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It's On: E&Y Fires Back, Says It Was All Lehman Management's Fault
The silence out of E&Y over the past two weeks was very odd. Some speculated that just like corrupt Arthur Anderson, a disgraced E&Y was quietly folding its business now that the "independent auditor" is one only in name. Others believed that its was merely a smart media ploy to not touch the issue until everyone gets tired of discussing the endless criminality in our daily lives and be content with late night TV, as the middle class fights for whatever remaining scraps the Goldman bankers allow it to have, even as the kleptocracy knows all too well that behind the scenes, trillions of dollars are siphoned away from America's working class (because in ten years when the country is bankrupt, the only thing that matters is who has the biggest gun and can shoot the straightest). Anyway, E&Y surprised us all (and the holders of 5 Times Square paper: CMBX 4 deal WBCMT 07-C31 specifically, who were ecstatic they would be next in line for taxpayer bailouts) by releasing the following list of rebuttals on a point by point basis, first reported by our friends at re:The Auditors and followed up by Reuters.
As Reuters reports, E&Y is scrambling to salvage whatever it can of not only its evaporating reputation but more importantly, its client base:
Some Ernst & Young partners have sent letters to audit committee members at the firm's clients over the past few days, defending their firm's audit of Lehman and how it dealt with a whistleblower's letter about the bank's accounting policies, according to Ernst & Young spokesman Charlie Perkins.
According to a copy of the letter [ID:nN22210897], the audit firm said it believes it "will prevail" if any of the examiner's potential claims against the firm are pursued by Lehman or its creditors and said some recent media coverage of the firm's role, such as the firm's use of "sham transactions" to hide bad assets, has been "inaccurate."
"The months leading up to Lehman's bankruptcy were among the most turbulent periods in our economic history," the accounting firm said in the letter.
"Lehman's bankruptcy was caused by a collapse in its liquidity, which was in turn caused by declining asset values and loss of market confidence in Lehman. It was not caused by accounting issues or disclosure issues."
Hm, one sure could argue that the reason why market confidence in Lehman evaporated overnight is because the market found out just how cooked Lehman's books had been all along, for which the party responsible was... you guessed it... Ernst & Young, and specifically "overstressed" auditor and feminist extraordinaire, Hilary Hansen, whom we profiled previously. Either way, this is one claim that the prosecution will spend exactly 10 minutes on. And speaking of, where are those class action lawsuits already?
The E&Y self-defense-cum-immolation continues:
According to the examiner's report, Matthew Lee, a senior vice president in charge of global balance sheet and legal entity accounting at Lehman, wrote to senior managers, raising concerns about "accounting improprieties" at the firm.
The whistleblower letter did not mention the Repo 105 transactions questioned by Lehman's examiner for their use in temporarily shifting some $50 billion of assets off of Lehman's balance sheet, but rather Lee brought them up in a subsequent interview with Ernst & Young auditors.
"When we learned of the letter, our lead partner promptly called the Audit Committee Chair; we also insisted that Lehman's management inform the Securities and Exchange Commission and the Federal Reserve Bank of the letter. EY's lead partner discussed the whistleblower letter with the Lehman Audit Committee on at least three occasions during June and July 2008," Ernst & Young said in the letter.
"In the investigations that ensued, the writer of the letter did briefly reference Repo 105 transactions in an interview with EY partners. He also confirmed to EY that he was unaware of any material financial reporting errors."
More fluff. Yet where it gets interesting is where E&Y will likely redirect in the imminent flurry of lawsuits against the auditor: Lehman's very own management.
Offering a preview of Ernst & Young's potential legal defenses, the firm also said that Lehman's senior executives "did not advise" Ernst & Young about any reservations they had related to Repo 105 transactions, and that regardless of any potential claims it does not believe that Repo 105 brought down Lehman.
"The decline in Lehman's reported leverage from its first to second quarters of 2008 was not a result of an increased use of Repo 105 transactions,"
Ernst & Young wrote. "Lehman's Repo 105 transaction volumes were comparable at the end of its first and second quarters."
