Lehman Bankruptcy Report Reveals Misleading Accounting Tactics

Online Exclusive: A Q&A about Senate Financial Reform Efforts

At the heart of the sprawling report on Lehman Brothers' downfall is an accounting gimmick that helped the investment bank hide $50 billion worth of assets to conceal its true leverage ratio. The 2,200-page tome, released in March, details the rampant use of repurchase agreements to temporarily and deceptively move the assets off the books.

"It's certainly playing fast and loose with the rules," says Gary Brown, a Baker Donelson shareholder who is currently seconded to the Senate's Permanent Subcommittee on Investigations, a role he also performed in the aftermath of the Enron crisis. "This is a good example of when somebody takes a rule and relies too heavily on it."

For years, Lehman used Repo 105 transactions without reprimand from auditors or regulators. But the use--and disastrous effects--of Repo 105 transactions was amplified as the company drew near financial ruin in 2008.

Fritz expects a great deal of scrutiny from investigators on Lehman's opinion shopping and says it could raise problems for the defunct company's former in-house lawyers.

"There could be a whole separate message on how far can in-house counsel go in terms of getting approvals for aggressive accounting practices," she says.

Contributing Author

Steven Andersen

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