Lehman's Bankruptcy

[Moliere]

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.

Because they are lawyers and darn good ones. I'm sure they covered their butts the whole time even before anyone knew what issues were festering.

Remember that Arthur Andersen was eventually found not guilty (although they were still guilty in the court of public opinion). Accountants aren't so good at legal stuff. The biggest mistake AA did was the shredding fiasco. Every auditor ends up with copies of items that are used for audit testing but which never make their way into the final audit files. Typically these files are shredded once the audit is complete. The Enron audit had years and years of these files still sitting around and when the crap started to hit the fan the auditors decided they better start shredding. Although what AA was doing was legal (although they did shred a bit after the court said to stop) it just looked bad. It looked like they were trying to cover up something.

Don't get me wrong, AA was somewhat incompetent. They also had a breakdown in their review process. Local partners were overruling national partner decisions (big no no) and most audit staff and managers are incompetent anyway.

Long story short, lawyers are smarter and better at CYA.

[Flystripper]

Because they are lawyers and darn good ones. I'm sure they covered their butts the whole time even before anyone knew what issues were festering.

Remember that Arthur Andersen was eventually found not guilty (although they were still guilty in the court of public opinion). Accountants aren't so good at legal stuff. The biggest mistake AA did was the shredding fiasco. Every auditor ends up with copies of items that are used for audit testing but which never make their way into the final audit files. Typically these files are shredded once the audit is complete. The Enron audit had years and years of these files still sitting around and when the crap started to hit the fan the auditors decided they better start shredding. Although what AA was doing was legal (although they did shred a bit after the court said to stop) it just looked bad. It looked like they were trying to cover up something.

Don't get me wrong, AA was somewhat incompetent. They also had a breakdown in their review process. Local partners were overruling national partner decisions (big no no) and most audit staff and managers are incompetent anyway.

Long story short, lawyers are smarter and better at CYA.

I was at Andersen when it blew up. I was in Los Angeles and was part of the litigation consulting practice there, and not in any way related to the national audit practice or even the Houston market other than we shared the same logo on our business cards. Watching the reaction of the partners in LA as this was going down in Houston was fascinating, frustrating, frightening and sad all at the same time. Working as expert witnesses made all of the people in our group meticulously aware of discovery issues. The day that we learned of the shredding of documents in Houston the partner that I worked for at the time turned to me and said, "This firm just signed its death warrant." This comment was made before a single client had fired Andersen and was uttered just minutes before the Global leader sent out an email to the firm promising everything will be fine. I was young and naive but not so foolish as to not prepare my resume that night.

[byu71]

I was at Andersen when it blew up. I was in Los Angeles and was part of the litigation consulting practice there, and not in any way related to the national audit practice or even the Houston market other than we shared the same logo on our business cards. Watching the reaction of the partners in LA as this was going down in Houston was fascinating, frustrating, frightening and sad all at the same time. Working as expert witnesses made all of the people in our group meticulously aware of discovery issues. The day that we learned of the shredding of documents in Houston the partner that I worked for at the time turned to me and said, "This firm just signed its death warrant." This comment was made before a single client had fired Andersen and was uttered just minutes before the Global leader sent out an email to the firm promising everything will be fine. I was young and naive but not so foolish as to not prepare my resume that night.

When I graduated the three best offers I had was AA and Price Waterhouse in LA and PW in San Jose. I much preferred the Bay area and that is where we went.

In the interview process it did seem AA was the young and up and coming firm. It also seemed they were loaded with LDS. Was it that way when you were with them.

[Flystripper]

When I graduated the three best offeres I had was AA and Price Waterhouse in LA and PW in San Jose. I much preferred the Bay area and that is where we went.

In the interview process it did seem AA was the young and up and coming firm. It also seemed they were loaded with LDS. Was it that way when you were with them.

Yes, tons of LDS at the firm. My start class in the Los Angeles Strategy, Finance and Economics consulting practice was 15 deep in 1999. Four people in my start class were BYU grads and every woman (none of which were BYU grads) was smoking hot.

[Moliere]

I was at Andersen when it blew up. I was in Los Angeles and was part of the litigation consulting practice there, and not in any way related to the national audit practice or even the Houston market other than we shared the same logo on our business cards. Watching the reaction of the partners in LA as this was going down in Houston was fascinating, frustrating, frightening and sad all at the same time. Working as expert witnesses made all of the people in our group meticulously aware of discovery issues. The day that we learned of the shredding of documents in Houston the partner that I worked for at the time turned to me and said, "This firm just signed its death warrant." This comment was made before a single client had fired Andersen and was uttered just minutes before the Global leader sent out an email to the firm promising everything will be fine. I was young and naive but not so foolish as to not prepare my resume that night.

