he authorized to attempt to deceive Lehman's creditors, rating agencies and regulators in the final months before the firm's collapse.
As a final note, and food for another post, does this not serve as a cautionary tale regarding regulation, and reliance on it to detect and prevent this sort of behavior?
With the Lehman example so fresh, financial sector misbehaviors are looking an awful lot more like crimes committed with illegal firearms. That is, we've passed lots of laws forbidding them, and hire police to enforce the laws.
But the truth is, the laws and enforcers don't stop the illegal behaviors in either case. They just provide more charges when the guilty are finally caught and tried
What's that tell you about the grand schemes afoot to 'reform' US financial sector regulatory oversight?
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