Presenting The Lehman Bankruptcy Examiner Report

Tyler Durden's picture

We present the first two volumes (out of 9) of the massive 2,200 page compendium that represents the just declassified examiner's report in the Lehman bankruptcy case. We will post the other volumes shortly. Below are the key findings from a quick perusal of Anton Valukas' report, which we will be combing through over the next week. Pay particular attention to the Repo 105 scam which allows banks to materially misrepresent their leverage ratios whenever they so choose, thank you FASB, corrupt auditors (in this case E&Y) and Federal Reserve.

Some observations:

Lehman actively misrepresented its capital ratio with the benefit of Fed complicity, because instead of using traditional Repo transactions, it used "Repo 105" which allowed repos to be treated as asset sales instead of financings. Will someone please ask uberregulator Fed how many other banks are using this borderline illegal accounting scheme RIGHT NOW to misrepresent their net leverage ratios?

  • Lehman was forced to announce a quarterly loss of $2.8 billion – resulting from a combination of write?downs on assets, sales of assets at losses, decreasing revenues, and losses on hedges – it sought to cushion the bad news by trumpeting that it had significantly reduced its net leverage ratio to less than 12.5, that it had reduced the net assets on its balance sheet by $60 billion, and that it had a strong and robust liquidity pool.
  • Lehman did not disclose, however, that it had been using an accounting device (known within Lehman as “Repo 105”) to manage its balance sheet – by temporarily removing approximately $50 billion of assets from the balance sheet at the end of the first and second quarters of 2008.  In an ordinary repo, Lehman raised cash by selling assets with a simultaneous obligation to repurchase them the next day or several days later; such transactions were accounted for as financings, and the assets remained on Lehman’s balance sheet. In a Repo 105 transaction, Lehman did exactly the same thing, but because the assets were 105% or more of the cash received, accounting rules permitted the transactions to be treated as sales rather than financings, so that the assets could be removed from the balance sheet. With Repo 105 transactions, Lehman’s reported net leverage was 12.1 at the end of the second quarter of 2008; but if Lehman had used ordinary repos, net leverage would have to have been reported at 13.9
  • Lehman did not disclose its use – or the significant magnitude of its use – of Repo 105 to the Government, to the rating agencies, to its investors, or to its own Board of Directors. Lehman’s auditors, Ernst & Young, were aware of but did not question Lehman’s use and nondisclosure of the Repo 105 accounting transactions. [And why should auditors question anything even remotely shady? After all they need to feed the monkey too.]

The case for why the Fed would be a truly horrible systemic regulator. Here is what happened at Lehman according to Valukas

  • Lehman decided to exceed the firm?wide risk appetite limit at several junctures.
  • First, though Lehman dramatically increased the limit for fiscal 2007, Lehman nevertheless approached the new limit by May 2007.
  • Then, in early October 2007, when Lehman’s risk appetite excesses were at their peak, at least some members of Lehman’s senior management discussed the limit breaches and decided to grant a temporary reprieve from the limits  based on the difficult conditions in the real estate and leveraged loan markets.
  • Rather than reduce its risk usage, Lehman cured its risk appetite overages by increasing the firm?wide risk appetite limit yet again.

The firm cooked its books:

  • Lehman also failed to apply its balance sheet limits in late 2007. Application of these limits would also have restricted Lehman’s risk?taking. Instead, Lehman dramatically increased the size of its balance sheet, and used increasingly large  volumes of Repo 105 transactions to create the appearance that the firm’s net leverage ratio remained within a reasonable range of such ratios established by the rating agencies.

The SEC was aware of the BS going on at Lehman:

  • Lehman’s stress tests suffered from a significant flaw. Although Lehman made a strategic decision in 2006 to take more principal risk, Lehman did not modify its stress tests to include the risks arising from many of its principal investments – including its real estate investments other than commercial mortgage backed securities (“CMBS”), its private equity investments, and, during a crucial period, its leveraged loan commitments.
  • The SEC was aware that Lehman’s stress tests excluded untraded investments and did not question the exclusion, because historically it had been the norm to limit stress tests only to traded positions.

