Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, March 11, 2010

Bankruptcy Examiner Reveals Accounting Tricks at Lehman

The examiner appointed by the bankruptcy court to examine the September 2008 collapse of Lehman Brothers reveals, in a 2,200 page report, new information about how Lehman used accounting tricks in efforts to conceal its deteriorating financial condition.  For details and the report, see:

NYTimes, Report Details How Lehman Hid Its Woes as It Collapsed

Wall St. J,  Examiner: Lehman Torpedoed Lehman

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It is no wonder, banks resorted to creative accounting. EVERYONE was in the game at the time. It is customary to:
a) sweep unfunded entitlements under the rug in most OECD states trying to hide sovereign technical insolvency (,
b) Hide the debt and unsustainability of big institutions such as Fannie Mae and Freddie Mac who for years practised accounting that would have landed other executives in jail for tens of years.
c) Allow a Federal "Bank" to issue "money" without any more backing than you and I would have if I issued writ and with this let them buy government debt that otherwise would not be saleable under a sounder regime (not if banks wouldn't be able to borrow against its unfunded AAA rating!) and let banks create surplus credit and then play a "lender of the last resort" which means nothing but issuing money when other funds have been totally squandered.
d) And last (well, really, there's thousands such shenanigans) but not least allow banks to evaluate their debt at a different price than what it would actually have in the marketplace at any particular time.
And it is the latter that over time leads to banks misreading their wealth so that when they find out, they need to hide that very fact ONLY because it was hidden "legally" all the while before.
If a "true and fair view" were rigourously enforced, all this could have never happened, but with regulators meddling and their superiors making a livinng out of such fraud it's no wonder.

Posted by: CrisisMaven | Mar 13, 2010 4:34:11 AM

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