Lehman's Bankruptcy

[Moliere]

Back in 2002 I had a job offer from Arthur Andersen. That fizzled out pretty quickly after the whole Enron scandal that took Andersen down. One of hte more interesting parts of the Enron deal is that ultimately Andersen was exonerated of pretty much all charges. Yet, even though they were not guilty, they lost the trust of the public and that's really where their business died. At that point the Big 5 turned into what we called in school, the Final 4 (KPMG, E&Y, PwC, Deloitte).

Fast forward to 2008 and it looks like there is some shady accounting going on at Lehman that helped keep them afloat for a couple additional quarters until they finally ran out of money. Ernst & Young is now tied up in this one, and while I really doubt they will get hit with anything more than some minor bad publicity it still doesn't look great for them, especially with them messing up an accounting issue that is so easy to deal with.

I still can't believe what Lehman was doing to stay afloat. They were entering into REPO 105 transactions, which are short term loans. However, to get the preferential accounting treatment, they had to increase the price of teh securities they repurchased to 105% of their value. That means they were selling securities at say $100, and then a week later repurchasing them for $105. I haven't calculated the interest rate that implies, but it's got to be north of 100% interest rates.

Lehman was obviously desparate as shown in these transactions. They were basically borrowing money at rates higher than payday lending companies. I'm still perplexed how no one (auditors, regulators, etc.) saw this coming 6 months prior to the bankruptcy.

http://blogs.wsj.com/deals/2010/03/1...S=ernst++young

[Moliere]

My original point was mistaken in regards to the high interest rate. Looks like the amount of the collateral as 105% of the amount of the short term loan. Actual interest rates were probably in line with normal rates. The 105% was necessary to get "sale accounting" since the interpretation of accounting guidance was that overleveraged financing would qualify for sale treatment. This ultimately reduced overall leverage on Lehman's balance sheet.

I know no one is interested in this but figured I'd link two articles that explain it down pretty well.

http://ftalphaville.ft.com/blog/2010...3241/repo-105/

http://wallstreetpit.com/20154-what-is-repo-105-man

[pellegrino]

I don't think it's a lack of interest that keeps people from responding. I usually like to know at least a little bit about what I'm talking about before I try to blow smoke and sound intelligent. I'm afraid in this case I can't even do that. I appreciated the articles though. They made for interesting reading.

[byu71]

Back in 2002 I had a job offer from Arthur Andersen. That fizzled out pretty quickly after the whole Enron scandal that took Andersen down. One of hte more interesting parts of the Enron deal is that ultimately Andersen was exonerated of pretty much all charges. Yet, even though they were not guilty, they lost the trust of the public and that's really where their business died. At that point the Big 5 turned into what we called in school, the Final 4 (KPMG, E&Y, PwC, Deloitte).

Fast forward to 2008 and it looks like there is some shady accounting going on at Lehman that helped keep them afloat for a couple additional quarters until they finally ran out of money. Ernst & Young is now tied up in this one, and while I really doubt they will get hit with anything more than some minor bad publicity it still doesn't look great for them, especially with them messing up an accounting issue that is so easy to deal with.

I still can't believe what Lehman was doing to stay afloat. They were entering into REPO 105 transactions, which are short term loans. However, to get the preferential accounting treatment, they had to increase the price of teh securities they repurchased to 105% of their value. That means they were selling securities at say $100, and then a week later repurchasing them for $105. I haven't calculated the interest rate that implies, but it's got to be north of 100% interest rates.

Lehman was obviously desparate as shown in these transactions. They were basically borrowing money at rates higher than payday lending companies. I'm still perplexed how no one (auditors, regulators, etc.) saw this coming 6 months prior to the bankruptcy.

http://blogs.wsj.com/deals/2010/03/1...S=ernst++young

This stuff infuriates me. After a couple of years in the business, I realized that a lot of people back east actually were out to screw people, or when they realized they weren't any smarter than anyone else, they scrambled to cover that fact up.

I may have a jaded opinion, but my experience has me not overly impressed with Harvard, Yale and Stanford MBA's.

I would be all for more government regulation, yikes, except the politicians are in their pockets so now you have two groups of overbloated, self absorbed, groups messing things up. At least if you let the market do it, it might be painful, but it would get resolved.

[Moliere]

This stuff infuriates me. After a couple of years in the business, I realized that a lot of people back east actually were out to screw people, or when they realized they weren't any smarter than anyone else, they scrambled to cover that fact up.

I may have a jaded opinion, but my experience has me not overly impressed with Harvard, Yale and Stanford MBA's.

I would be all for more government regulation, yikes, except the politicians are in their pockets so now you have two groups of overbloated, self absorbed, groups messing things up. At least if you let the market do it, it might be painful, but it would get resolved.

The thing that infuriates me is that having been in the auditing business I can almost recreate how this happened:

- Company's investments are tanking and it makes their balance sheet look worse and worse each quarter.
- Company's credit rating is in jeopardy if they don't deleverage
- Company scours accounting guidance to find ways to deleverage and finds an obscure loophole in the appendix to some FASB statement.
- No reputable law firm in the US will sign off on the accounting treatment so they go find someone in the UK.
- Accounting treatment is use sparingly at first just to cover the perceived blip in the market (don't worry, the investments value will recover and all will be fine)
- Market continues to tank and thus the accounting treatment starts to get abused.
- Auditor, who first signed off on the accounting, sees the treatment being abused but doesn't want to tell the BOD becauase they signed off on it at first when it was small and immaterial.
- Company finally runs out of options and files bankruptcy
- Everyone points fingers at someone else
- Lawyers make off like bandits through litigation of the related cases

[Surfah]

My last company had an apartment in NYC and out of the window I could see right into Lehman Brothers offices. I'd see guys burning the midnight oil all the time there. Then practically overnight the building is rebadged in blue Barclays signs. It was really weird. Especially looking down the road and seeing E&Y still there.

