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More LEH


Bill Black, The Big Picture, The SEC Flacks Paint Lehman’s Looters as the Victims of a “Political” SEC, here.

To understand this example of non-enforcers pretending to virtue requires a bit of context.  The Department of Justice (DOJ) and the SEC focused their “investigations” solely on Lehman’s quarter-end “Repo 105” transactions that were entered into for the sole purpose of deceiving investors and the SEC about Lehman’s liquidity, earnings, and leverage crises – crises that would soon cause it to collapse.  A “repurchase obligation” (REPO) is a short-term borrowing that is nominally structured as a “sale” with a “repurchase obligation.”  Lehman improperly treated these short-term borrowings as if they were a true sale with no repurchase obligation, which caused Lehman to report lower debt levels.

Note that the journalists report that the SEC’s experts on whether such deceit was “material” to investors (“senior accountants and the head of the S.E.C. unit that oversaw corporate disclosures”) concluded that it was material.  The fact that Lehman was so desperate to deceive its investors about the crises that would soon cause it to collapse that it sought out a legal opinion in the City of London (which “won” the ethical race to the bottom) to bless the deceit and proceeded to recurrently make large transactions near the end of quarters for the sole purpose of deceiving its investors and the SEC demonstrates that Lehman knew its deceit was material to its investors.  That is a central reason why publicly traded firms engage in accounting fraud.

Matt Levine, Bloomberg, Lehman’s Cold Dead Hand Is Still Reaching Out For Money, here.

  • Every bank had a bunch of derivatives trades on with Lehman.

  • So Bank X, for instance, would have 100 trades where it owed Lehman money, and 125 trades where Lehman owed it money.

  • Also, Bank X would have collateral from Lehman, or vice versa, depending on who owed whom money when they last passed collateral (typically, the Friday before Lehman filed).

  • When Lehman filed for bankruptcy, Bank X would tot up how much it owed Lehman,how much Lehman owed it, and how much collateral there was. Then it would net them, and get some total amount of money.

  • If Bank X owed Lehman $100 million, it paid Lehman $100 million. If Lehman owed Bank X $100 million, Bank X got a bankruptcy claim for $100 million, which is likely to pay out $18 million to $22 million in oh around 2016.


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