The firm overindulged in speculative garbage LBO loan positions:

  • Lehman’s principal investment strategy also included participating in leveraged loan transactions. This business grew spectacularly in 2006 and the first half of 2007. Many of these loans were made to private equity firms, or sponsors, who were purchasing companies as part of leveraged buy?outs.
  • These transactions were risky for Lehman because they consumed tremendous amounts of capital, were made on terms that strongly favored the borrowers, and often involved bridge equity or bridge debt that Lehman hoped to distribute to other financial institutions (but was committed to keep for itself if it was unable to do so).

Lastly, Lehman directors can sleep well. Once again, nobody in the world is guilty for the biggest corporate bankruptcy in history:

  • The Examiner Does Not Find Colorable Claims That Lehman’s Senior Officers Breached Their Fiduciary Duty to Inform the
    Board of Directors Concerning the Level of Risk Lehman Had Assumed
  • The Examiner Does Not Find Colorable Claims That Lehman’s Directors Breached Their Fiduciary Duty by Failing to Monitor
    Lehman’s Risk?Taking Activities
  • Lehman’s Directors are Protected From Duty of Care Liability by the Exculpatory Clause and the Business Judgment Rule
  • Lehman’s Directors Did Not Violate Their Duty of Loyalty
  • Lehman’s Directors Did Not Violate Their Duty to Monitor

On the much prevalent conflict of interest of selling portfolios that one has originated (especially as pertains to Goldman's assorted CDOs held by AIG):

  • In one memorandum, Lehman’s Head of Global Strategy expressed the concern that “the team responsible for selling down these positions is the same one that originated them.”628 But several witnesses denied there was any incentive not to sell down the portfolio because they knew that no one in GREG would be getting a 2008 bonus

Attached are Volume one of the report (just the first 240 pages, including the 45 page table of contents) and Volume two. We will upload the remainder shortly.

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Ragnarok's picture

Dust in the wind.  $IMFS needs to die.


We will never learn from history because no one wants to learn from history.  Our flagrant  disobedience of natural law will turn us all into pillars of salt.

BlackBeard's picture

Somewhere out there, David Einhorn is getting a raging megalomaniacal hard on

jbcorwin's picture

+1, hilarious.

Tyler - can we get a large downloadable version?

johngaltfla's picture

Hell, I've got one now. Do you have a wife available or a sheep?

Racer's picture

Sounds like the US government and the Fed


and raising the debt ceiling, uh, sorry debt mountain... tick...

Cooking the books in the US... tick....

SEC aware of the this for the US.... tick...

Once again, nobody in the world is guilty for US bankruptcy .... tick....

The fed overindulged in garbage  positions.... tick....




Anonymous's picture

On an inevitable path toward bankruptcy... TICK!!!

BlackBeard's picture

Also, can somebody please enlighten me as to how the directorship is not responsible in anyways for the massive shareholder loss in this case?

Miles Kendig's picture

A classic of the era.

crosey's picture

Romans 12:19-21

Beloved, never avenge yourselves, but leave it to the wrath of God, for it is written, “Vengeance is mine, I will repay, says the Lord.”  To the contrary, “if your enemy is hungry, feed him; if he is thirsty, give him something to drink; for by so doing you will heap burning coals on his head.”  Do not be overcome by evil, but overcome evil with good.

Anonymous's picture

> but overcome evil with good.

Unless, of course, the evil has no conscience to hold those burning coals. In that case, shrug and walk away.

crosey's picture

I think you're right....evil has no conscience.  Just desire.

lizzy36's picture

Just reading executive summary.

LEH made extensive use of a "Repo 105" whereby the manipulated their balance sheet (through an accounting technique) so that leverage was less than it really was, thus allowing them to avoid material downgrades and maintain confidence so they could continue to access the repo market.  LEH didn't disclose this to anyone (not even their board), only the accountants knew (fuckers).

The good news, is the FRBNY and SEC were dispensed (on site daily) to LEH from the time of BSC"s death and maintained that LEH had adequate liquidity for all of 2008. Why anyone has any confidence in any regulator is beyond my comprehension. 

Oh yeah and Paulson started warning LEH in June of 2008 about consequences of a large 3rd quarter 2008 write-down.  But didn't actually do anything (after all what did goldman have to gain by LEH going down?)

Cognitive Dissonance's picture


I recommend you dig deeper into the meat of the report after reading the "summary". Often, the biggest white wash happens in the summary, which is an summary "opinion" and can (and often is) massaged to avoid things, usually by highlighting other things.

