DK M.
Chairman mi2g, ATCA, Philanthropia, HQR dkmatai.chairman.office@gmail.com we.divine.engineer.enter-prise.innovate.excel!
What are your views about the Lehman Brothers examiner's report? Drugged Elephant(s) in the Room: How to Address Off Balance Sheets Hiding Leverage?
For Background and Clarification:
Dear Friends
The 158-year old Lehman Brothers' collapse on September 15, 2008, was the largest bankruptcy in US history. That event is etched on the financial world's collective memory because it unleashed the most devastating financial crisis in generations, causing panic in capital markets, accelerating The Great Unwind, and bringing about a virtual freeze in global trade, The Great Reset. This led to trillion dollar rescue packages from Washington and other capitals.
It has taken a year of painstaking research and a 2,200-page report in nine volumes by a Chicago-based lawyer, Anton Valukas, to lift the lid on the management failures, destructive internal culture and reckless risk-taking that confined Lehman to history. The bankruptcy examiner's massive report on the collapse of Lehman Brothers has found "credible evidence" that top executives, including the Chief Executive, approved misleading statements and used accounting gimmicks as drugs to hide the truth from investors and the public. Worse, the report raises serious questions about the behaviour of auditors and regulators, who are supposed to protect the public. Specifically, the report's revelations include:
The Whistle-Blower
Inside Lehman Brothers Holdings Inc, some executives were very concerned about the firm's Enron-like accounting practices as the company headed to the brink in September 2008. In May 2008, Matthew Lee, a former Lehman senior vice president wrote a letter to senior management warning that the company may have been masking the true risks on its balance sheet. His warnings, revealed in the bankruptcy report, show that Lehman's auditors knew of potential accounting irregularities and allegedly failed to raise the issue with Lehman's board.
Clarification added March 15, 2010:
Read the full article at: http://ow.ly/1l1uu
Stress Tests
Lehman Brothers, like its peers, was required to stress-test its trading positions and investments. Despite the risks posed by Lehman's dramatic ramping up of its illiquid investment portfolio, the firm's own stress tests excluded illiquid assets. Specifically, the firm excluded its principal investments in real estate, its private equity investments and its leveraged loans backing buyout deals. For example, a USD 2.3bn bridge loan for the buyout of Archstone-Smith Real Estate Investment Trust in May 2007 was never included in its risk usage calculation, although that single transaction would have put Lehman over its already enlarged risk limit, the examiner notes.
Vulnerability
Lehman's practices meant that the firm did not have a true picture of just how vulnerable it was to volatility in capital markets and, more importantly, in the markets for the illiquid assets in which it had invested. The issue was all the more crucial to Lehman because the firm, with only USD 25bn in capital, had far less of a balance sheet buffer than its much stronger competitors.
Conclusion
The bankruptcy examiner's nine volumes report could have far-reaching implications for former Lehman Brothers' executives, including its former chief, Dick Fuld, and its auditors Ernst & Young. The bank that comes out of the report is an organisation prepared to take short cuts and huge risks to boost earnings, where control and accounting procedures were found to be sorely lacking. It also sheds a damning light on the inner workings of some parts of Wall Street that may be hell-bent on maximising profits and hiding losses plus true leverage using off balance sheet techniques. Contagion risks and counterparty failure have been the main hallmarks of The Great Unwind and The Great Reset thus far. In the light of the Lehman report, the question is whether there is a better way to ensure volatile investment banking and proprietary trading functions do not dominate the future stability of the commercial banking and financial intermediation environment that is so critical to real economic activity across the world. Could transparent leverage rules outlawing the use of obscure off-balance-sheet structures achieve this?
The world outside of policy making is still waiting for a fundamental reassessment of banks’ business models with sophisticated off balance sheet activities that hide true leverage. What banks are actually doing inside and how they may play acrobatics with rules to compete with each other has become utterly opaque and non-transparent to the investors, amongst other stakeholders. Wouldn't a single new rule barring off-balance-sheet techniques prevent a future "Lehman Brothers" to use accounting manoeuvres to make itself look financially stronger than it actually is? This is the “drugged elephant in the room” syndrome on which some policy makers have not yet had the time or inclination to focus.
