BBC BLOGS - Peston's Picks
« Previous | Main | Next »

Lehman: How it disguised its frailty

Robert Peston | 09:37 UK time, Friday, 12 March 2010

"Repo 105" is about to enter the lexicon of shameful accounting and financial techniques employed to hide risk from the markets.

Lehman Brothers buildingAccording to Anton Valukas, the examiner appointed to investigate the collapse of Lehman Bros by a New York bankruptcy court, Lehman used Repo 105 to hide from creditors, markets, ratings agencies, regulators and even members of its own board quite how much it had borrowed relative to its capital.

Or to put it another way, the firm used Repo 105 to exaggerate its financial strength in 2008, which was when this really mattered because of widespread concerns about the robustness of many banks.

The ruse worked like this.

Lehman was highly and dangerously dependent on raising hundreds of billions of dollars of short-term finance every day, in what's known as the repo market.

This is a market used by US investment banks in which assets can be swapped for short-term loans.

But because the finance raised in this way has to be repaid within days, the assets - in an accounting sense - are never deemed in an accounting sense to have left the repo-ing banks' balance sheets.

Except that Lehman found a ruse to use the repo market to make it look as though the assets had been removed in a permanent way.

Apparently (and this is quite difficult to believe) the accounting rules allowed Lehman to report a reduction in assets if it exchanged those assets for funds at a conversion rate of 105 to 100: so if Lehman exchange assets with a value of $105 for loans at a value of $100, that $105 of assets could be removed from the balance sheet when reporting group financial results.


Now according to Valukas, this ruse allowed Lehman to report that its assets were $38.6bn lower than was really the case at the end of the 2007 financial year. And the reduction increased to $49.1bn at the end of the first quarter of 2008 and $50.4bn by the middle of 2008.

Why did this matter?

Well, one of the most important measures of an investment bank's financial strength is its leverage ratio, or the ratio of its reported assets to its reported capital. The lower the ratio, the stronger a firm will appear to be: the bank will appear to have more capital relative to its loans and investments to absorb any losses on those loans and investments.

So by removing $50.4bn of assets from its reported balance sheet using Repo 105, Lehman reduced its reported leverage ratio from 13.9 to 12.1.

That may not sound a lot, but in the context of the fraught market conditions of 2008 - after Bear Stearns imploded - it could have been the difference between life and death for Lehman.

In particular, it was hugely dependent - as I've said - on raising short-term finance from the conventional repo market. And if its creditors in that market had known the true state of its leverage, they might have ceased lending to it even earlier than they did - which would have brought forward the date of Lehman's demise.

I'm slightly under the cosh now. But when time permits later in the day, I'll also look at why Valukas believes there is a case to claim damages from Lehman's chairman, Dick Fuld, three chief financial officers - Christopher O'Meara, Erin Callan and Ian Lowitt - and the firm's auditor, Ernst & Young.

For different reasons, he believes there may also be claims on JP Morgan and Citibank, for the way they demanded collateral from Lehman in its final days, and from Barclays, for the alleged improper transfer of certain assets to Barclays as part of its purchase of the rump of Lehman.


Page 1 of 2

  • Comment number 1.


    The role of auditors in creating and sustaining the bubble economy is quite critical. It is I believe quite reasonable the consider certain practices in auditing and in particular the concentrating of auditing in a very few firms as a cause of the bubble/crash.

    The professional bodies are under severe pressure not to harm their major financial contributors - the large firms - and have bowed to their needs. For example: there is no real separation of ancillary services from auditing. This is exactly the same reason the Enron went down. We can't say that we were not warned we were and we did nothing and now we have a far greater financial catastrophe. Is it time for international statutory regulation of auditing and should the power to regulate be taken away from the professional bodies as they have not served society well? Is the another example of self-regulation going badly wrong? The profession needs urgent root and branch reform.

  • Comment number 2.

    This just sums it all up.

    "LEHMAN Brothers used accounting gimmicks and had been insolvent for weeks before it filed for bankruptcy in September 2008, but there was not extensive wrongdoing, a court-appointed examiner has..."

    So you fiddle the books, you lie to your investors - and the law finds no wrongdoing?

    It's time for the law to be circumvented by the people - in the same way financial institutions have been doing for so long.

    I hope this makes the rest of you as angry as it does me. I don't mind the bankers bringing the world to chaos so much, but when they are protected by the laws which are supposed to protect us - it's a very bitter pill to swallow.

    Quote from:

  • Comment number 3.

    "That may not sound a lot, but in the context of the fraught market conditions of 2008 - after Bear Stearns imploded" would this be the same Bear Stearns who were threatened by other Wall Street banks when they refused to put their money in the pot to bail out LTCM?

    I believe the phrase used was "it was like they broke some sort of code - and they would regret that one day"

    Have people realised that we are merely cannon fodder for the big bankers petty financial games? What happens to us doesn't matter - it's all a big game to them..

  • Comment number 4.

    RP: and the firm's auditor, Ernst & Young

    Finally, for the first time, an auditor is being implicated.

    The whole stack of cards rests on the auditors.

    Are their audits 'True and Fair' in every sense ?
    I can't believe for a second that they are, and if not, that whole stack of cards....

  • Comment number 5.

    Zombie banks will try every trick in the book to stay alive. The truly alarming fact is that these institutions have their cold dead hands around the throats of UK & US taxpayers. Your tax demands will be arriving on RBS, Lloyds, Citi, etc, headed letters. As for public services, well, for a zombie bank these are simply wastes of resources that ought to be allocated to them.

  • Comment number 6.

    The scary thing is that this is still going on with banks (and govs) manipulating their accounts.

    Regulators and auditors should be looking at the substance of transactions ie ensure that the spirit not the letter of the 'law' been followed.

    A good example from recently is Barclays who have put $12.4bn assets into a company called 'Protium Finance'. They've made a loan to this co but they don't have to report its results as part of their profit/losses.

    A decision like this is purely for accounting reasons and has not changed the substance of the problem.

    Theres a good article 'Watch Barclays in the cellar' in the FT about it. See link below

  • Comment number 7.

    It's not Repo 105 that's the real problem for many bonus-less ordinary people - it's the real danger that because of these greedy bankers, their houses may be repo'd. Caledonian Comment

  • Comment number 8.

    To me all of the worse scams in bank and firm accounting all seem to have happened in America. Then they bring the rest of the world down with them.
    Is is now the time for the Americans to look at history and actually do something about this?
    If not when will the next down turn come? I just want to be ready this time....

  • Comment number 9.

    It is all really to late and smacks of closing the gate after the horse bolted.

    Globally, governments have tacitly signalled that the Banker of Last Resort is now the tax-payer so, even if Christopher O'Meara, Erin Callan and Ian Lowitt and the Lehmans' auditor, Ernst & Young are chased for their participation in what is seen as dodgy accounting but may be far more deceitful, they won't be the last bankers to act immorally as governments have shown that global regulations and accountancy rules are there to be abused as opposed to being used as intended - as the governments will always now pay up even if the bankers cheat or act without scruples.

  • Comment number 10.

    All of the Big 4 auditors have been shown up by this crisis

    RBS auditor was Deloitte

    and PriceWaterhouseCoppers were paid significant sums for 'letters of comfort' regarding Northern Rocks off balance sheet vehicle.
    Its not much comfort for the small shareholders at Northern Rock some of who lost everything!

    If you are a millionaire partner at one of the big 4 I'm sure you don't lose too much sleep about it though.