While the plaintiff bar will be busy, and E&Y will be defending, one wonders what is the point? After E&Y is dragged through the mud, it will have no financial practice left, and potentially the entire business will be decimated as a result of what is sure to be extensive law suits, with the firm's name appearing on the front pages of all newspapers for months and months. In a business where integrity is everything, and defense is an indication the battle has already been lost, E&Y is over. But from denial to acceptance there are millions of fees in legal fees to be spent, and lawyers are people and need to eat and ride in private jets, just like all of us.
And ultimately, all of this is merely a distraction from the truly guilty party in this case: the Federal Reserve Bank of New York.
Full excerpts from the E&Y letter.
General Comments:
-- EY's last audit was for the year ended November 30, 2007. Our opinion stated that Lehman's financial statements for 2007 were fairly presented in accordance with U.S. GAAP, and we remain of that view. We reviewed but did not audit the interim periods for Lehman's first and second quarters of fiscal 2008.
-- Lehman's bankruptcy was the result of a series of unprecedented adverse events in the financial markets. The months leading up to Lehman's bankruptcy were among the most turbulent periods in our economic history. Lehman's bankruptcy was caused by a collapse in its liquidity, which was in turn caused by declining asset values and loss of market confidence in Lehman. It was not caused by accounting issues or disclosure issues.
-- The Examiner identified no potential claims that the assets and liabilities reported on Lehman's financial statements (approximately $691 billion and $669 billion respectively, at November 30, 2007) were improperly valued or accounted for incorrectly.
Accounting and Disclosure Issues Relating to Repo 105 Transactions:
-- There has been significant media attention about potential claims identified by the Examiner related to what Lehman referred to as "Repo 105" transactions. What has not been reported in the media is that the Examiner did not challenge Lehman's accounting for its Repo 105 transactions.
-- As recognized by the Examiner, all investment banks used repo transactions extensively to fund their operations on a daily basis; these banks all operated in a high-risk, high-leverage business model. Most repo transactions are accounted for as financings; some (the Repo 105 transactions) are accounted for as sales if they meet the requirements of SFAS 140.
-- The Repo 105 transactions involved the sale by Lehman of high quality liquid assets (generally government-backed securities), in return for which Lehman received cash. The media reports that these were "sham transactions" designed to off-load Lehman's "bad assets" are inaccurate.
-- Because effective control of the securities was surrendered to the counterparty in the Repo 105 arrangements, the accounting literature (SFAS 140) required Lehman to account for Repo 105 transactions as sales rather than financings.
-- The potential claims against EY arise solely from the Examiner's conclusion that these transactions ($38.6 billion at November 30, 2007) should have been specifically disclosed in the footnotes to Lehman's financial statements, and that Lehman should have disclosed in its MD&A the impact these transactions would have had on its leverage ratios if they had been recorded as financing transactions.
-- While no specific disclosures around Repo 105 transactions were reflected in Lehman's financial statement footnotes, the 2007 audited financial statements were presented in accordance with US GAAP, and clearly portrayed Lehman as a leveraged entity operating in a risky and volatile industry. Lehman's 2007 audited financial statements included footnote disclosure of off balance sheet commitments of almost $1 trillion.
-- Lehman's leverage ratios are not a GAAP financial measure; they were included in Lehman's MD&A, not its audited financial statements. Lehman concluded no further MD&A disclosures were required; EY did not take exception to that judgment.
-- If the Repo 105 transactions were treated as if they were on the balance sheet for leverage ratio purposes, as the Examiner suggests, Lehman's reported gross leverage would have been 32.4 instead of 30.7 at November 30, 2007. Also, contrary to media reports, the decline in Lehman's reported leverage from its first to second quarters of 2008 was not a result of an increased use of Repo 105 transactions. Lehman's Repo 105 transaction volumes were comparable at the end of its first and second quarters.