The same thing happened in the Enron, WorldCom and other executive summaries. Rarely does the average Joe read the actual report because of the length, instead assuming the truth is in the summary. That is usually a bad assumption to make. I will be reading it this weekend.

AnonymousMonetarist's picture

Ten years from now the examiner's report on Smells Fargo will probably be just as ridiculous...

Howard_Beale's picture

I think we can safely add JPM, BAC, and many others to the list. And thanks for the BOOM! on the other thread. Loved it!

AnonymousMonetarist's picture

If Repo 105/108 ain't fraudulent conveyance the term has lost all meaning.

deadhead's picture

that was beautiful AM....truly, a golf clap!

Careless Whisper's picture

It was Lloyd. In the library. On his cell phone.

Pound Of Flesh's picture

-It was Jamie. In his office. On his instant messenger.


"March 11 (Bloomberg) -- JPMorgan Chase & Co. and Citigroup Inc. helped cause the collapse of Lehman Brothers Holding Inc. by demanding more collateral and changing guarantee agreements, the bankrupt bank’s examiner said today in a report. "


Cognitive Dissonance's picture

Like the 9/11 Commission Report, the truth lay not in what the report says but in what it doesn't say. And I'm not just talking about the redacted portions. These reports are intended to support, add to and massage the public myth. They are rarely intended to enlighten or document the truth.

Anonymous's picture

By September 12, two days after it publicly reported a $41 billion liquidity
pool, the pool actually contained less than $2 billion of readily monetizable assets

johngaltfla's picture

Tyler, I have one question before I spend my entire weekend reading this f'ing lie:


Did Lehman underwrite it's own swaps using hedge funds they owned in the Caribbean and then resell them to clients and other divisions to offer a "legal" counterparty insurance policy for their own game?


Just wondering becuse this smells a LOT like ML.

Anonymous's picture

re Ernst&Young...glorification of that sort of gambling in “clever strokes” which constitutes the very essence of theft, swindling and all sorts of similar anti-social deeds.” PKropotkin’s Memoirs, ca 1899

MarketTruth's picture

Anyone going to jail over this? Anyone at all? Anyone?  Bueller? Bueller?

virgilcaine's picture

Liberty Pointe fail.. The First CRE lender to go. 

bugs_'s picture

Very bad for E&Y.

Anonymous's picture

60,000 riot in Greece. There will be that many in every large city in the USA if the lies are exposed and the money stops flowing. Timmy, Bennie and the media are "all in" and the cover up will be accelerated and expanded. 150 week unemployment coverage, 1300 SPX and 4.5% mortgages this year. Next year could be a problem.

Anonymous's picture

Does it matter?
They had all this time to get their stories straight.

Anonymous's picture

I can't wait until the market implodes and every fucking company that is pulling this same bullshit goes down!!! Shareholders start going Greek on every CEO's ass. We need some shit to start hitting the fan, get mad, and revolt!!!! Revolt now, by selling all the financials, AND the money center banks!!! Quit these pussyfoot comments! We need to form a huge massive revolution where instructions are given out to the millions out there who are pissed off just like me!! First things first, I say we organize a massive run on the banks! Those fucking bastards have taken every penny and bought MBS fucking shit marked to fucking Myth anyhow! I will have a Cinco De Mayo week long bash full of tequila and dancing girls the day fucking Goldman goes under!

Anonymous's picture

Ben and Timmy will see to it that we are all dragged down with them.

Anonymous's picture

>> I say we organize a massive run on the banks

Sounds like a plan, punish them. Now - assuming we get enough bank-runners to actually withdraw their bank deposits, where do they put the money?

litoralkey's picture

Just for the CRE portfolio...

page 234 -

footnote 810

810 In 2008, the SEC met with Lehman on February 7?8, March 5, March 31, May 21?22, June 20, July 3 and July 16.  

Anonymous's picture

good paper, but from the guy who "overseas" trading instead of "oversees".

MKC Global Investments is a boutique commodity pool operation (CPO) focused on generating strong and consistent long-term returns for its partners. Andrew McCormick overseas MKC Global’s trading, risk management and model
development. He has traded professionally for the last decade in futures, FX, stocks
and equity options. After a strong 2008 he decided to manage outside capital.

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