One Very Tragic Death

Even as the Lehman scapegoating campaign is on in full force, there is little doubt that the man who somehow was in the middle of virtually everything, was not Dick Fuld, or any of the bevy of rotating Lehman CFOs, but Lehman's very much under the radar Global Product Controller, Gerard Reilly. Reilly was the point man on Repo 105, the point person for E&Y's "investigation" into the Matthew Lee whistleblower campaign, Lehman's Level 2 and Level 3 asset valuation, the brain behind the idea to spin off Lehman's commercial real estate business, Lehman's Archstone investment, and likely so much more. Reilly stayed on at Lehman, solid as a rock, even as the CFO's above him rotated one after another. Tragically, on December 29, 2008, a 44-year old Gerald [sic] Reilly died while skiing alone on New York's Whiteface mountain, while on a trip with his wife, 4 small children, and two other families.

Here are the facts.

Gerard Reilly was Lehman's Global Product Controller. Gerard was at the nexus of virtually all of the recently disclosed "shady" transactions. Gerard reported to Lehman's CFO. And while the CFO's came and went, Reilly was with Lehman until the bitter end.

Here is a summary of some of the key activities in which Gerard was party of.

Repo 105:

In a November 2007 e-mail, O’Meara, then-Lehman CFO, wrote to Reilly, “I realize we’re in a tough spot given mkt, but we should be pressuring everywhere to try to end year in good way on balance sheet . . . especially since the rev’s are not materializing.


In February 2007, Joseph Gentile, FID’s then-Chief Financial Officer who reported directly to Gerard Reilly, sent a proposal to Ed Grieb, then-Global Financial Controller, petitioning Grieb to increase the firm’s $22 billion combined firm-wide Repo 105/108 limit to $25 billion.


In the summer of 2007, Grieb and Reilly enlisted the help of John Feraca, Kentaro Umezaki, and Michael McGarvey in an attempt to move mortgage-backed securities into the Repo 105 program. E-mail from Gerard Reilly, Lehman, to Steven Becker, Lehman, et al. (Aug. 16, 2007) [LBEX-DOCID 251602] (“Why can’t we repo 105 some prime AAA stuff?”); e?mail from Steven Becker, Lehman, to Gerard Reilly, Lehman, et al. (Aug. 16, 2007) [LBEX-DOCID 251603] (“I spoke with John who is currently trying to get off as much of the European deals [apparently CMOs or collateralized mortgage obligations] as he can via REPO 105.”); e-mail from Gerard Reilly, Lehman, to Steven Becker, Lehman, et al. (Aug. 16, 2007) [LBEX-DOCID 251605] (“Any mortgage should be our highest priority.”); e-mail from Kentaro Umezaki, Lehman, to Gerard Reilly, Lehman (Aug. 16, 2007) [LBEX-DOCID 1905992] (“Who can give me a repo 105 status/projection. This is around the mortgage inventory and using repo 105. . . . I need some sense of what we are doing, and whether we can move some of the high rated mortgage products into that framework.”); e-mail from John Feraca, Lehman, to Gerard Reilly, Lehman (Aug. 18, 2007) [LBEXDOCID 4553350] (Feraca and Reilly discuss putting either commercial mortgage backed securities or residential mortgage backed securities into Repo 105); e-mail from Gerard Reilly, Lehman, to John Feraca, Lehman (Aug. 18, 2007) [LBEX-DOCID 4553351] (“Many benefits to us getting these assets [CMBS and RMBS] into the [Repo 105] program.”); e-mail from John Feraca, Lehman, to David Sherr, Lehman, et al. (Aug. 19, 2007) [LBEX-DOCID 4553352] (“[W]e are looking at the possibility of Repo 105 for AAA RMBS and CMBS positions . . . only want to focus on non-agency products for this exercise as both agency pass-thrus and agency CMOs roll up as government or agency products in the balance sheet, not mortgages.”);


Gerard Reilly, Global Product Controller, appointed McGarvey, a product controller for Finance in FID to be the point person for Lehman’s Repo 105 program. Examiner’s Interview of Michael McGarvey, Sept. 11, 2009, at p. 10; see also e-mail from Michael McGarvey, Lehman, to Gerard Reilly, Lehman (Sept. 4, 2007) [LBEX-DOCID 3232534] (“We have been reviewing with the London repo desk and finance on a regular basis (We have roughly 80% of the month end 105 balance outstanding for the entire month although the daily average has been slipping.) We’ll stay in front of it for the rest of the year.”).


Notably, only days before Lehman’s bankruptcy filing, Gerard Reilly asked Michael McGarvey to remove all references to Repo 105 from a third quarter schedule of all of Lehman’s US government securities. See e-mail from Gerard Reilly, Lehman, to Michael McGarvey, Lehman, et al. (Sept. 12, 2008) [LBEX-DOCID 641537].