    PS. I've noticed PwC are sponsoring a new scheme 'Backing Young Britain' [putting back a fraction of tax they've helped people avoid] - they get mentioned first in the radio add anyway - good PR no doubt.
    Thats sadly probably the closest the audit profession will get to saying sorry and making recompense for their role in this whole crisis.

  • Comment number 11.

    And will anyone be found guilty of any criminal offences, and jailed? And their assets seized? I don't think so!. These banking creatures must be laughing at us suckers, from their sun-soaked hideaways.

  • Comment number 12.

    This isn't much worse than RBS and HBOS tapping shareholders for capital in their respective rights issues. Nobody in their right minds would have subscribed (not many did in the case of HBOS if memory serves) to this if they had known the full scale of the problems faced by these organisations.

  • Comment number 13.

    How can UNDERSTATING your assets hide insolvency?

  • Comment number 14.

    Yesterday I wrote in a comment on Robert's blog about the necessity to take legal action against banks, a comment which I then considered to be quite radical. Today, after reading Robert's article concerning Lehman, it seems like the most natural thing to do. Please allow me to quote from my comments made here yesterday:
    "Maybe only extensive legal action taken against banks, pursuing them agressively though the courts, can expose what really goes on in banks internal processes, exposing their cosy nepotism networks and inform the wider public. Moral reasoning and media attention seems to make no difference. Who could take legal action, on what grounds, and what chance of success? Could one pursuit banks legally for lack of due diligence and fraudulent surveyance? Any legal practitioners/scholars reading this blog have any ideas?"

    Please find many more arguments for the urgent need to regulate, reform and investigate the global finanncial services sector here:

  • Comment number 15.

    Thanks for explaining something so lucidly - it was almost impossible to grasp via the news bulletins alone. However, it still puzzles me how an organisation can look stronger if it removes assets from its balance sheet, by whatever means. Maybe Lehman's assets are not the kind I, as a layman, would understand.

  • Comment number 16.

    ...and meanwhile, Pandora's box remains open!

    Europe's banks brace for UK debt crisis

  • Comment number 17.

    In the UK in 99/00 the crime statistics were that the figure for stolen or damaged property in the UK was £19 Billion pa. Its about 25% higher now.

    We won't know for sure until the insurance schemes and sale of banks "assets" has unwound, but the NAO in Dec 2009 calculated the NET figure for the bank bail out was £119 Billion:

    "The Treasury’s net cash outlay for purchases of shares in banks and lending
    to the banking sector, including Northern Rock, will, after allowing for measures
    announced in November 2009, amount to about £117 billion."

    Who are the robbers? And where should Government efforts be placed?

  • Comment number 18.

    'Colorable claims': 'The meticulously researched document describes Lehman’s aggressive growth strategy which, Mr Vulakas said, was intended to take advantage of the sub-prime mortgage crisis that broke in 2006 by increasing its exposure to real estate at a time when others were cutting back.'

    The Times on Lehman and accounting practices

    The problem is, there are many many people working for these firms, i.e accountancy firms as well as banks etc (and it's endemic), who, though sensing that there's something wrong with practices like 'Repo 105', will be treated as incompetent by their managers/colleagues if they voice their concerns. And the sad fact is that those managers/colleagues will be technically right, as if it's legitimate (albeit venal) practice, their jobs are to help their clients according to current professional rules, and rules like laws have been written to facilitate these practices. Any other behaviour, and you won't 'get on', so anyone who blows a whistle will be committing professional/economic suicde.

    This is the mess that we are now in. We are in an enormous mess basically because people are just doing their jobs, i.e the problem is systemic.

  • Comment number 19.

    People do not get destructed by old stories about old crooks. There's no point discussing what went wrong, it's time to fix it.

    There's another way - 100% Registered Money

    When is Robert Preston going to report on alternatives to the current system of Money Creation?

  • Comment number 20.

    AM I missing something? If the bank was making it's assets seem smaller than they really were then surely it was actually stronger than its accounts would suggest? Robert, you are always rather good at explaining things but you lost me on this one.


  • Comment number 21.

    If there is one person, above all, who should be taken to task for the collapse of Lehman Brothers and following that the financial system of the entire world, it is the US Treasury Secretary at that time!

  • Comment number 22.

    Dear Sirs,

    The role of the auditing profession in our current demise
    has been neglected by the media! Whilst a rather dry subject
    for the man in the street to read it is essential that their
    culpability is highlighted!

  • Comment number 23.

    This highlights what has been said for some time, that the whole system of accountancy for these banks, is not fit for purpose.

    An investor at any time should be able to see at a glance what the true position of a bank is from its last report,then and only then will any confidence ever return to the system as a whole.The banks arent going to do it of their own accord, we the people need to step in and force the system on them.

    These people are no better than Enron and should be treat as such, and they should certainly be removed from their posts as unfit,and forfeit all due remuneration....Experts ??? yeah right, in my day it was called Cat Burgling.

  • Comment number 24.

    13. typicallistener wrote:
    "How can UNDERSTATING your assets hide insolvency?"

    Ah - this is the thing about banks:

    Loans that the bank has made to others are the bank's ASSETS ie they expect to get the loan back with interest (their profits).

    Money that have been lent to the bank by others (eg investors) are the bank's LIABILITIES (ie they will have to pay this money back at some point, with interest).

    Now if some of these loans that the bank has made (their assets) are actually worth much less than they thought (because they are probably not going to get the money back) then they stand to loose an awful lot of money in the future.... better hide those loans (get them off the balance sheet), or say they are actually loans for much less than they are.

  • Comment number 25.

    Astonished, I'm affraid i am not.

    What was the real result of the Enron scandel, Accounting firms now charge even bigger fees as a result of SOX requirements, surely there is an ironey here that after messing up big time, Accountancy firms end being better off.

    Why does this happen, simply because large Accountany firms earn more by finding ways around the rules than adhering to them or at least using common sence. Audits fees alone for one big bank is C £25m of revenue each year, do people really expect Audit firms to risk losing this

    Why do Audit Firms, and why will they continue to get away with this (IMO), Because it is a very closed shop network. Only 4 firms account for over 80% of the FTSE 100 Audits ( being audit revenue in excess of £400m each year), over 2/3rds of FTSE 100 company finance come from these same 4 firms.

    These schemes become so complex, other members of the big 4 are asked for expert witness to see if what is being done is illegal. Frankly (IMO) it is very nieve to believe they will be highly critical of one of the other big 4 members when they all do the same thing.
    With a dependence on Audit Fees is any of the big four going to get a reputation for not helping their clients as much as its competitors

    Technically Auditors cover themselves by only reporting to the shareholders of the company, and vast exclusions signed of by company directors.

    I have been banging on about this problem for ages. i know others have expressed a view that it is human nature to avoid rules and it should be companys / individuals choice to do so if they can, but i stand firm with my view that this culture must stop.

    ways to limit this problem is fairly simple
    1) prevent Audit firms giving ancillary services e.g. advice, whether its client or not advice
    2) Mandatory changing of Audit firm every 2-3 years
    3) Reducing the power firms have over their auditors by the current structure of fees
    4) Breaking up the top 4
    5) A body who will strongly scrutinise practices
    6) Punishment of a level and likelyhood which should prohibit risk taking

  • Comment number 26.

    This is a fairly obscure write up for an accountant to follow. Reading between the lines though, I think that Lehman converted loans (one type of asset, but with an associated level of risk) into cash (another type of asset, which Mr Peston doesn't really explain very well to my mind).

    The short term conversion of the loans (which may be subject to default) to cash transfers some risk to the person giving you the cash and hence they request a discount. In this case it would appear to have been just shy of 5% (which on $50 billion is a lot of money).

    Just my 2 cents.

