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Dick Fuld Unaware of Lehman’s ‘Cooking the Books’? STOP IT!!

Posted by Larry Doyle on March 13, 2010 2:34 PM |

Given the global interest in this story, I am bumping it up from the original posting on 3/12/2010.  LD


Former Lehman Bros. CEO, Dick Fuld

Reports that Lehman was effectively ‘cooking its books’ prior to its ultimate demise are not a surprise.

Reports that Dick Fuld, then CEO of Lehman, was not aware of the nature of this cooking are both ridiculous and pathetic.

The lifeblood of every financial institution on Wall Street is access to financing for its operations. That financing very often comes in the form of repurchase agreements (repo financing), in which the institution borrows funds while pledging assets. These short term loans, often overnight loans, are unwound at a preset date and preset prices. The rates borrowers have to pay for funds borrowed depend on the credit quality of the borrower itself and the quality of the assets pledged.

Auditors assess the health of the institution on a variety of a measures, but ultimately look at the amount of equity capital the institution holds relative to its assets so it can determine its overall leverage. As defined by Investopedia:

The amount of debt used to finance a firm’s assets. A firm with significantly more debt than equity is considered to be highly leveraged.

A firm such as Lehman would have to pay more to borrow funds to finance its operations if lenders determined it was overleveraged. This increased cost of borrowing would eat right into Lehman’s bottom line and if the lending dried up completely would cause the firm to go belly up.

Was Lehman overleveraged? A report released yesterday is extremely revealing and incriminating of what was truly going on at Lehman, not only in the midst of the crisis but going as far back as 2001.

Welcome to the world of repo financing on Wall Street!!

Bloomberg reports on just how Lehman ‘cooked its books,’ in writing, Fuld ‘Negligent’ as Lehman Hid Leverage:

Lehman Brothers Holdings Inc. used off-balance-sheet transactions to understate its leverage in late 2007 and 2008, deceiving shareholders about its ability to withstand losses, a bankruptcy examiner’s report said.

Then-Chief Executive Officer Richard Fuld was “at least grossly negligent” for letting Lehman file financial reports in which a key gauge of strength was “reverse-engineered” through transactions known as Repo 105s, bankruptcy examiner Anton Valukas said in a report yesterday. Lehman auditor Ernst & Young LLP could be accused of “professional malpractice,” he said.

Lehman moved assets off its balance sheets via Repo 105 transactions (pledging excess collateral in return for funding) and accounted for them as sales, not financings, so that the overall leverage of the firm was disguised.

Bloomberg writes that the independent investigation reveals:

“The balance sheet manipulation was intentional, for deceptive appearances, had a material impact on Lehman’s net leverage ratio” and caused financial reports to be misleading, Valukas wrote of the New York-based company. Higher leverage undermines a firm’s capacity to absorb financial shock.

Was Fuld aware of these transactions? Does a bear dump in the woods? Fuld’s attorney begs otherwise. As Bloomberg reports:

Fuld didn’t know what the Repo 105 transactions were, his lawyer, Patricia Hynes of Allen & Overy LP in New York, said in a statement. He “didn’t structure or negotiate them,” she said. “Nor was he aware of the accounting treatment.”

What does Fuld’s right hand man, Bart McDade, have to say about this financing operation and Fuld’s knowledge?

The bank, which had been using the repos since 2001, ramped them up in mid-2007, breaching internal limits, the report shows. Lehman’s former president, Herbert “Bart” McDade, commented on them in an April 2008 e-mail exchange, after he was asked whether he knew about their effect on the balance sheet, Valukas said. “I am very aware,” McDade wrote back. “It is another drug we r on.”

Fuld, 63, received a presentation referencing Repo 105s in March 2008, and McDade, 50, recalled discussing the transactions with the CEO in June of that year, according to the report.

“Fuld knew about the accounting of Repo 105,” McDade said in an interview with Valukas on Jan. 28 this year.

What regulatory authority was charged with overseeing Lehman during this period? The NASD, which then became FINRA in 2007. Recall that FINRA’s oversight (or lack thereof) of Lehman and others is addressed in the Amerivet Securities v FINRA complaint.

In regard to Dick Fuld, his career on Wall Street started as a commercial paper trader (another form of short term borrowing). To think he was not fully cognizant of the Repo 105 transactions is beyond absurd.

Where should this Lehman situation go now? Let’s start with the following, in the appropriate halls of justice: “Mr. Fuld, raise your right hand and repeat after me…..”


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  • fiscalliberal

    In McDonalds book on Lehman, he alludes to the view that Fuld was obsessed in building the company and did not spend time on detail in the company. He came in, took the executive elevator and did not mix with the troops. In the end it was his job to know and he cannot lay that on anyone. Did he not have to sign a SARBOX statement, or was the financial industry exempt from SARBOX.

