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Lehman 'gimmicks' disguised insolvency

By Lee Wild

Date: Friday 12 Mar 2010

Lehman 'gimmicks' disguised insolvency

Former bosses at Lehman Brothers have been heavily criticised for employing an accounting "gimmick" that managed to hide the failed bank’s insolvency.

A year-long investigation into the collapse of Lehman by court-appointed examiner, Anton Valukas, found that ex-chairman and chief executive, Dick Fuld, and senior executives regularly ignored the bank’s own risk controls.

The chairman of law firm Jenner & Block decided there had been no systematic wrong-doing, but called the use of the accounting practice known as Repo 105 “inherently improper”.

That, unknown to investors or regulators, managed to temporarily wipe $50bn of assets from Lehman’s balance sheet in 2008, giving the illusion that debt was falling.

British law firm Linklaters approved the use of the controversial practice after Lehman had been turned down by American lawyers.

They said that under English law it was permissible to sell financial assets ahead of results then buy them back afterwards. By including a cash element, these counted as sales rather than transactions.

That cash then turned up on the balance sheet and reduced the level of debt, but Lehman would borrow more cash to repurchase the assets at the beginning of the new reporting period.

Auditor Ernst & Young is also rapped in the 2,200-page report for failing “to question and challenge improper or inadequate disclosure in those financial statements”.

When Lehman filed for bankruptcy in 2008 it had about $600bn of debt, but had actually been insolvent for weeks before.

"Our last audit of the company was for the fiscal year ending November 30, 2007. Our opinion indicated that Lehman's financial statements for that year were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP), and we remain of that view," Ernst & Young said in a statement.

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