  • Comment number 27.

    It is incorrect to say that Lehman reduced their assets to improve leverage: they treated the repo105 loan as a sale and used the monies to repay other loans. That's how they made their leverage look better.

  • Comment number 28.

    At the time of the initial emergence of huge volumes of dodgy loans held by subprime lenders and others who bought the securitised financial WMD down the line, I asked a group of senior technical staff at a mega firm of accountants, "So was the auditing defective or were the accounting standards defective, or do you think it was a bit of both?"

    Surprisingly, my question was met with a mixture of sharp intakes of breath and icy glares. So, er, I didn't raise the matter again .....

  • Comment number 29.

    As some have pointed out Enron /Andersen is exactly the same as Lehman/Ernst&Young---the accountancy and auditing relationship was just too cosy among the relative handful of a few hundred firms and the former Big Five.

    The slack practices are not challenged as they emerge, and indeed become the 'smart moves'--the Enron people were the original smartest guys in the room weren't they....?

    The smart moves become accepted run-of-the-mill moves, and then someone puts a bit more topspin on them until we get to where we are ----- here again.

    Of course it's a wider problem.... again, as mentioned above, a different member of the (now) Big four was signing off Northern Rock as a going concern even after senior execs in the Bank were already exercising their options and selling their own shares and months before the entire thing collapsed---- I know accountants aren't experts in the companies they audit, but there are some signs and indicators around companies that require a bit more in the way of comment than an embarrassed cough and a 'lets move on shall we, Gentlemen?'

    It's always been a basic problem of morality and honesty in the Banks and the accountancy firms --- and the politicians---after all aren't PPP financed developments just our own National version of 'repo 105'?

  • Comment number 30.

    When Ruth Lea appears on Questiontime she used to be introduced as former Leamans economist but I noticed recently when she was introduced this had been dropped from her introduction.

    Please make sure when she appears on the BBC that her full CV is given to your audience.

  • Comment number 31.

    A Holistic system should be implemented to remove corrupted business practices. Auditors have nothing to do so they run up costs illegally to justify doing nothing.

  • Comment number 32.

    Disguised = hidden = defrauded which should mean jail..

  • Comment number 33.

    Organized crime, or is it just the Amercian free-market, Way?

    If you watch FRONTLINE's 'THE WARNING, it's very hard to say, I suggest - think of people like Ayn Rand, Ludwing Von Mises... They may not have packed machine guns etc.

  • Comment number 34.

    An interesting blog, and not unexpected.

    I work in education (an example of just one area)and after May we are expecting cuts in up to 25% of the education area.

    The ripples in the pond from the banking stone are spreading further and still the group of individuals who threw the stone in have not been dealt with!

    If they did not know what was happening or could not predict what was happening why were they being paid so much and why are they still being paid so much? I fall to see what their individual USP is!

  • Comment number 35.

    I'm not too sure it is ''astonishing'' as finance has been looking for the Holy Grail in accounting for centuries.

    Anything to hide losses.

    Some gamblers,stockbrokers,over friendly auditors like racehorse tipsters do this too and should be avoided at all costs.


    Sad to say, this is what regulators need to address. This style of financial operation to save us from the next meltdown.

    The truth will out(that applies to BBC moderators too. Hee Hee.]

  • Comment number 36.

    How can we expect companies to be honest with their accounting when governments, especially the UK, use every scam in the book to hide liabilities "off balance sheet".

    It will be interesting when Cameron opens Gordo's cupboard and discovers what is there.

  • Comment number 37.

    International Standards are supposed to avoid the problem you get with prescriptive rules such as US GAAP, unfortunately a lot of people in the world of accounting can only ever see the rules NOT the spirit.
    We need people who can view a business in its wider context rather than a "get rich quick" scheme.
    I also agree with a previous point on disagreeing with your superiors, you can very quickly be heading for the exit if you dare challenge someone's wrong-headed notions.

  • Comment number 38.

    Is this not a pecularity of US accounting rules which tends to be very detailed and a box ticking exercise whereas UK accounting rules (and most of rest of world) the accounting rules are principles based which makes it harder to run simple accounting slight of hand ruses like repo 105 - UK accounting ruses tend to be much more complex

  • Comment number 39.

    I am an auditor at a big for firm and not E&Y.

    I don't workin in the FS sector so cannot comment on the treatment in question. However undoubtedly the way this treatment is reported above does not sound good but I very much doubt Mr Preston fully understand what he is talking about. Afterall he has made his name in doubiously simplified commentry for the baying public on the financial crisis, this is just another case in point.

    Possibly, at worst, the application, which is appears has been agreed as technically correct, had dubious effects in this instance. However the rules are set by extremely dedicated groups, independant form the practicing firms, who aim to prevent these issues. The topics are very well debated and there will be very good reason that this treatment was allowed. It is possible that it will now be revised but I can assure all that the motive was not to facilitate reporting which could be misleading. Furthermoe I suspect E&Y had teams of highliy skilled people spend far longer than Mr. Prestons hour researching this and they believed it was right. It seems that not even the review board are suggesting anything else.

    Corporate reporting for financial instituations can be improved but will never be simplied to the point anybody other than a dedicated specailist can understand it. The business are to big, complex and diverse to achieve that.

    KPMG nor Deloittes did anything wrong with respect to RBS or HBOS . Infact I don't know of any serious case against an auditor through the financial crisis. You have to remember their was nothing wrong with their financail reporting, what changed was the underlying value of the assets due to the market conditions, auditors cannot be held responsible for that.

    A for the ways suggested to regulate the profession:

    1) prevent Audit firms giving ancillary services e.g. advice, whether its client or not advice - This would achieve nothing. We would just provide advice to all the non-audit clients, who's business we would inherently understand less about, reducing the effectiveness and value of our services.
    2) Mandatory changing of Audit firm every 2-3 years - Again no effect, we are big enough not to be that influenced, no chaneg in the output would be acheived, it would just cost the companies and hence investors more due to inefficencies.
    3) Reducing the power firms have over their auditors by the current structure of fees - The fee structure is purposely fixed, they have little power due to our size, this point is simply wrong.
    4) Breaking up the top 4 - Smaller firms will only be influenced more by their clients. £25m is less to us than to a firm helf the size.
    5) A body who will strongly scrutinise practices - We have many, you are obviously misinformed. They are extremely stringent, as are our own internal practices. I have absolutely not doubt on this.
    6) Punishment of a level and likelyhood which should prohibit risk taking - In my experiance we take virtually no risk and fail very infrequently. Hence you can only name a couple of admittedly embrassing cases for the profession world wide in the last decade.

  • Comment number 40.

  • Comment number 41.

    The greed and folly of the senior banker community has reduced or wiped out the savings of a significant part of the population. Bankers argue that they were acting on behalf of their banks and of the banks' clients but it all went horribly wrong for reasons beyond control or reasonable expectation.

    Except it didn't. The reason the banks failed was that many bankers were taking enormous risks, and knew it. They were doing it primarily for their own benefit - not that of shareholders or clients. In so doing it is arguable that they have exposed themselves to personal liability for the losses incurred.

    Surely, it is time for the civil law to bring these financial pirates to book. Class actions, freezing assets and seizing passports would be a good start.

  • Comment number 42.

    Ooops, sorry Ludwig, RIP.

  • Comment number 43.

    Nobody coming out in support of Lehmans? - is this our first 100% agreement on this blog?

    It seems to me we are being productive, I am comprising the 'order of business' based on what the intelligent people on this blog say.