I bet that was a crazy time. I had an internship offer from AA for Phoenix for the summer of 2002, which obviously never materialized. I received some emails from the recruiter saying everything would be okay. Then she sent one last email which could have been rightly titled "Every man for himself!"

I go to lunch at least once a week with a friend that was on the AA audit engagement. He was only a staff at the time but he did meet David Duncan and the whole lot. He was actually assigned to the shredding room and spent many hours shredding documents.

Enron and AA's takedown has left a pretty serious scar on the financial statement auditing industry in Houston. Paranoia is still rampant. Audits are not truly risk-based as they are paranoia-based. I could give details and tell stories but I'd bore 99% of this board. Suffice it to say that I'm glad I'm no longer in that business, although I work with auditors almost daily.

It's also interesting (to me) that what took down AA was the public perception of shredding documents, which documents should have been shredded years before. The public doesn't understand consolidation accounting or mark-to-market accounting but it does understand when someone looks guilty, and AA looked guilty.

[Flystripper]

I bet that was a crazy time. I had an internship offer from AA for Phoenix for the summer of 2002, which obviously never materialized. I received some emails from the recruiter saying everything would be okay. Then she sent one last email which could have been rightly titled "Every man for himself!"

I go to lunch at least once a week with a friend that was on the AA audit engagement. He was only a staff at the time but he did meet David Duncan and the whole lot. He was actually assigned to the shredding room and spent many hours shredding documents.

Enron and AA's takedown has left a pretty serious scar on the financial statement auditing industry in Houston. Paranoia is still rampant. Audits are not truly risk-based as they are paranoia-based. I could give details and tell stories but I'd bore 99% of this board. Suffice it to say that I'm glad I'm no longer in that business, although I work with auditors almost daily.

It's also interesting (to me) that what took down AA was the public perception of shredding documents, which documents should have been shredded years before. The public doesn't understand consolidation accounting or mark-to-market accounting but it does understand when someone looks guilty, and AA looked guilty.

I am sure in Houston every "freckle" is assumed to be "melanoma" when testing items and making decisions on whether an issue will pass. It has to be a royal pain in the ass for companies to deal with their audit committee and audit team, but who can blame the auditors at this point?

[old_gregg]

high probability the svb collapse is lehman 2.0.

[falafel]

high probability the svb collapse is lehman 2.0.

Where will the pain be? Throughout banking, or limited to venture cap?

[Northwestcoug]

high probability the svb collapse is lehman 2.0.

Well shit. And I had big plans for 2023.

[old_gregg]

Where will the pain be? Throughout banking, or limited to venture cap?

hopefully contagion is limited to regional banks. will be issues at many private capital backed companies (way, way more of those than you think).

[Clark Addison]

high probability the svb collapse is lehman 2.0.

I think it has more of a chance of being a disrupter in the VC/start up space than a precursor of a lot more in the banking space, but that is very possibly wishful thinking on my part. I don't spend a ton of time digging into the balance sheets of regional banks.

[old_gregg]

I think it has more of a chance of being a disrupter in the VC/start up space than a precursor of a lot more in the banking space, but that is very possibly wishful thinking on my part. I don't spend a ton of time digging into the balance sheets of regional banks.

lots of private capital providers other than vc funds are directly affected, not to mention the huge number of operating depositors forced to bank with svb to access credit products. now no access to deposits or credit both of which frequently collateralize other obligations means lots of forthcoming defaults. svb is the largest, but there are similarly situated regional banks (frb, western alliance, etc.) that will be directly affected. not to mention all the other banks with a bunch of afs bonds that they're not going to be able to sell to meet leverage tests if broader demands for liquidity. it's a big mess. many employers aren't making payroll this week. need rodge cohen from s&c to strike a deal this weekend.

[YOhio]

lots of private capital providers other than vc funds are directly affected, not to mention the huge number of operating depositors forced to bank with svb to access credit products. now no access to deposits or credit both of which frequently collateralize other obligations means lots of forthcoming defaults. svb is the largest, but there are similarly situated regional banks (frb, western alliance, etc.) that will be directly affected. not to mention all the other banks with a bunch of afs bonds that they're not going to be able to sell to meet leverage tests if broader demands for liquidity. it's a big mess. many employers aren't making payroll this week. need rodge cohen from s&c to strike a deal this weekend.

Yeah this is nasty. A lot of really good companies that could make tremendous positive impact could get destroyed. Would be absolutely foolish to let that happen.

[Moliere]

high probability the svb collapse is lehman 2.0.

I hope not. I haven’t been able to read too much about it but it doesn’t look great, especially for small tech companies. Silicon slopes may be in a bit of trouble.

I thought Dodd Frank was supposed to prevent the contagion. I guess we’ll see if all that money poured into those regulations were worth it.

[beefytee]

Why the call out of silicon slopes? Is it because it is in the area off interest for the board or do you think it will be disproportionately affected?