Lehman and fraud at the highest levels of business and government

If you’ve missed this breaking story of Enron-like proportions, here’s a summary:

The bankruptcy examiner report on Lehman says their then-CEO Dick Fuld was “at least grossly negligent” and that their auditor Ernst & Young could be accused of “professional malpractice.” They were cooking their books with fraudulent transactions worth $50 billion. Tim Geithner, who then headed the NY Fed, is also implicated.

Repo 105 is the type of swap transaction whereby this was done. However, Lehman reported them as sales not swaps, and that’s fraud.

The Agonist says abandon all hope, the government, regulators, and Wall Street have learned nothing.

Regulators are useless, or even dangerous, if their political masters deprive them of staff, a decent budget, and authority.

That’s the core of it. The corruption is everywhere. It’s become institutionalized in the government too. But an awake citizenry can – and must – change it. If you didn’t believe that, you wouldn’t be reading blogs like this one.

Deconstructing Ernst & Young

Ultimately the biggest loser from the whole Repo 105 scandal may not be the perpetrators, i.e., Fuld, the firm’s numerous CFOs, Tim Geithner and Mary Schapiro, but the alleged “fact-checkers” – auditors Ernst & Young. Just like Enron’s Star Wars-based off balance sheet accounting gimmicks brought down Arthur Anderson, so “Repo 105” may likely be responsible for the downfall of E&Y.

How about this time, dozens of the auditor’s executives go to prison and are stripped of assets, not just a few like with Enron. What a novel concept. Enforce the existing laws.

Too big to succeed?

But an even more troubling section of the Lehman report is not Volume 3 on Repo 105. It is Volume 2, on Valuation. The Valuation section is 500 pages of utterly terrifying reading. It shows that, even eighteen months after Lehman’s collapse, no one – not the bankruptcy examiner, not Lehman’s internal valuation experts, not Ernst and Young, and certainly not the regulators – could figure out what many of Lehman’s assets and liabilities were worth. It shows Lehman was too complex to do anything but fail.

The Big Picture has a Lehman news round up and says:

In addition to tarnishing what little name Fuld had, the tentacles of the Valukas Report are reaching to the NY Fed and Geithner, Ernst & Young, even Linklaters, a law firm in the UK that blessed Repo 105 for the British subsidiary of LEH as kosher.

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