    1) Smash the banks
    2) Smash the politicans
    3) Smash the auditors

    ...and don't anyone dare come on here citing phrases like 'cutting off your nose...' - because the freedom of choice means that if the world wants to cut off it's nose to spite it's face - then it is it's prerogative to do so.

    Sometimes you must sacrifice some of your own blood to rid yourself of the parasites upon your back.

  • Comment number 44.

    These Scuss Bags have mis-lead so many unsuspecting (individuals who put trust in the regulatory system) investors. And for the UK investors who lost out, from what was not necessarily their own fault, it will cost the rest of the taxpayers as the Financial Services Compensation Scheme groans under the burden.

    I bet the personal assets of those involved, accrued by these unscrupulous methods are safely tucked away!

    Funny how this article should emerge same day that the FSA claims they must do more to protect the consumer!

    Sorry to repeat what has been previously called, but the global cartel of bookies must be broken up and heavily regulated until proof that they add genuine value is revealed.

  • Comment number 45.

    I came across something similar to this back in the late 1990s, we used to call them “window dressing”. You can spot them a mile away.

    I don't know about the rest of you folks, but when I read a set of bank financial accounts, I know they are, at best, merely an exercise of creative accounting management. It’s just a game. Why? There are two reasons:
    - Financial reporting dates are fixed, which means that if there are problems on the balance sheets, the firms have a finite amount of time to put fixes in place to present better impressions to the investors.
    - Banks and other financial institutions regularly provide innovative solutions to their clients to help them dress up their balance sheets, why won't the banks use the same solutions to help themselves?

    What is really inexcusable is why haven’t the regulators spotted these activities in Lehman Brothers? Aside from regular financial reports that financial institutions have to file with the FSAs and SECs of the world, they are required to report credit large exposures, concentrations, and regulatory capital and economic capital usages and a while bunch of ratios on a weekly basis, if not more often. It doesn’t take a rocket scientist to spot sudden changes to these figures. Surely, if Lehman have been playing around with their numbers over several quarters, someone, somewhere, would have spotted this irregularity.

  • Comment number 46.

    > 10. At 10:53am on 12 Mar 2010, danj180 wrote:
    All of the Big 4 auditors have been shown up by this crisis

    RBS auditor was Deloitte

    In 2003 I was a contractor and I did a job at KPMG.
    Or to be precise I sat around getting very bored and being paid for nothing whilst meeting after meeting took place regarding why the IT job I (and several others) had been called in to do was so behind schedule. At the point of my arrival it was 6 months behind and due to restart again, on the day I left not a single hour more actual work had been done!

    After 4 days I had to leave due to a family emergency. Before I left I turned to the manager who was my liason and asked him what had actually been going on in the meetings (that I and the little people were not privy to attend).
    "The problem is X" he said.
    "Oh." I replied. "Do Y, should be fixed in about an hour."
    He looked at me gobsmacked.
    "I hope you guys are better at accounting than IT" I said as I left.

    My role was taken over by a friend of mine from the same firm I worked for. 4 weeks of sitting around later he told me they had just done Y. Exactly as I had told them a month earlier.

    Somehow I am not suprised they were involved in one of the banks going to the wall. I'm only surprised that they themselves haven't yet!

  • Comment number 47.

    The corporations of the world, not satisfied with the destruction of our lives now want to finish the job with a good old war.

    "Big business in the US has told Mr Obama to get tougher with China on trade and currency issues. "

    "getting tough" with a nuclear nation is never a good idea - I certainly don't want to be involved in that war when it comes as mutal destruction will be assured.

  • Comment number 48.

    Repo 105

    People are asking how understating assets manages to overstate the finacial health of a company.

    It is all a question of the quality of the various assets.

    A bank must hold sufficient shareholder investment against potential losses from its asset book. If a bank can turn banking assets bonds or loans say into cash then the perceived risk of loss is smaller and correspondingly less shareholder investment is required. On top of that, if the assets are not held on balance sheet, then no valuation is necessary and any already identified loss would not have to be recognised thereby not further erroding the level of shareholders' investment.

    Taking Robert's short form explanation of what happened, potentially this Repo 105 technique could be used to distort the key financial well being indicator. Why would the auditors condone the method. Presummably the auditors thought that if Lehman's could exchange an asset for 5% more than par then it was a very good quality asset and "as good as cash". Trouble is that a poor quality asset rightly earning a high level of interest could easily be worth more that 105% and still be poorer quality than "cash". The auditors should have had more interest in the relative yields not simply the par values.

    I look forward to seeing more on this "trickery" as it unfolds. I love the expression that as the tide goes out, you see who is not wearing their swimming trunks. Totally relevant again here, I think.

  • Comment number 49.

    Just as we were getting into a good Footie story we go back to banks.

  • Comment number 50.

    Special congratulations to Linklaters for enhancing the UK´S legal industry´s reputation for deviousness...they ok´d controversial accounting practices ( ) ...even US laywers apparently refused to countenance this.... all this may have been legal but it contributed to pulling the wool over thousands of innocent investors eyes. Rather than a "no comment" from Linklaters, wouldnt it be nice if they offered to review or change their future practices or do they prefer a reputation for devious dealings and the rich rewards that go with it?
    And wouldn´t it be good if our government jumped in sometimes licensing at the top of the agenda (i dont have a dog but what a useless idea that is)..but no one in the house of commons has the time to do anything about this...when it contributed to the greatest investor and pension losses in a long time.

  • Comment number 51.

    12. At 10:57am on 12 Mar 2010, Dr_Doom wrote:

    This isn't much worse than RBS and HBOS tapping shareholders for capital in their respective rights issues. Nobody in their right minds would have subscribed (not many did in the case of HBOS if memory serves) to this if they had known the full scale of the problems faced by these organisations.

    "If they had known the full scale......" That's a big "if!" Because yet more dodgy, (fradulent - allegedly) auditing has been and is being used by Investment banks to cover up their bankruptcy. This is why many ordinary people, quite justifiably, want Glass-Steagall like legislation re-instated at the very least.

    Apparently, U.S., European, including UK Governments are NOT persuaded (yet) to introduce legislation to force AUDITORS to get their act together, or face jail, for no other reason than they are worried about such legislation threatening the competitive position of their national businesses.

    Ordinary people just don't matter quite frankly! So the bankers (aided and abetted by fraudulent auditing,) are going to be allowed to continue causing intermittent worldwide financial mayhem, that sees millions thrown on the dole with, perhaps, a similar number having their houses repo'ed out from underneath them, just so we don't overdo the auditing legislation? It's just insane!

    Of course politicians won't lose their shirts in worldwide financial meldown, so they have no real pressing motive to enact "Dangerous Auditor" legislation. (Quite possibly because such politicians used to be auditors in a former professional capacity.)

    How many more Enron's, World Com's, Tyco Internationals, Bristol-Myers Squibbs, Barings, Kmarts, AIG's, Madoff's, Lehman's, Bear Stearns do we need???

  • Comment number 52.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 53.

    Is not this sort of behaviour the natural consequence of market pressures? The point being that it was only necessary for loans to Lehman Brothers to appear to be secure, not for this to be actually true.

    It illustrates yet again the folly of the relying on markets driven by the self interest of the participants to regulate the financial system.

  • Comment number 54.

    For those who haven't bother to read the full report (read: sane people who have better things to do), there are some interesting tables in the report which throw some light on what kind of assets were ‘converted’ into cash. The vest majority of the assets that were ‘temporarily sold’ were highly rated (AAAs and AAs), and a large proportion of those were government debt. The cash that came in was used to repay loans until after the reporting dates. After that, Lehman would borrow again, ‘repurchase’ the assets that were ‘temporarily sold’.