The post mortem report emphasises not only the need for transparent and comparable accounting rules, for improvements in corporate governance, but it also supports the imposition of a transparent group leverage ratio to provide a binding capital constraint -- that Basel risk-weighted rules have been unable to achieve -- and suggests the need for the elimination of non-transparent off balance sheet activities to hide true leverage. These reforms are essential to deal with contagion and counterparty risk that are so integral to the ‘too big to fail’ drugged elephant(s) in the room.
[ENDS]
We welcome your thoughts, observations and views. To reflect further on this, please respond within Twitter, Linked and Facebook's ATCA Open and related Socratic dialogue platform of HQR.
All the best
DK Matai
Chairman and Founder: mi2g.net, ATCA, The Philanthropia, HQR, @G140
Answers (14)
Dorina G.
Experienced Program Leader-seeking new opportunities
Best Answers in: Change Management (9), Ethics (4), Government Policy (2), Organizational Development (1), Planning (1), Philanthropy (1), Manufacturing (1), Project Management (1), Career Management (1)
Everything went according to the plan; Gov. reached that envy position where they had to borrow more money from the “bank” but most importantly became more dependent on banking and insurance system. Now, everything works perfectly because majority of Gov. are dependent on banks while banks are dependent on some Gov. which will ensure their future businesses.
There are several ways to change this simple architecture as to take banks and insurance companies from global investments and allow them to invest only in their own region, and simultaneously create an international organization (where governors cannot be bribed etc.) to monitor investments and other activities closely. There might be some efforts in this direction but so far, I do not think that proper system is available.
Impose laws and regulations but most importantly the profit made from mortgages should be scrutinized and analysed, and if it is legit, money should be returned to local business development (daycare, food banks, hospitals, nurseries etc).
Vincent V.
Breakthrough Coach | Global Ambassador at Shaklee Independent Distributor
Best Answers in: Using LinkedIn (21), Work-life Balance (10), Business Development (10), Change Management (8), Health Care (7), Organizational Development (7), Government Policy (6), Public Health and Safety (6), Job Search (5), Staffing and Recruiting (5), Manufacturing (4), Career Management (4), Green Business (4), Energy and Development (4), Computers and Software (4), Event Marketing and Promotions (3), Economics (3), Personnel Policies (3), Internationalization and Localization (3), Customer Relationship Management (3), Business Analytics (3), Planning (3), Starting Up (3), Education and Schools (2), Freelancing and Contracting (2), Mentoring (2), Treaties, Agreements and Organizations (2), Graphic Design (2), Public Relations (2), Quality Management and Standards (2), Supply Chain Management (2), Wealth Management (2), Communication and Public Speaking (2), Ethics (2), Small Business (2), Enterprise Software (2), Wireless (2), Customer Service (1), Car and Train Travel (1), Conference Planning (1), Budgeting (1), Risk Management (1), Government Services (1), Compensation and Benefits (1), Health Administration (1), Environmental Health (1), Antitrust Law (1), Intellectual Property (1), Guerrilla Marketing (1), Writing and Editing (1), Corporate Governance (1), Bond Markets (1), Futures Markets (1), Inventory Management (1), Project Management (1), Personal Investing (1), Branding (1), Market Research and Definition (1), Product Design (1), Pricing (1), Positioning (1), Professional Organizations (1), Professional Networking (1), Green Products (1), Information Security (1), Telecommunications (1), Software Development (1)
DK, I'm not entirely surprised at the findings. Perhaps we should rename the decade as the Enron-Lehman decade with a crude reference to Sarbanes-Oxley. What is more important for me is what lessons we will learn from them and how we are going to institutionalize them. And secondly, how we are going to answer the question at what point we should stop bankrolling these types of institutions.
I think some consideration for returning all investment banks to partnerships would do a great deal to reign in the risk. When it is their capital then they don't take excessive risk.
Sir
The first thing comes to mind that if the management along with audit team was there to manipulate the financial figures and leverage position, then how could a small investor can rely or investigate on the credibility of any entity and if he decides to do so then to what extent he may be able to gain access to the insider treatments or operations.On the other side even if the regulators came to know about the exhausted position after a long time then it is always out of reach for anyone else to assess real situation.It is a clear example of social motives being overshadowed by personal motives, so there may be many others in the queue for Chapter 11 filing which are not well governed.