Handling of the Whistleblower's Issues:
-- The media has inaccurately reported that EY concealed a May 2008 whistleblower letter from Lehman's Audit Committee. The whistleblower letter, which raised various significant potential concerns about Lehman's financial controls and reporting but did not mention Repo 105, was directed to Lehman's management. When we learned of the letter, our lead partner promptly called the Audit Committee Chair; we also insisted that Lehman's management inform the Securities and Exchange Commission and the Federal Reserve Bank of the letter. EY's lead partner discussed the whistleblower letter with the Lehman Audit Committee on at least three occasions during June and July 2008.
--In the investigations that ensued, the writer of the letter did briefly reference Repo 105 transactions in an interview with EY partners. He also confirmed to EY that he was unaware of any material financial reporting errors. Lehman's senior executives did not advise us of any reservations they had about the company's Repo 105 transactions.
-- Lehman's September 2008 bankruptcy prevented EY from completing its assessment of the whistleblower's allegations. The allegations would have been the subject of significant attention had EY completed its third quarter review and 2008 year-end audit.
Should any of the potential claims be pursued, we are confident we will prevail
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So I guess they will be returning all their fees.
The dog ate my homework!
There's the truth, then there's the legal truth, then there's the legally provable truth, then there's the truth E&Y thinks they can defend in a court of law, not to mention the court of public opinion. While all these "truth's" might be connected by the actual word, they're miles apart and moving in opposite directions.
We should have learned the semantics lesson with Clinton's "it all depends on what 'is' is" episode.
It seems to me that sooner or later someone will be "sacrificed" to "prove" that the bankers don't own the government. Of course, this will fool no one that reads this blog, but the general public is another issue. I think the banksters all know that someone will have to take the fall for this latest fiasco. So, the question is who will be the sacrificial lamb? Answer: Whomever has the least pull of course! Perhaps E&Y know they are very low on the "pull scale"?
+1
Somebody must be sacrificed. E&Y realizes it could be them.
We won't sacrifice a "big boy", but we can certainly take-out-back-and-shoot some smaller expendible people/firms.
That's what happened in Russia too, after the collapse -- when you kill (literally) a couple of your peers, that's good, because the market was no longer big enough to sustain all the players, and the ones left standing can divide the spoils.
Hey, it's just business. Nothing personal.
The first sacrificial lamb goes down:pity poor Hassan Nemazee, off to jail for doing the same scam. a small investor takes the fall for doing what the TBTF banks perfected: Check kiting writ large: 105's or moving (borrowed) money around in Hassan's case..corruption in finance and politicians in the mix (Hassan raised $$$ for Hilary and Bill & the one).
E&Y: "We blame that Lehman executive who recently did a Sonny Bono onto a tree while skiing. Yeah, that's the ticket."
They couldn't possibly blame the E&Y partner in charge. I am still in disbelief that Hilary Hansen is a real partner at E&Y.
In her own words:
@13:45
http://fora.tv/2009/01/26/Womens_Networks_Help_Level_the_Playing_Field#f...
Blame the dead guy.
Funny how the word "E&Y" looks/sounds alot like eBay.
There are no coincidences . . .
ebay had top management, didn't they? now cali can have her too
http://www.youtube.com/watch?v=Q28mq9W3bKE
IN CASE OF AUDIT:
http://williambanzai7.blogspot.com/2010/03/blog-post_22.html
TOP SECRET:
http://williambanzai7.blogspot.com/2010/03/blog-post_2877.html
Some of these are funny.
Great list of excuses...but Lehman surely could not have cooked the books without E&Y's helping hand
The Macro View
http://themacroview.wordpress.com
Says the rapist to the Pedophile...
"because in ten years when the country is bankrupt, the only thing that matters is who has the biggest gun and can shoot the straightest"
Ten years?
Thats the most absurd comment you've made Tyler. How 'bout 10 weeks or months ?
+1000
Ernst & Young, you say? Dodgy interbank transactions? Yes, I do recall something about that, now that you mention it.
Shane Ross, The Bankers: How the Banks Brought Ireland to Its Knees, pp. 200-1; emphasis added.