    What that means is that Lehman deleveraged using “repo 105”, but actually made the firm’s overall asset quality position worse. Since the illiquid toxic assets were impossible to shift and with decreasing liquidity, it should have been obvious something was wrong to the regulators months before Lehman finally fail. So the more important question is: What were the regulators doing?

  • Comment number 55.

    Surely, the critical point to notice is that it is very probably all within the rules, i.e. it is legal and standard practice. What some see as criminal behaviour is just venal behaviour. That's deregulated capitalism. Who is surprised?

    'Ernst & Young said: “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.”

    The Times

    This is how liberal-democracies work, i.e. laws are passed and rules created which ease business. That's what's meant by reform through legislation, but what most of the electorate doesn't see, is this is reform towards anarchism and the kleptocrats/plutocrats who do well from it, not reform towards socialism (which the aforementioned understandably see as a force of constraint).

    Why was the Cuban revolution of 1959 such a problem for the USA? Why was the (Old) Labour Party post WWII such a problem for the USA?

  • Comment number 56.

    36. At 12:20pm on 12 Mar 2010, truths33k3r wrote:

    "How can we expect companies to be honest with their accounting when governments, especially the UK, use every scam in the book to hide liabilities "off balance sheet"."

    I have a feeling the dishonesty of business preceeded the dishonesty of Government.
    Government only turned to dishonesty once it slipped into a spiral of debt - i.e. when it was sold off to the highest bidder - coincidently just a Lehmans did.

    Lehmans almost failed in 1998 under the weight of the LTCM collapse - why do you think they continued to act in such an irrational manner which ultimately led to their downfall?

    Once you have that answer you will see why Capitalism is doomed - you cannot temper it, anymore than you can ask the formula one guys to 'go easy on Schumacher' on Sunday.

    One breaks, they all break, they all crash.

  • Comment number 57.

    33. At 12:08pm on 12 Mar 2010, Statist wrote:
    Organized crime, or is it just the Amercian free-market, Way?

    Statist, I'm surprised your post got through the watchful eyes of the moderators.

    The mob created Las Vegas and the Mafia did transfer its experience in gambling to the financial sector too.

    I also wondered why the BBC had to waste our money making documentary about that awful place, The Lure of Las Vegas, recently shown on the BBC.

    I thought we were entering the age of austerity.
    Obviously not!

  • Comment number 58.

    From the above the auditors are now coming in for a kicking. I was not aware that 80% of the work was done by 4 companies.
    Does the government still look into competitions or lack thereof? Or even the FSA?
    Maybe time to ask my prospective candidates for parliament when they come knocking on the door. Maybe time to ask every candidate as so many are new this time....

  • Comment number 59.

    I don't quite understand this.

    If Lehman's leverage ratio= debt/equity...

    And equity= assets-liabilities...

    Surely reducing their assets using "Repo 105" reduced their equity and increased (not decreased) their leverage ratio.

    Please let me know if I'm missing something.

  • Comment number 60.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 61.

    Hm.. there's something wrong today. We don't have our usual banking sycophants, spitting feathers about how we can be so cruel to feeble-minded bank bosses...

    Perhaps it's because they realise that if the boss of Lehmen Brothers was a dunce who hid his accounts, then the rest of the bank bosses may be dunces as well. I see that Barclays Bank is in the list; could thier shareholders be in for the long drop as well? Fingers crossed...

  • Comment number 62.

    > 39. At 12:39pm on 12 Mar 2010, JR222 wrote:

    > I am an auditor at a big for firm and not E&Y.

    "Not me guv, it just fell apart in me ands" doesn't progress the debate. Any advice on what to do now?

  • Comment number 63.

    Having seen how "vested interests" of auditors distort or discredit what should be basic principles/codes of practice, perhaps the tax authorities should audit company's books instead? Then we would pit HMRC's "vested interests" against a company's and all for the benefit of the tax payer. Just a thought....!

  • Comment number 64.

    This all moved from a technical area of business regulation ages ago, if it ever was ONLY that; as there are some very fine lines being drawn in very faint ink, a long way from common sense, that need very powerful radio telescopes to discern.

    To be honest I think the senior executive bankers (and also large business professional advisory firms execs) have made calculations little different from Bernard Maddoff in many ways, and these boil down to ...."This deal could blow apart at any time --- but how bad can it be.??"

    "Even if everything goes bottom-up on this, I will be sitting on (pauses to mentally check off figures for fee bonus and remuneration on imaginary fingers) £xx Million, checked out and checked in"

    After that thought has swept around the various rooms these last few years everyone then gets down to minuting the meeting, safe in the knowledge that no 'rules' have been broken because the rules were built 'already broken'.

    The biggest effect of this whole mess ---- (and there have been plenty of big effects already, with plenty to come) is the effect on Leonora Helmsley's little people (that's most of us I imagine) at the sight of the spectacle unveiled before us of these (mainly Square Mile and Canary Wharf, mainly Wall Street) people who continue to posture as if nothing has changed and the bonuses will just keep on rolling.

    Everything has changed--- and they really need to get on the right side of History quickly because the doors are closing --- and staying dumb and continuing to count the money and fudge the issues won't be an excuse for'll be the reason...

  • Comment number 65.

    Lehman Bos. is just one. The financial collapse was a conspiracy by the bankers to create the housing bubble without providing the capital to underwrite the loans. As the bankers argue against further regulations one must wonder why the elected bodies do not act on behalf of citizens. A self-regulated industry is a corrupt or corruptable industry...proven time and again. If your elected or appointed officials will not take basic steps to protect those with whom you entrust your money than you should find someone else for the job. The rippling effects of the financial collapse go beyond the banks and have impacted many and entire nations, yet the bankers are still in control and continue their above the law posturing. Big criminals go free...societies die from within and this is the evident sign of corruption that sits at the core of captialism. The greedy have no philosophy, no allegiance, no national interest, they are common thieves in suits and should be treated as such..

  • Comment number 66.

    47. At 12:56pm on 12 Mar 2010, writingsonthewall wrote:
    The corporations of the world, not satisfied with the destruction of our lives now want to finish the job with a good old war.

    Well, you know war is the ONLY way out of depression. So I won't be surprised if the USA is already working in preparation to go to war.

    But the truth is that Western capitalists scored an auto-goal when they decided to open up China and thought they'd be able to milk it forever. They should have studied the history of the events prior to the Opium wars between the British empire and the Qing Dynasty.

    WAY TO GO CHINA! Teach the American bully a good lesson!

  • Comment number 67.

    57. plamski The mob just got smarter. Presumably that's why the former USSR referred to the USA as gangsters?

    One has to ask: who were more prone to Anti Social Personality Disorder? Anarchists or socialists? With the gift of the gab, some folk can spin it either way. In my world, one is wise to be wary of those who put themselves first all the time, and who regard others as prey (living by caveat emptor).

  • Comment number 68.

    2. At 10:18am on 12 Mar 2010, writingsonthewall

    Well said.
    The students, teachers and lecturers are now striking across California and
    yet we heard not a peep on this side of the pond.
    I listened to the reports on Democracy Now last Friday.

    Take a look at the pounding people are taking in the different US States. While the super bankers cream off the bonuses, no one realises it has been left to the state governments to wield the cuts, and those cuts are deep.

    We are told the laws are to protect us. I was told about Santa as a kid too.

  • Comment number 69.

    #58. barry white wrote:

    "Does the government still look into competitions or lack thereof (of auditors)? "

    No, they just preferentially hire consultants from the same four firms!!!!

  • Comment number 70.

    #59: CallumM, welcome basic banking accounting 101...