Larry S.
CxO in training. Warp factor 9, Scotty. Engage.
Best Answers in: Software Development (4), Job Search (2), Blogging (2), Computers and Software (2), Regulation and Compliance (1), Accounting (1), Compensation and Benefits (1), Advertising (1), Graphic Design (1), Writing and Editing (1), Change Management (1), Labor Relations (1), Planning (1), Quality Management and Standards (1), Career Management (1), Starting Up (1), Green Business (1), Web Development (1), Using LinkedIn (1)
I don't get the position that is being taken in here that government intervention is to blame.
Lehman did the act of window dressing to the nth degree to hide the toxicity of their own balance sheet. How they can be absolved of any culpability is beyond me since it was specifically done to hide the state of the company, which is a prima facie case of fiduciary malfeasance.
In other words, those who are found to have directly or indirectly knowledgeable of the activities at the time of their execution should, themselves, be drawn and quartered.
Jeff M.
Director, People-Centered Economic Development UK
Best Answers in: Social Enterpreneurship (6), Government Policy (4), Philanthropy (4), Nonprofit Management (2), Ethics (2), Economics (1), Government Services (1), Personnel Policies (1), Business Development (1), Change Management (1), Project Management (1), Using LinkedIn (1)
A few months before the September collapse, the core argument from a 1996 critique of capitalism was published on the web.
Capitalism based on manipulation of abstract numbers has reached the point of implosion.
Links:
Colin T.
Owner, Security Class Action Estimate Service
Best Answers in: Currency Markets (2), Auditing (1), Economics (1), Government Policy (1), Business Analytics (1), Hedge Funds (1)
The question now is what happens to the businesses associated with the collapse of Lehmann. Ernst & Young are now on the hook for securities class action lawsuits relating to the demise of Lehman.
Other companies include the Underwriters include Bank of America Securities LLC (NYSE:BAC), Citigroup Global Markets Inc. (NYSE:C), Merrill Lynch, Pierce, Fenner & Smith Inc. (NYSE:MER), Morgan Stanley & Co. Inc. (NYSE:MS), UBS Securities LLC (NYSE:UBS), and Wachovia Capital Markets, LLC (NYSE:WB). These guys underwrote a stock offering prior to the collapse.
All of these companies have deep pockets the lawyers love to go after.
My company is currently involved in projecting potential settlements for this case for our clients.
I have to say that Jesse James was a fool to rob banks. The best way to rob someone in America is to sell them a security for $10 dollars and let them settle with you out of court for $1 and give 25 cents of their dollar to their lawyer.
Stephen R.
Preeminent real estate expert, place primacy inventor,trusted strategy advisor and investment manager,cultural visionary
Best Answers in: Business Development (3), Business Analytics (3), Work-life Balance (2), Using LinkedIn (2), Business Dining and Entertainment (1), Freelancing and Contracting (1), Advertising (1), Corporate Governance (1), Change Management (1), Bond Markets (1), Wealth Management (1), Ethics (1)
Lehman unraveling report underscores the inadequacy of its executive management team and systems, providing a more comnprehensive autopsy to complement and underscore many of the critiques already published. Certainly, more realism in disclosure is imperative. At the same time, Lehman and many others needed/need more realistic ways of mananging and communicating the essence of their business.
Fundamentally, Lehman overlayed aggressive trading and project finance, committing long yet funding short, on an operating business model that was dwarfed by momentum-based trading and dealmaking premised upon the idea that gravity, economic reality, accountability, market cycles, you can't fool all the people all the time, etc. did not apply to their business.
Significantly, Lehman, in common with many other financial services firms, failed because of mistakes and misrepresentations re their real estate invovlements. Disproportionate faux profits were linked to real estate, and a major share of real losses resulted directly from real estate.
Seshadri Nathan K.
Director at Seshadri Nathan Securities Pvt Ltd
Best Answers in: Equity Markets (2), Certification and Licenses (1), Personal Investing (1)
DK - Reading through the examiner's report is certainly thought provoking.