Dramatis personae:
It turns out that Ernst & Young knew perfectly well about the loans, and gave Anglo the green light to keep them secret. And all of this was just the warm-up; when Anglo got into trouble that September, they did it again, but this time with Irish Life and Permanent (another S&L thingy) and real money (€7.5 billion on a c. €100 billion balance sheet).
The term "independent auditor" is an oxymoron. I was a whistleblower at a small regional utility. PricewaterhouseCoopers is the company's "independent auditor". The company and PwC conspired against me. Do you think anybody cared? No. No one cares about whistleblowers. If you work for a corrupt organization, I suggest you look for a different job. Unfortunately, most organizations are corrupt, so you'll just be leaving one boiling pot for another.
Good luck cursive. My organization is corrupt too. I work at a university. I apologize to everyone. I wonder if institutions are intrinsically corrupt? If someone knows of an honest one it would be good to hear about it.
"I wonder if institutions are intrinsically corrupt?"
Yes and No.
Man as he presents today (at least for the last 6,000 years) is intrinsically corrupt, thus any insitution he creates is intrinsically corrupt. When is a lie not a lie? When the majority say it isn't a lie because the lie benefits everyone in the group/institution. Phuck everyone else.
Thanks, MsCreant! Good luck to you, too. We live in the city of Man, not the city of God. Would be nice, though, if we had a bit more honesty.
If someone knows of an honest one it would be good to hear about it.
Indeed. And I join Cursive in looking for genuine honesty rather than the systemically purified and refined crap that is being shoveled.
Lehman's cooking of their books turned what could have been a 150k profit on a trade into a 60k one day loss for me.
Yes I was short and like other shorts, I knew they were insolvent 10 times over and as a free market capitalist( that's right I take my wins and losses and don't sulk as long as something completely illegal was not done to defraud me) I was betting against them.
There were no false rumors that I was spreading about Lehman.
It was Lehman management that was spreading the false rumors which fooled the dumb "smart money" on Wall Street.
Jim Rogers said the best piece of advice he ever got was to read the quarterly and the annual filings and in doing so, he would be ahead of 99% of the people on the Wall Street (aka the dumb "smart money")
I don't mind being a lead plaintiff for the class action lawsuit either. I'm still young but there are plenty of elderly who lost their life savings in Lehman stock and even in their safe bonds.
http://funy1.blogspot.com/2010/03/dick-fuld-please-advise-us-where-to.html
Amen. I too took an ass whoopin' on " safe " Lehman bonds. And the jack boot from WaMu bonds shortly thereafter.
Even with that, the destruction of bondholder rights in the Chrysler deal ( no position ) really irked me more than anything else. The Supreme Court.....courtesy of Ginsberg....refused to hear their appeal as they got skinned alive by the Obama car czar.
i am vizualizing the sparks in Chris Dodd's circuitry.
he jumps Sarah Palin
LH was toast unless there was a miracle. You know, the miracle that saved the ones still living. Yes the swaps were a gambit but one that certainly everyone knew about. If not the specifics at least the gist. I will posit that Geithner and the NY Fed let it be known that doing such things to maintain confidence were not only approved but expected. It was just extend and pretend.
So being conspiratorial, and this is ZH after all, I'd say that EY's delay in speaking about this is that stories have to be made straight between all the parties. LH, EY, Fed and Treasury. Threats have to be made and noted, etc. etc., without paper or bits left behind. These things take time.
+1
if we have to be serious about this.
matthew lee's letter says that the accountants were incompetant (more likely they were over-loaded, but he was bitter)
the numbers (all of them) are fictional.
nobody (lehman or e&y) wanted to accept the fact because that means responsiblity
i just read ernst & young's statement.
basic accounting says:
a sale is a sale when substanially all of risk and rewards of ownership are transferred to the buyer
if FASB says otherwise then the banksters have control of everything.
whoops.
rhetorical statement.
Just blame the dead guy. Works every time.
Some folks just don't know when to shut up and others can never seem to ask the question. EnY has managed to shout from the mountain top that they are succeeding mightily at doing both. Too bad they weren't as successful as auditors.
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