[Pheidippides]

The thing that infuriates me is that having been in the auditing business I can almost recreate how this happened:

- Company's investments are tanking and it makes their balance sheet look worse and worse each quarter.
- Company's credit rating is in jeopardy if they don't deleverage
- Company scours accounting guidance to find ways to deleverage and finds an obscure loophole in the appendix to some FASB statement.
- No reputable law firm in the US will sign off on the accounting treatment so they go find someone in the UK.
- Accounting treatment is use sparingly at first just to cover the perceived blip in the market (don't worry, the investments value will recover and all will be fine)
- Market continues to tank and thus the accounting treatment starts to get abused.
- Auditor, who first signed off on the accounting, sees the treatment being abused but doesn't want to tell the BOD becauase they signed off on it at first when it was small and immaterial.
- Company finally runs out of options and files bankruptcy
- Everyone points fingers at someone else
- Lawyers make off like bandits through litigation of the related cases

You forgot the part that Lehman had a billion trades with everybody else in the world, causing everybody to shit bricks when they had the nutty prospects of unwinding everything. Not gold ones either.

[statman]

... ultimately Andersen was exonerated of pretty much all charges. ...

Exonerated? LOL!

They were accounting whores, trading their good name, signed on the bottom of Enron's I N C R E D I B L E internal accounting policies, for lucrative consulting projects.

The fact that they lost every one of their customers and ceased doing business is proof that they were exonerated of nothing...

[Moliere]

Exonerated? LOL!

They were accounting whores, trading their good name, signed on the bottom of Enron's I N C R E D I B L E internal accounting policies, for lucrative consulting projects.

The fact that they lost every one of their customers and ceased doing business is proof that they were exonerated of nothing...

Maybe I should have said acquitted of all criminal charges instead of exonerated. Andersen was found not guility in the obstruction charges levied against them.

http://www.washingtonpost.com/wp-dyn...053100491.html

It's true they messed up big time and lost the confidence of the public, which led to their downfall. This is the same reason that EY is probably scrambling to limit any exposure they may have in the Lehman beankruptcy.

[byu71]

scrambling to limit any exposure they may have in the Lehman beankruptcy.

beankruptcy, I like it. Accountants (bean counters) exposure to someone's bankruptcy. Well done.

[statman]

Maybe I should have said acquitted of all criminal charges instead of exonerated. Andersen was found not guility in the obstruction charges levied against them.

http://www.washingtonpost.com/wp-dyn...053100491.html

It's true they messed up big time and lost the confidence of the public, which led to their downfall. This is the same reason that EY is probably scrambling to limit any exposure they may have in the Lehman beankruptcy.

There was one charge brought against them - obstruction of justice for destroying documents. Their communal conviction was overturned on a technicality - improper instructions to the jury. They could have been retried, but at that point A&A didn't really exist any longer, and there didn't seem to be any reason to continue. The firm was essentially given the death penalty by the American business community. And they deserved what they got...

[statman]

On a related note, has anyone taken the time to read this?

[ame="http://www.scribd.com/doc/28449111/The-Story-of-the-CDO-Market-Meltdown"]The Story of the CDO Market Meltdown:[/ame]

It's some girl's honor's thesis from Harvard last year - on the economic meltdown.

It's the second time in about a week that I've seen it mentioned. Now I actually think I might want to plow through it. But it's over 100 pages long...

[Moliere]

http://online.wsj.com/article/AP58b3...S=ernst++young

I'm late posting this but thought it was interesting. Looks like EY is getting sued (civilly) for its role in signing off on shady accounting at Lehman. Too bad I wasn't allowed to cash out my pension plan.

"At a time when it was critical for investors to make informed decisions as to whether to keep or buy Lehman stock, E&Y assisted Lehman in defrauding the public," the lawsuit claims. "Lehman had no legitimate business reason to enter into such transactions, and could have obtained sufficient financing through less costly means."

[Green Monstah]

You forgot the part that Lehman had a billion trades with everybody else in the world, causing everybody to shit bricks when they had the nutty prospects of unwinding everything. Not gold ones either.

I'd like to know how V&E came through the Enron debacle relatively unscathed. I've heard it's because they had really shitty insurance and so the feds went after deeper pockets, but that's just lawyer-to-lawyer gossip. I often work on the other side of one of the attorneys who structured a lot of Enron's shady deals, and he's a helluva lawyer.

[Pheidippides]

I'd like to know how V&E came through the Enron debacle relatively unscathed. I've heard it's because they had really shitty insurance and so the feds went after deeper pockets, but that's just lawyer-to-lawyer gossip. I often work on the other side of one of the attorneys who structured a lot of Enron's shady deals, and he's a helluva lawyer.

I'm much closer to that than it may appear (no I haven't worked at V&E) and the answer isn't clear to me either. Everybody I've worked with at V&E has been smart and honest, so I'm not sure how they got involved in the Raptor things anyway. I think the biggest thing is that they probably relied on fairness opinions from AA. There are a lot of things I could say about that - I have had access over the past few years to people and information most don't, and I have asked many questions - but that's a topic that I'd rather discuss over lunch than on here.