The structure has flaws, as we have seen time and time again. Other than dismantling the whole structure and rebuilding it (say, abolishing the Fed, going back to Gold etc.); my thoughts here are more towards reform.
I don't get the treatment of repo 105. I am still wondering how it came to be that the auditors decided to ignore an event occurring after the balance sheet date (i.e the securities coming back to the financials) as non-material. The watchdog should have barked and barked loudly and non-stop at this. Andersen was not enough of an example, it seems.
I agree with Brian completely - IB firms should go back to partnership or partnership-like structures; where the long-term capital of the principals is at stake in every deal.
Also wondering, if it is time to do away with quarterly reporting of balance sheets and move to a more frequent statement of positions. With today's level of technology, it may be possible for a regulator to get up to date financial on a daily basis or a weekly basis with a little time lag. Overnight Off Balance Sheet vehicles may not be as attractive as the three week week kind of Repos and the shell game of SPVs may not work that well in this situation. If you are TBTF, you can also afford the costs of this compliance.
DK M.
Chairman mi2g, ATCA, Philanthropia, HQR dkmatai.chairman.office@gmail.com we.divine.engineer.enter-prise.innovate.excel!
Lightning Response to Drugged Elephants in the Room: Lehman's Off Balance Sheet Autopsy
Dear Friends
We are grateful to our distinguished friends within The ATCA 5000, The Philanthropia 1000 and HQR Initiative for their lightning response to the Drugged Elephants in the Room briefing on the Lehman Brothers' Off Balance Sheet Autopsy. If you wish to view the Socratic dialogue and to participate in its evolution please follow the links:
1. LinkedIn
http://ow.ly/1lt2P
2. Facebook
http://ow.ly/1lt2Q
The original briefing "Drugged Elephant(s) in the Room: How to Address Off Balance Sheets Hiding Leverage?" can be accessed from:
http://ow.ly/1lu9E
[ENDS]
We welcome your thoughts, observations and views. To reflect further on this, please respond within Twitter, Linked and Facebook's ATCA Open and related Socratic dialogue platform of HQR.
All the best
DK Matai
Chairman and Founder: mi2g.net, ATCA, The Philanthropia, HQR, @G140
To connect directly with:
. DK Matai: http://twitter.com/DKMatai
. Open HQR: http://twitter.com/OpenHQR
. ATCA Open: http://twitter.com/ATCAOpen
. @G140: http://twitter.com/G140
. mi2g: http://twitter.com/intunit
- ATCA, The Philanthropia, mi2g, HQR, @G140 --
This is an "ATCA Open, Philanthropia and HQR Socratic Dialogue."
The "ATCA Open" network on LinkedIn and Facebook is for professionals interested in ATCA's original global aims, working with ATCA step-by-step across the world, or developing tools supporting ATCA's objectives to build a better world.
The original ATCA -- Asymmetric Threats Contingency Alliance -- is a philanthropic expert initiative founded in 2001 to resolve complex global challenges through collective Socratic dialogue and joint executive action to build a wisdom based global economy. Adhering to the doctrine of non-violence, ATCA addresses asymmetric threats and social opportunities arising from climate chaos and the environment; radical poverty and microfinance; geo-politics and energy; organised crime & extremism; advanced technologies -- bio, info, nano, robo & AI; demographic skews and resource shortages; pandemics; financial systems and systemic risk; as well as transhumanism and ethics. Present membership of the original ATCA network is by invitation only and has over 5,000 distinguished members from over 120 countries: including 1,000 Parliamentarians; 1,500 Chairmen and CEOs of corporations; 1,000 Heads of NGOs; 750 Directors at Academic Centres of Excellence; 500 Inventors and Original thinkers; as well as 250 Editors-in-Chief of major media.
The Philanthropia, founded in 2005, brings together over 1,000 leading individual and private philanthropists, family offices, foundations, private banks, non-governmental organisations and specialist advisors to address complex global challenges such as countering climate chaos, reducing radical poverty and developing global leadership for the younger generation through the appliance of science and technology, leveraging acumen and finance, as well as encouraging collaboration with a strong commitment to ethics. Philanthropia emphasises multi-faith spiritual values: introspection, healthy living and ecology. Philanthropia Targets: Countering climate chaos and carbon neutrality; Eliminating radical poverty -- through micro-credit schemes, empowerment of women and more responsible capitalism; Leadership for the Younger Generation; and Corporate and social responsibility.