    1. Typically, leverage ratio is total assets over shareholders’ equity. You can use total liabilities over equity, but you’d get a smaller number. Some people even use total liabilities less deposits over equity, but that’s stretching things.
    2. The ‘stuff’ that is repo’ed out is from the asset side of the balance sheet. In typical repo accounting, the assets actually remain on balance sheet, but you have a new item called ‘securities sold under agreement to repurchase’ (or something to that effect) on the liability side of the balance sheet and any cash you receive for the repo’ed asset will appear as additional cash. On a net basis, total assets less total liabilities (ie. equity), the number is stays roughly the same (less a small discount on the repo’ed assets). But leverage goes up: total assets have increased, but equity remained the same.

    The above is true for repos. But you will notice that the asset remain on the balance sheet, the firm still has title to the asset.

    What Lehman appeared to have done was some form of sell/buy back, but the sell was allowed to be classified as a ‘true sale’, which means from an accounting perspective, the assets had actually left the firm’s books. Lehman then used the cash to repay existing debt. So asset went out and was replaced by cash; there was no change in liabilities at this stage. Then the new cash was used to pay down existing debt. Again on the net basis, there was no change (cash out, debt repaid), hence equity remained the same. However, total assets went down (cash out), and leveraged decreased as a result.

  • Comment number 71.

    How many other banks around the world have hidden their problems off balance sheet I wonder?

    It may be called Repo 105 in America, but what is the equivalent called here, Robert? I'd like to know just how many of our banks have conducted themselves in the same way - I suspect all of them. I also suspect that this practice is alive and well, and still being used.

    When the crash happened, there was absolute outcry over all this. Investigations and prosecutions were called for, but nothing happened. People were too busy trying to salvage their lives to worry about shady accounting practices. This call should now be renewed, and no prisoners taken. (Might be good idea to ban the sale of shredding machines while it's being done!)

    Whilst the drive to own your own home was begun under Mrs Thatcher, the speed at which this happened was facilitated by the current government. The crash happened on Gordon Brown's watch because he wasn't looking.

    The greed of all banks knows no bounds. By following this Repo 105 procedure (under whatever name it is in this country) they have shown that their desire for profit and gain outweighed their sense of moral hazard - they fed the demand for loans which would not have been there if people had found them harder to get. Cheap money, quick profit.

    Just goes to show that had this not happened, then only those who could afford to repay would have borrowed money. Why increase a credit limit on a credit card unless you want someone to get into even more debt? Why offer 100% mortgage on if someone can't find a deposit of even 5% conveniently forgetting that house prices don't always follow an ever upward trajectory?

    100% mortgages were originally offered specifically for those people wanting to buy their council house because the local authority were offering such discounted prices that the value of the house on the open market could be as much as double.

    Our economic growth was based on debt alone and I find it impossible to believe that the government had absolutely no idea what was going on!

    Investigate and prosecute like America is doing, and find me a political party to vote for which will stop this EVER happening again.

    Like any of this is going to happen!

  • Comment number 72.

    #39 - Sorry, but if you are an auditor I find it difficult to understand how you could have achieved this position with so many spelling and grammar mistakes. Surely you have to write reports which are correct in both?

    #63 HMRC do periodically audit VAT processes at companies, particularly if they divert from their usual ups and downs. Unfortunately, I think that these particular practices are so far removed from normal accounting practices that most normal companies follow, it would be difficult for them to undertake such a task - particularly if there is no VAT element involved.

  • Comment number 73.

    61. At 1:47pm on 12 Mar 2010, Jacques Cartier

    Or they are at an online meeting trying to co-ordinate the online response they need, the spin to save their gravy train... the guilty are always last to see the game is up.

  • Comment number 74.

    #52. Ed Hart wrote:

    "Auditors are in a difficult position, they need to ensure they do not give inappropriate advice, they need to point out errors and concerns to boards that frequently don’t understand or worse, don’t want to listen, and they need to ensure their role is impartial. No wonder they hide behind a legislative system that asks for little more than “true and fair” opinion."

    As you probably know quite well Auditors are not required to "give inappropriate advice" or "to point out errors and concerns" or even look for fraud. They are there to form an opinion on the reliability of the accounts presented to them and of the underlying procedures that exist in so far as they provide support for the view of the board of the company expressed in the set of accounts. The idea of materiality is quite critical to auditing that is the likelihood of the figures, if wrong, having any substantial consequences which would change the figures as presented. They further always rely on the presentations and assurances given them by the directors.

    The nub of the problem of Auditing is that the firm wants the job next year! So the solution is not to permit them to have the job fro more than one year - this will put up the cost of audits substantially, but the quality may improve.

    The other problem revolves around the fact that there are so few companies doing audits - concentration and cartels are the concern here. So them perhaps Auditors should not be permitted to work in large international partnerships either - a maximum number of partners (and no companies or limited partnerships at all).

    The third problem is that auditors also provide a range of other services - this should stop.

    The 'value' of these three ideas can fairly be judged by how much the existing large companies hate them! If they don't hate them they are not tough enough!!!

  • Comment number 75.

    #63. tertium_quid wrote:

    "perhaps the tax authorities should audit company's books instead"

    Don't think that is a good idea as all HMG will do is the hire the existing big 4 firms of auditors as sub-contractors to do the work!

  • Comment number 76.

    Lehman used Repo 105 to hide from creditors, markets, ratings agencies, regulators and even members of its own board quite how much it had borrowed relative to its undercapitalized capital; this is known as severe undercapitalization, and it is COMMON in the USA because of the lack of regulation.
    Finance raised in this way has to be repaid within days, and therefore the repo’ing leads to false reporting on balance sheets, and let's just say very bad accounting practices.
    It’s not really “astonishing”, Robert. It’s a great big piece of how the United States of America engages in regular (but not regulated) financial trading.
    The US (and any country with whom it has traded) cannot know its true leverage value if and until
    - toxic debt is segregated into “bad bank”
    - true worth of delcared assets is validated and
    - the bank meets required capitalization (as set by the EU?).
    As in the Valukas’ Report, I too believe there is a case against several investment banks in the USA (the US being the pivot point for all the rot that has pervaded the banking industry throughout the world).
    This is why I have implored, and implored again, that the EU must be involved in the assessment of the damage inflicted in European countries, especially sovereign debt. Europe must go about this financial audit – unified, clear, and with excellence in accounting, all of which Brussels can afford.
    Yes, I believe there is a case against JP Morgan and Citibank, Barclays, any several other American banks because, Robert, there is no regulation, I MEAN NO REGULATION in the US banking indusdtry – not even good-ole Glass-Steagall.
    I condemn Lehman's use of repo agreements, which by the way go all the way back to 2001 - ultimately hiding $50B of leverage off-sheet. The Valukas’ Report is an indictment on Lehman's top officers, auditors, and competitors JP Morgan Chase and Citigroup.
    The report is 2,200-pages, so I haven’t gotten very far in the reading of it. I have read that Valukas reported ex-Chief Executive Dick Fuld and CFOs Chris O'Meara, Erin Callan and Ian Lowitt as possible candidates for negligence or breach of duty. The report says, Lehman may have been insolvent already on Sept. 2, 2008, almost two weeks before its official bankruptcy which rocked the financial world and skydived the stock market.
    In my opinion, this is just the tip of the credit dfault swaps, derivative, convoluted financial mess that got dumped all over Europe, leaving countries to cope with debt that was never their own. In my humble opinion, this type of "hidden" trading is criminal. This is why I keep saying – stop trading with the US until it gets regulated and the EU is totally satisfied with the regulations that are put in place.
    Oh by the way, do you believe the American stock market is not being manipulated NOW, and that this manipulation is wounding countries world-wide? Do you believe in the validity of stock market reports?
    And one more by the way, Anton Valukas, the bankruptcy examiner, filed in Manhattan Federal Court.
    Valukas, is Chairman of the Chicago- based law firm Jenner & Block LLP. US Attorney in Chicago from 1985 to 1989, Valukas was nicknamed the Midwest’s Rudolph Giuliani for his hard line on white-collar crime. In his report, he says that Ernst & Young LLP, Lehman’s auditing firm, failed to question inadequate disclosures by the Lehman executives.
    Valukas spent a year and $38M putting the report together. He has interviewed 100 + people - including US Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and former US Securities and Exchange Commission Chairman Christopher Cox, and scrutinized (Are you ready?) more than 10M documents + plus 20M pages of e-mails from Lehman.
    Case: Re Lehman Brothers Holdings Inc., 08-13555, US Bankruptcy Court, Southern District of New York (Manhattan).
    I firmly believe that if the EU firmly gets it teeth into this rotten situation, it may well have a legal case against the United States of America and its lack of regulation or accountability.