Reilly was likely not much liked by Lehman's FID group:

e-mail from Gerard Reilly, Lehman, to Joseph Gentile, Lehman (Feb. 21, 2007) (stating the impact of $10 billion balance sheet breach by FID on Lehman’s net leverage ratio and stating: “These guys are going to have to take accountability for under performance. At least tell guys to cut b[alance] s[heet] if they don’t make money.”); e-mail from Joseph Gentile, Lehman, to Gerard Reilly, Lehman.


On June 17, 2008, Reilly circulated to McDade, Lowitt, Andrew Morton (Head of FID), and Chris O’Meara a document entitled “Balance Sheet and Key Disclosures” that incorporated McDade’s plan to reduce Lehman’s firm-wide Repo 105 usage by half – from $50 billion to $25 billion in third quarter 2008. In response to Reilly’s circulation of the presentation announcing that Lehman’s firm-wide Repo 105 usage would be cut by 50% in the third quarter 2008,  Morton complained that the proposed balance sheet target for FID in third quarter 2008 was identical to the second quarter target, but with the Repo 105 limit cut in half, the Rates business of FID would not survive.


November 2007 e-mail from Reilly to Clement Bernard, Reilly wrote: “Let’s get our best thoughts on fid b[alance] s[heet]. We are slipping in real estate. Take a look at liquid holdings like cp and items we can put into the repo 105 program. We need fid close to 5b on net.”


Even near the time of Lehman’s bankruptcy, FID continued to perform poorly. In response to a late August 2008 e-mail from Reilly asking, “How much repo 105 do we have now and how much will we have at 8/31,” McGarvey replied, “FID is the worst run division in the company.”

Curiously, Reilly used CDS alongside Repo 105 for balance sheet masking:

Notably, Reilly kept O’Meara informed of these efforts by forwarding to him the e-mail communications with Feraca and Sherr. At the same time, per O’Meara’s request, Grieb made inquiries regarding a potential credit default swap structure for Lehman’s RMBS and CMBS securities in addition to the plan to move them into the Repo 105 program.  Specifically, O’Meara told Reilly that “the plan is to do both [Repo 105 and credit default swap] if all checks out fine with legal and accounting.

Reilly sure kept Erin Callan well appraised of all Repo 105 activity, contrary to her pleading the Fifth:

In February 2008, Reilly again wrote Callan, forwarding to her an e-mail with an attached FID Balance Sheet PowerPoint presentation that “was used to educate sr fid guys on the bs and generate ideas to make the bs  target.” The e-mail forwarded to Callan noted that the FID team working on balance sheet issues had reached the  “recommendation that Repo 105 program is expanded.”

Reilly was the guy to whom E&Y's auditors Schlich and Hansen reported. Also, based on the above disclosure, either Reilly or Hansen was lying:

Following Ernst & Young’s June 12, 2008 interview of Lee, Schlich and Hansen met with Lehman’s Gerard Reilly to discuss Lee’s assertions regarding improper valuations. During that meeting, Hansen informed Reilly of the $50 billion Repo 105 figure Lee provided during Ernst & Young’s interview of Lee. According to Schlich, Reilly told the auditors that he had no knowledge that Lehman used Repo 105 transactions to move $50 billion in assets off its balance sheet. “Hillary [Hansen] took away from the meeting with Reilly that he did not know and it was not $50 billion.

Reilly was the man in charge of supervising and validating Lehman's desk marks.

Several witnesses gave conflicting statements as to whether Product Control had the ability to effectively provide an independent check on the business desk marks. Walsh told the Examiner that Product Control existed on an  independent track and could not be “frozen out” of the valuation process. Kenneth Cohen also stated that Product Control ran on a “parallel track,” and came up with its own numbers running its own models. Kenneth Cohen stated that the business desk had no control over Product Control and that, if the business desk could not convince Product Control that a number was correct, Product Control could elevate the issue, all the way up to Reilly if necessary.

Reilly was involved in the Arcchstone (mis)valuation:

On August 22, 2008, Gerard Reilly, the Head Product Controller, asked Abebual A. Kebede, GREG’s Vice President of Valuation Control, to “put a memo together” on the valuation of the Archstone commitment, as “this will get a lot of focus.” The Examiner did not locate any evidence that demonstrated or suggested that Lehman engaged in any systematic effort to value its Archstone commitments prior to this date.