Links:
Scott M. W.
Owner, Autonomous Solar
Best Answers in: Equity Markets (9), Commodity Markets (8), Currency Markets (7), Derivatives Markets (7), Bond Markets (6), Option Markets (5), Government Policy (4), Risk Management (3), Hedge Funds (3), Energy and Development (3), Personal Real Estate (2), Public Funding (1), Economics (1), Financial Regulation (1), Exporting/Importing (1), Offshoring and Outsourcing (1), Treaties, Agreements and Organizations (1), Advertising (1), Guerrilla Marketing (1), Corporate Governance (1), Personal Taxes (1), Personal Investing (1), Computers and Software (1), Software Development (1)
It isn't Rocket Science what happened to Lehman. First and foremost they were leveraged better than 40:1. Which in normal times was...normal. However when the proverbial s#@! hit the fan and everyone was grabbing collateral back from everyone to save their own asses Lehman got caught short Collateral. Since they had `smallest' Balance Sheet of the big firms (now that over leveraged Bear Stearns was gone) they were now officially in trouble. They did everything within the letter of the Law to raise Capital to satisfy demands for Collateral back from their Customers and the Street. Everyone on the Street knew they were over leveraged and it became a feeding frenzy trying to get there Capital out of Lehman before everyone else. No one broke the Law they all did the prudent thing. Lehman tried like hell to get ahead of the tide and survive for another day, which included the Repo's the Report speaks about. The Street and Lehman's Customers all wanted whatever Capital they had tied up at, or in, Lehman back. I think the biggest villain here is Fuld, he should have started De-leveraging a long time before he did ( I don't know when he started, or even if, but whenever he did it wasn't soon enough) it was his job to prevent these things. If the Fed and Treasury hadn't stepped in and forced the Firms left to take Billions in Capital and say they would provide `whatever Capital needed' to support the system someone else was going to fail because they were all over leveraged. The next one up the food chain...Morgan Stanley.
I have personally not read the report but off balance sheet hiding leverage can simply be addressed by cross review of old B/S with new parameters trending the leverage and accordingly pooling this leverage pool to swipe out debt/borrowing/etc...
Boo Boon K.
Principal Consultant in Casino Gaming and Financial Services
Best Answers in: Change Management (1), Organizational Development (1), Equity Markets (1), Project Management (1)
Hi DK,
I see this purely as a failure of ethical standards of executives in Lehman Brothers, Ernst & Young and if I may extend it further to include those in the Securities and Exchange (SEC) and stock-broking firms. I believe that any analysis of the failure of Lehman Brothers and other failed Wall Street firms (both financial and non-financial firms) to accounting fraud/accounting dodges per se betrays the furtive minds that is involved in furthering their personal interests at the expense of shareholders, investors and other stakeholders. The senior management in Lehman were interested in boosting revenue and in presenting a strong balance sheet that will boost the stock price. The auditor, Ernst & Young, was more interested in the fat fees and in maintaining their profitable relationship with their well-heeled client. the stock analysts from investment-banks owned stockbroking firms were asked to made favorable recommendations in exchange for future 'investment banking deals'. Finally, the SEC often time was unable to act on time and enforce the laws in deference to some higher authorities and budget constraints.
Against this backdrop, transparent leverage rules outlawing the use of obscure off-balance-sheet structures or a single new rule barring off-balance-sheet techniques can never prevent prevent a future "Lehman Brothers". And this is very obvious in the case of Lehman here. Even the failure and the subsequent censure of Enron for keeping loans off balance sheet using special purpose vehicles (SPV)did not deter them in taking a similar guise. As a matter of fact, Lehman Brothers, went a step further, using the Repo 150, which was more difficult to detect compared with Enron's SPV.
My point is simply this: Unless we address the failure of ethical standards among executives, furtive minds of the greedy and the corrupt will challenge and circumnavigate new rules and procedures that are put in place.