  • Comment number 77.

    A leverage ratio is the ratio of capital to liabilities. When will Mr Peston learn the difference between his Assets and his Liabilities !

  • Comment number 78.

    Post 39 I very much hope your numeracy is much better than your spelling.

    The first two paragraphs of your post exhibit a number of major spelling howlers.

    Sorry to be pedantic about these things but unlike bankers and accountants I work in a profession where both numeracy and literacy are basic requirements.

  • Comment number 79.

    I always wondered what happened to my old colleagues from "Militant Tendency", but they appear to be all here.

    Anyway, the most interesting interview I have seen and the one least subsequently reported was from the Emeritus Professor of Economics at the LSE, I believe it was on BBC.

    He stated in apparently utter exasperation that the UK fiscal position vis a vis Greece was completely unfounded, the debt length (due dates), rates obtained, transparent gnp etc. etc made a default by the UK the LEAST likely of the G7.

    He went on to say that the now regular "Bits of Gossip" from the so called ratings agencies regarding the UK were pure and utter ramping of the FX markets for purely financial gain and that the ratings agencies were one and all substantially responsible for the "Crash" and that their current activities regarding sterling were tantamount to an act of war.

    I've paraphrased and exagerated, but not by much going by the expression on his face.


    We're Doomed.


    We're Struggling but fine.

    Every analysis I do comes out with

    If its fundementals we're fine.

    If its down to the financially motivated speculators and their friends in the media and ratings agencies, then we are screwed.

    Last question, " How many top bankers, Financial Industry Captains, Oligarchs etc are Tories and how many are members of or supporters of groups who wish to benefit as many people as possible?"

    I would propose

    99.999% and 0.001% would be the respective answers.

    In the forthcoming election it is between

    Well intentioned, incompetent petty swinding people who are trying to do their best for all


    Dyed in the Wool, rapacious thieves who have only one agenda, the acquisition of more wealth, power and money for their paymasters who may be of any nationality.

    As ususal it will come down to who offers the most realistic bribes.

  • Comment number 80.

    JR222 (#39) has given a reasoned response on this - more helpful than some other comments that are more cynical than realistic.
    I would just add one further point: it may be that arrangements such as Repo 105 (about which I know nothing) are neither morally nor legally wrong, but have the effect of causing a material distortion in the published results of the company concerned, and are set up mainly for that reason.
    If so, it should be the responsibility of the auditors to INSIST that the company's published results must include a brief explanation of the arrangement used and its effect on the results.
    It would then be possible for market analysts to judge the riskiness of the company and how it compares with its peers, and for the financial community generally to challenge arrangements that are presenting results in too favourable a way.
    After all, the third pillar of the Basel banking rules is supposed to be about openness of financial practices and the ability of the market to form judgements on them and to bring pressure to bear to stop abuses etc.
    It wasn't put in place just for fun, but because regulators know from decades of examples that setting "strict" regulations (as in the first two pillars) leads companies to game the system rather than to present results fully and openly. Such disclosure helps professional investors, lenders etc to judge which companies are accounting on a conservative basis and which are trying to window-dress their weaknesses.
    If auditors don't have such a responsibility at present, then they'd do well to insist they should be given it, in order to preserve their own reputations if nothing else.

  • Comment number 81.

    #39. JR222 wrote:

    "KPMG nor Deloittes did anything wrong with respect to RBS or HBOS"

    So, what you are saying, is that the obvious over leveragaging in the financial sector was not visible before the crash - come on pull the other one - many people were concerned by the bubble economy and rightly so. Surely the 'going concern' test should have failed well before the crash (or in RBS's case the rights issue) or is the test a joke!

    The fact is that there have (as yet) not been disciplinary cases brought before the Institutes's Disciplinary Committee has another implication - that the committee is unwilling to prosecute its own!

    But I do agree with you proposals for reform - except they may not go far enough!

  • Comment number 82.

    I learnt my bookkeeping from a little book "Fred Learns Bookkeeping".

    At one time being accused of not knowing the difference between a bad debt and a bank balance was an insult.

    Now it's a prerequisite.

  • Comment number 83.

    Here's a good one.....

    In California, the banks have foreclosed on some major building projects which were part completed.
    (the state is bankrupt - only being kept going by some 'clever accounting' which as we can see is perfectly acceptable in the clepto-pungent world of auditors)
    ...anyway, because the banks didn't want to have the hassle of yet more property on their books - they paid for them to be bulldozed

    There are proposals of demolishing half of Detroit for similar reasons - although it's to stop large tracts of 'ghost streets' attracting crime.

    Now I know recessions are about destroying capital following overproduction - but this is literally destroying built property in order to level the market.

    Did any of these consequences go through the minds of the bankers when they were packaging mortgage securities?

    This is extreme, even for Capitalism. However it's good to see that the majority of people are getting the picture and are venting their anger - the next stop, action based on their anger.

    As Jacques Cartier wrote:

    "Hm.. there's something wrong today. We don't have our usual banking sycophants, spitting feathers about how we can be so cruel to feeble-minded bank bosses..."

    Yes - they are all in hiding today - finally the indefensible has lost it's defenders - it's a landslide victory for common sense and reality over fantasy and idiocy!

  • Comment number 84.

    Linklaters, what's in a name.

    Talk about Giant Squids!

  • Comment number 85.

    #25. Kudospeter wrote:

    "large Accountancy firms earn more by finding ways around the rules than adhering to them"

    Perhaps we should add to the list of necessary reform:

    It should be a criminal offence to provide advice to others with the aim, or consequence of avoiding taxation!!! (That should do the trick - the prospect of the large tax advice companies (both accountants and lawyers) being illegal as companies and the partners and staff spending a few years behind bars!)

  • Comment number 86.

    I think you'll find that 'the accounting rules' in USA did not allow Lehman to use this procedure off-balance, they had to use their London offshoot who could get UK Lawyers to agree the principle within our set of rules.

    Because our system was full of bigger holes........


  • Comment number 87.

    According to Anton Valukas, the examiner appointed to investigate the collapse of Lehman Bros by a New York bankruptcy court, ‘there may be claims on JP Morgan and Citibank for the way they demanded collateral from Lehman in its final days’.
    In the above context, one wonders why and how Lehman Brothers Holdings had agreed recently (late February 2010) with JP Morgan Chase to settle about US$7.68 billion in collateral obligations!
    There ought to be no such settlements until all claims from the Lehman creditors are completely settled.

  • Comment number 88.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 89.

