The fallout from the report into the collapse of Lehman Brothers shook Wall Street and London on Friday as US officials grilled banks about off balance-sheet trades and questions were raised over the City’s role in the company’s attempts to cover up its problems.
The 2,200-page report by Anton Valukas, appointed by a US court to probe the reasons for Lehman’s failure in September 2008, paints a damning picture of the bank’s top management, including former chief executive Dick Fuld, three of its chief financial officers and auditors Ernst & Young
Its conclusions – that there is credible evidence against Mr Fuld and others for breach of their fiduciary duties and against E&Y for professional malpractice – are also a further blow to the battered credibility of the entire banking industry.
"Give bankers of any ilk an inch and they will take a mile,” said Simon Maughan, analyst at MF Global in London. “Lehman might just have taken a couple of miles.”
Fuld, Ian Lowitt, one of Lehman’s CFOs mentioned in the report, and E&Y have denied wrongdoing. Erin Callan and Christopher O’Meara, the other two CFOs, could not be reached for comment.
Mr. Senior US financial executives said they had received worried calls from US regulators early on Friday asking about the use of transactions like “Repo 105” – a device that helped Lehman flatter its financial health
The trades, which were never disclosed to investors, rating agencies or regulators, are described as “window-dressing” and “an accounting gimmick” in the report released on Thursday by Mr Valukas.
Goldman Sachs and Morgan Stanley, which competed with Lehman in investment banking and had similar funding needs, said they had never used such transactions.
People close to the situation said US regulators wanted to ensure that Repo 105, which enabled Lehman to move some $50bn off its balance sheet at the end of the first and second quarter of 2008, was not a widespread practice.
The trades helped Lehman to reduce its leverage and balance sheet at the height of the crisis, avoiding potentially costly rating downgrades but misleading investors as to the true state of its finances, Mr Valukas claims.
Bankers said Repo 105 was an unusual move as it was more costly than traditional repos – where a bank pledges collateral to another in exchange for cash and promises to return the funds with interest.
Mr. Valukas found that Lehman had to structure these deals through its UK subsidiary because it could not find a US law firm to give a legal opinion on them.
Lehman used UK-based Linklaters instead. Linklaters on Friday said it had not been contacted by Mr Valukas, adding it had reviewed its opinions and was “not aware of any facts or circumstances which would justify any criticism”.
Lehman’s counterparties on the repo trades included Barclays, UBS, Mizuho, Mitsubishi, ABN Amro (now Royal Bank of Scotland) and KBC. They declined to comment or could not be reached.
Additional reporting by Tom Braithwaite, Jeremy Lemer and Justin Baer
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