How Lehman broke the law and spirit of the law

We learned last week that the Lehman Brothers' managerial board chose to "disregard and overrule" the bank's risk control systems during its years of aggressive expansion. This was hardly a revelation given that the bank collapsed so spectacularly in September 2008 with debts of $600 billion (Dh2.2 trillion) but the extent to which Lehmans used "lazy accounting gimmicks" to hide the bank's true financial position has shocked the investment community.

The revelations came in a report into the decline and fall of Lehman Brothers – an event, remember, that gave the global credit system such a heart attack it triggered the economic downturn. According to the 2,200-page report, Lehmans made use of a creative accounting trick that allowed it to offload up to $50bn of debt from its balance sheet just in time for its quarterly reporting periods.

The bank "sold" financial assets and then bought them back after its results were reported – a system it called Repo 105. This allowed Lehmans to add big chunks of cash to its balance sheet for a few days while also reducing its leverage. But Repo 105 was, the report said, an "inherently improper" device. Dick Fuld, the Lehman chairman and CEO, as well as other senior executives may now find themselves pursued by creditors who believe they are to blame for the bank's collapse. Fuld said last week that he had no knowledge of the Repo 105 deals.

Nobody comes out of the report into Lehmans' collapse well and it confirms what most people suspected: that the bank had become so obsessed with risk and making money that it lost sight of the need to operate both within the law as well as the spirit of the law.


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