    At 62 - As to what needs to be done I cannot answer and my right would be different to others (and certainly many on this forum) because of my view of how society should work. My point was simply that in the merry-go-round of blame that is occuring very little should fall at the doors of the profession I am involved in. I am very confident of that.

    My route issue in this whole crisis and the reason I bother to register to this forum today is because again and again poor journalism is being used to milk modern societies need for blame, simply sensationalising individually insigificant elements of an issue without hitting the route cause.

    Lets be simple about this the system fell down because the economy was fueled by debt of indiviuals that could not afford to repay it. Now governments are trying to maintain the bubble by doing the same. It is not sustainable, it will all be paid for in time by us all.

    So the taxpayer is really the route cause in the first place, ironically the only thing the Labour government has done to redistribute wealth is to socailise this debt through the support of the banking system.

    The problem was the simple loss of sight of the fundermentals but an awfull lot of people (statistically most of those who complain on this forum), not just bankers, enjoyed the ride and are now bitter it has ended.

    All the parties, the banks, the corporates, the governments and most importantly the individual lost sight of reality, the only thing the bankers did wrong was to enable it. Personally I believe they even did this by accident, simply by believing in the system.

  • Comment number 90.

    I have been advocating jail for bankers for some time now - subject of course to due process. Leeson spent 6 years inside for what seems quite a trivial fraud.

    I want all the then-directors of all failed banks to be disbarred from directorships worldwide and a compulsory insurance scheme paid by all banks and other financial institutions that may have theoretical need for a bail out for the risk incurred in being the lender of last resort. The premiums going to the taxpayer of course who is the real sufferer here.

    Meanwhile the banks should have interest rates capped so they can't charge all this back to the consumer. If they find it difficult then there is all that real estate they can get rid of, not to mention bonuses and

    The poor taxpayer is taking the hit now. We have more than doubled our national debt and cannot afford to start HS2 until 2017 and that even only as far as Birmingham! We will take not 4 but more like 40 years to repay this lot and have nothing to show for it. Afer all we only recently finished repaying the $4billion Keynes post-war loan.

    So while we have 'invested' some £70+ billion in banks and 'lent' something over £400 billion for repayment in 2012 (don't make me laugh), we have to look over our shoulders at the value of the £ and our credit rating.

    Who sets these bond values and credit ratings?

    Why it's the same crew who signed off corrupt accounts with billions if not trillions of fraudulent scams in them. The involvement of a city law firm seems to be the last straw so why should we, the humble taxpayer and voter, not have that lot in jail too?

    It's about time the cancerous tail stopped wagging the hard-working dog.

  • Comment number 91.

    Tiger post 72 you stole my thunder.

    The US authorities have a much better record than the UK for imprisoning financial miscreants so hopefully Mr Fuld and some of his acolytes will be joining Bernie Madoff and Jeffrey Skilling in a long stretch "up river".

  • Comment number 92.

    68. At 2:21pm on 12 Mar 2010, copperDolomite

    I agree it's very odd how the Atlantic (where Marconi put a communication line across about 100 years ago) how the communication has dried up almost completely.

    Only 2 states showed a surplus last year. Several are already effectively bankrupt. Cuts are on a par with Greece and are now producing the same result (strikes)

    They say this is a 'southern Europe' or a 'satellite nation' problem, but it's about to bring down the biggest of them all...

  • Comment number 93.

    59. At 1:36pm on 12 Mar 2010, CallumM wrote:

    “Please let me know if I'm missing something.”

    It would appear that they were managing to treat a repo as a true sale, and then “ignored” the repurchase obligation somehow.

    By way of example, imagine that before the repos they had:

    Securities: 100
    Other assets: 100
    Total: 200

    Financed by:

    Equity: 100
    Debt: 100
    Total: 200

    Under a ‘normal’ repo, they would transfer the securities to the counterparty and receive cash in return. They would also agree to give the cash back on a certain date and get the securities back in return. This would normally be accounted for as a secured loan. Assuming a ‘haircut’ of 2, they would repo 100 of securities against 98 of cash, giving them:

    Securities: 100
    Other assets: 100
    Cash: 98
    Total: 298

    Financed by:

    Equity: 100
    Debt: 198
    Total: 298

    They can then use the 98 of cash to retire a portion of the existing debt, leaving them with:

    Securities: 100
    Other assets: 100
    Total: 200

    Financed by:

    Equity: 100
    Debt: 100
    Total: 200

    So - no change from before the transaction.

    Treating the repo as a true sale, would mean that they treated the repo as if they had just sold the securities for 98 of cash (giving a “loss” of two). This would give them:

    Securities: 0
    Cash: 98
    Other assets: 100
    Total: 198

    Financed by:

    Equity: 98
    Debt: 100
    Total: 98

    They can then use the 98 of cash to retire a portion of the existing debt, leaving them with:

    Securities: 0
    Other assets: 100
    Total: 100

    Financed by:

    Equity: 98
    Debt: 2
    Total: 100

    Now, their gearing appears reduced.

    The question is how they managed to “ignore” the obligation to repurchase the securities at the end of the repo.

  • Comment number 94.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 95.

    73. At 2:33pm on 12 Mar 2010, copperDolomite
    61. At 1:47pm on 12 Mar 2010, Jacques Cartier

    Right - that's it, I'm going for the defense - it's unfair this is all so one sided....

    Before you all start criticising the lack of legal recourse in this matter I would remind you all of the following facts:

    1) Lehmans only lied about $50.4bn worth of assets - it's not much is it? Surely we can let them off that small amount

    2) The bosses were severely criticised, not just told off, or repremanded, or told not to do it again. It must have hurt a lot to go through the pain and agony of such criticism.

    ...that's the best I can muster folks, I did my part for a "balanced argument"...

  • Comment number 96.

    #71 Tigerjayj

    Not sure what you mean by: "By following this Repo 105 procedure (under whatever name it is in this country) they have shown that their desire for profit and gain outweighed their sense of moral hazard".

    I think you’re confusing this particular accounting trick with other accounting tricks that the likes of Enron and WorldCom used to boost their ‘profits’. This, “repo 105”, trick is for dressing up balance sheet to make it look healthier than it really is. I don’t even think this trick involves the profit/loss account.

  • Comment number 97.

    #70. At 2:26pm on 12 Mar 2010, spikegifted

    Our posts crossed in moderation. I think we're saying the same thing - sorry for having repeated your explanation.

  • Comment number 98.


    I assume that you mean that under this scheme Lehman was able to remove both the asset and the liability from its balance sheet (thus fundamentally altering its capital ratios).

    An allied question is that if UK accounting (principles rather than rules led) allows this test to be passed then E&Y does face some serious questions about the the strength of and its understanding of its analytical review.

    I am no expert in US GAAP (or IAS) but suspect that a rules based definintion might allow you to do this?

  • Comment number 99.

    71. Tigerjayj wrote:

    "Why increase a credit limit on a credit card unless you want someone to get into even more debt? "

    Funny you should say that. I've just this minute had to contact one of the big credit card issuers about a query. Type in the numbers, etc, etc. I didn't want an automated balance, but they were going to give me one anyway. This is what the machine said:

    "Your current outstanding balance is £1200. You have £xx,000 available to spend today"

    Scary, or what? Fortunately I'm a fairly strong character - resistance isn't futile!

  • Comment number 100.

    19. At 11:12am on 12 Mar 2010, plamski wrote:
    There's another way - 100% Registered Money

    Mr Plamski, a nail squarely hit.

    If we (the country), don’t have control over the creation of money, we (the country) will be forever at the mercy of those private corporations that do.


Page 1 of 2

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.