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Bloomberg’s Susan Antilla Exposes Lehman’s Charade

Posted by Larry Doyle on March 15, 2010 10:54 PM |

Journalism is not dead.

I find it easy to critique financial journalists and journalism these days for not digging to expose the charades within the Wall Street-Washington incestuous liaisons; however, a few journalists are not beholden to the financial industry, do dig, and truly distinguish themselves in the process. The two finest journalists in this realm both happen to work at Bloomberg. One is Jonathan Weil. The other is Susan Antilla.

While many journalists have written about the finer points of repo financing and how Lehman cooked their books, Susan Antilla took the time to delve deeper into Anton Valukas’ expose on the inner workings of Lehman.

I have the utmost respect for Susan and commend her for this outstanding work, Don’t Bluff Buffett, Plus Other Lehman Lessons:

It’s tough not to conclude that, whoever is at fault, Lehman Brothers got away with scamming investors about its financial state until the New York-based investment bank hobbled into bankruptcy court on Sept. 15, 2008.

How did the firm hide so much for so long? Consider these Top Ten Ways to Pull a Lehman, inspired by bankruptcy examiner Anton R. Valukas’s 2,200-page tome of travesty, released last week:

10. Don’t burden the board of directors with fine points.

Before a presentation to the board on March 20, 2007, the chief administrative officer of Lehman’s Mortgage Capital division e-mailed a colleague to summarize her discussion with Lehman President Joseph Gregory:

“Board is not sophisticated around subprime market — Joe doesn’t want too much detail.” While it would be OK to be candid about risks, the presenters should take care to be “optimistic and constructive.”

9. Know your regulators . . .

At the Securities and Exchange Commission, people were aware of risk excesses but “did not second-guess Lehman’s business decisions” so long as management was aware of what was going on, Valukas wrote. When the less-forgiving Office of Thrift Supervision caught on that Lehman had blown past its risk limits during a review of the company’s 2007 operations, it issued a negative report, citing “major failings in the risk management process.”

8. . . . and use that knowledge when you get the chance.

In 2003 and 2004, when Lehman and other U.S. banks had a choice between letting the U.K.’s Financial Services Authority or the SEC supervise them, they chose the friendly cops in the U.S. Little wonder it would be a court-appointed examiner, not the SEC, that would wind up delivering the authoritative Lehman autopsy.

7. Have a bad memory.

Until Lehman published its 2007 annual report, the firm offered a section called “Other Measures of Risk,” which described its “risk appetite metric.” But, whoops, that section went missing in 2007 and was nowhere to be found in its swan-song first or second quarterly reports in 2008, either.

How come? Valukas spoke with a manager who helped draft one of the reports, plus the chief financial officer and the senior vice president of external reporting. No one remembered why the section was mysteriously zapped.

6. Keep the focus on your bonus.

Lehman businesses that breached their balance-sheet limits faced penalties that “could include the diminution of their compensation pool,” the report says. But hey, no problem. If the balance sheet topped the limits, sometimes Lehman would just raise them. And by early 2008, when declining revenues threatened to eat into compensation, Lehman upped the percentage of net revenues that would go into the compensation kitty, to 52.5 percent from 49.3 percent.

5. Don’t let the risk experts get uppity.

Madelyn Antoncic, Lehman’s chief risk officer from 2004 to 2007, “expressed her opposition to the large increase in the 2007 risk appetite limit and to the firm’s bridge equity and leveraged loan business,” the report says. She was replaced on Dec. 1, 2007.

4. Don’t keep notes.

Lehman’s Risk Committee met on Wednesdays, Antoncic told Valukas. Or was it Mondays, as Kaushik Amin, head of liquid markets, recalled? Mondays, Wednesdays, it’s all the same when there’s no record of it, anyway. Valukas cited David Goldfarb, chief strategy officer, in reporting that “no minutes were kept because it was an active dialogue rather than a decision making meeting.”

3. Break your own rules.

Fuld and Gregory “apparently faced financial difficulties” and wanted to sell their limited partnership interests in employee-only funds. The rules dictated that the partnerships were not redeemable “except on events such as death or severance.”

No worries. On July 17, 2008, “Fuld and Gregory received wire payments of $3,933,929 and $4,614,565, respectively.” The report says the transactions “appear to have been an exception to Lehman’s rule.”

2. Make friends with Warren Buffett . . .

Among Fuld’s efforts to drum up capital to keep the firm afloat was a pitch to Buffett for $2 billion or more. The billionaire was willing to discuss the possibility, talking to Fuld on March 28, 2008, and then spending the rest of the day poring over Lehman’s 10-K.

1. . . . but never, ever, try to bluff him.

Buffett considered Fuld’s carping about short sellers to be “indicative of a failure to admit one’s own problems,” the report says. Fuld also made the mistake of leaving out details of what the report calls “a $100 million problem in Japan” that Buffett learned about on March 29.

Fuld called Buffett on March 31 to say Lehman couldn’t accept his terms. By then, Buffett already had decided he wasn’t interested, according to the report.

So Fuld didn’t know when to keep his mouth shut or when to share important information with Buffett. That is just the way things were in Lehman-land, as this distressing report reveals.

Valukas certainly distinguished himself with his extremely thorough work. Why wasn’t a court examiner appointed to do the same with the SEC and FINRA instead of allowing for a self-directed internal review?

Valukas’ work and Susan’s expose are de facto indictments of the SEC, FINRA, Lehman’s board, Lehman’s management, and Lehman’s compliance for abrogation of duties if not outright corruption. She opens windows which real regulators and examiners should continue to explore. I would think prosecutors could have the makings of a serious RICO (Racketeeer Influenced and Corrupt Organizations Act) case. Will they pursue it? Whether they do or not, we all owe Susan a debt of gratitude for this fabulous piece of work.

Do yourself a favor and make a point of checking Bloomberg for Susan Antilla’s work. Do your friends a favor and have them check as well. Susan is dogged in pursuing and promoting the truth, transparency, and integrity our country so badly needs.

Simply the best!!


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