Barron’s published an article on January 21, 2008 suggesting that Archstone equity could be worthless. Lehman prepared an analysis that rebutted Barron’s methodology and conclusions. This Subsection of the Report addresses the Examiner’s analysis of the Barron’s article and Lehman’s rebuttal. The Barron’s article concluded that Archstone’s equity may have been worthless based on Archstone’s high level of debt and the capitalization rate implied by the stock prices of publicly traded apartment REITs. The Barron article’s thesis was that the increase in capitalization rates was large enough to reduce the value of equity investments in Archstone to zero. Hughson also said that comparisons of Archstone to AvalonBay were inapposite because AvalonBay’s assets were not as intrinsically valuable as Archstone’s assets. However, after the Barron’s article was published, Reilly, the Global Product Controller, asked Jonathan Cohen in an e-mail to “look at” the capitalization rate of AvalonBay when Lehman “bought Archstone” because AvalonBay was the “best comp.”

Reilly was in charge of all lehman Level 2 and Level 3 valuations, the source of much consternation in Lehman's latest three analyst calls:

Christopher M. O’Meara, Lehman’s former CFO, described Reilly as the person ultimately responsible for valuations of Level 2 and Level 3 assets.

Reilly may have been involved in intentional number fudging in Q3 writedowns which were "made up numbers":

Jonathan Cohen also stated that the write-down numbers for specific assets on this document were "made up numbers," as he did this analysis very quickly and had to meet the scenarios' targets. For instance, he stated that the write?down number for Archstone on this document was a "completely made up number." Jonathan Cohen explained that there was a lot of juggling to get the numbers to fit the total write-down scenarios and that it was hard to get down to these numbers in the last two scenarios. Jonathan Cohen told the Examiner that it was his opinion at the time that the proper write-downs in the third quarter would have been somewhere between $1.5 billion and $2.2 billion, which are the write-downs reflected by the first two scenarios in this document. He also noted that he personally delivered the document to Reilly and that it was a "good question" whether Reilly asked him not to e-mail it.

Reilly was among the brains at the core of the Lehman "panacea" that was supposed to save the firm from filing: the spin off of all toxic commercial real estate asset:

See e-mail from David Goldfarb, Lehman, to Paolo R. Tonucci, Lehman, et al. (July 19, 2008) [LBHI_SEC07940_404388] (“Need some creative ways to fund Spinco. Best to get some relationships which do commercial real estate lending in scale. They could buy seniors or mezz’s. Start thinking, this is key challenge that needs to be nailed”); e-mail from Gerard Reilly, Lehman, to Ian T. Lowitt, Lehman, et al. (July 22, 2008) [LBEX-DOCID 2997880] (“[S]elling mezz certainly helps as it supports validity of capital structure. If we can find other SR debt in market and gain some comfort on our spread then we could call it [a Level II asset]. Placing some Sr is best”). Accord Examiner’s Interview of Richard S. Fuld, Jr., May 6, 2009, at p. 7.

and so forth...

and so forth...

Fast forward to December 29, 2008:

Wilmington, NY - A 44-year old New Jersey man died Monday while skiing at Whiteface Mountain Ski Center in the Adirondack Mountains of Upstate New York.

New York State Police based in nearby Ray Brook, N.Y. have confirmed that Gerald Reilly of Morristown, N.J., a stockbroker with Lehman Brothers, was skiing alone on the John's Bypass Trail, a connector between the Excelsior and Lower Cloudspin ski runs that's accessible from either the Cloudsplitter Gondola or the Summit Quad chairlift, when he left the trail and hit a tree. A skier following behind Reilly witnessed the incident and contacted ski patrol.

Reilly was evacuated by the Whiteface Mountain Ski Patrol and transported to Adirondack Medical Center in Lake Placid, where he was pronounced dead at 12:36 p.m. An autopsy has confirmed that Reilly died of internal trauma.

and this:

Essex County Coroner Walter Marvin Jr. then ordered an autopsy of Reilly, which was conducted by pathologist Dr. C. Francis Varga at AMC's main hospital in Saranac Lake. Varga determined the cause of death to be traumatic internal injuries due to a skiing accident. Marvin ruled the death to be accidental.

Although winter storms left more than a foot of natural snow for skiers prior to Christmas, much of that snow has melted in recent days. The Whiteface Web site reported conditions to be "loose granular and wet granular" Monday.

This holiday period is generally one of the busier times of the ski season, and there were more than 4,000 people at Whiteface Monday, said General Manager Jay Rand, who said the accident was "unfortunate."

We get some more information from Kimreilly at a message board:

1. His name was in fact Gerard Reilly, of Morristown, NJ--there on a skiing vacation with his wife, 4 small children and two other families who were friends.

2. Thank you for all of the condolences and nice words I see here.

3. I guess we will never know his frame of mind during all of this, although people who were there that day have been kind enough to post indication on the www for me of what the conditions were...not only was he was a decent skiier but he was over 6'4" tall and wearing a helmet---it may always be a mystery to us how he succumbed to his injuries so fast...

4. Yes, the Holidays for our family will be fked up for a very very long time.

Truly a tragic death for the Reilly family, and our condolences. That said, Reilly took many answers with him. And most notably - does Gerard's death add to list the list of questions?