    So – the real question is, how many of the others were in the same shape. The often repeated comment in Sorkins book was Blankfeins comment to John Mack was that if Morgan Stanley went down, Goldman was a matter of 12 hours behind. That had to be because of over leveraging and playing games like Lehman did.

    In the end this all happened because the regulaters did not do their jobs.

    • LD


      ….and who was charged with regulating these broker-dealers? Mary Schapiro and FINRA directly who reported up to the SEC.

  • fiscalliberal

    Am I correct in saying the Investment Banks were regulated by SEC – Chris Cox who was a failure. However all of the Investment banks went converted to Holding Companies to get access to the FED window. Now they are regulated by the FED.

    So the real question is – how well is the FED regulating them?

    Have you sent a thank you note to your Senator Chris Dodd in terms of his taking the bull by the horns to get something done on reulation rather then putting up with the Shelby and Corker obfuscation and delaying tactics.


    It only takes about 10 minutes to do it on his website

    • LD

      Unless and until Dodd and or anybody else is willing to truly take the bull by the horns and address the obligations of FINRA, I am not sending a thank you note to anybody.

      Immunity (for FINRA) without transparency does not work for me and should not be allowed to work for anybody.

      I do agree with you that the Republicans are not doing anybody any favors here.

  • Bill

    Gasparino in his book Sellout discusses how the characters who ran–using that term gratuitously–these investment houses and banks were clueless as to the risk of the operations. Guys like Cayne at Bear, O’Neal and Thain at Merrill, Prince and Rubin at Citi. Even if Fuld was not on top of the risk at LEH, which is debatable, he surely had a grasp of the 105 accounting, a much easier topic to comprehend.

    • LD


      I do not believe that Cayne, O’Neal, Thain, or any of the others were not fully aware of the risks in their books. Why do I say that? Each and every one of these firms would have internal Risk Committees that would meet on a very regular basis to review exposures.

      O’Neal may not have had as much appreciation given his background in retail brokerage and Prince was also likely out to lunch given his background in law but the others had extensive time in or around institutional trading (either fixed income or equity) not to have a full and total appreciation for the risks.

      They may not have focused on the risks when times were rolling along and they were getting filthy rich but when the proverbial ‘you know what’ was hitting the fan, they certainly would have been aware of all risk positions.

      • Bill

        LD, I overstated Gasparino’s case with the characterization as clueless. Yeah, they had some appreciation of it. He contrasted guys like that with somebody like Larry Fink, for whom you used to work, who according to Gasparino, is extremely attuned and knowledgeable of risk. He said that Fink’s experience in the early 80’s when he was forced out of First Boston made a believer out of him, unlike others who went through it, such as John Meriwether. I think clueless fit somebody like Prince with no background in bond trading and dealing.

  • Sean

    How is it that there have not been more criminal prosecutions involving these people who have brought-down our entire financial system? Some of these executives make Bernie Madoff look like a piker in comparison. Instead, the institutions got free taxpayer money with very-little strings attached! At the very least these executives involved should not be allowed to work in the financial services industry again, so that they’re not allowed to inflict any more harm to society than they already have; they have more than enough money in their personal bank accounts to be able to afford to find some other vocation/avocation for themselves. NCAA-athletic regulation/violations are enforced better.

  • coe

    LD – It is inconceivable to anyone who has been around the street for any length of time to believe that the senior executives do not know the key details of what goes on in the trenches (I suspect some repo traders and salesmen were paid quite handsomely for their yeoman work in funding the firm – all of which was probably reviewed by senior management up to and including Fuld in nut-crunching detail during compensation meetings). What’s more, to the extent any individual had specific career experience in Fixed Income, by way of example, it is preposterous to assert they would be oblivious to this issue. In the Lehman case, to the extent the CEO began his climb to the top in CP screams out that he would be familiar with the full panoply of short term funding vehicles and intimately involved with the repo desk. By the way, in addition to Fuld, I have heard that Bob Diamond of Barclays also made his bones on the Finance Desk, as did many others at one time or another in their “leadership” arcs on Wall Street. Used correctly, this experience would serve them and their firms quite well. And even if one wasn’t fully conversant in the technical nuances of Repo 105 as I suppose is possible, at a minimum, I am quite sure one would absolutely understand it’s “off-balance sheet” impact on the leverage ratio!

    Lehman was not tied into a huge commercial bank, though they owned a small ILC of limited consequence in Utah. Their operations were grand and their aspirations grander. They depended on short term funding liquidity for their lifeblood. This imperative grew even more desperate as the crisis loomed over them. I could certainly picture many meetings during the day at which key folks would provide senior management with updates on the funding status. I have to believe that the Fed and FINRA and the Administration and Treasury were asking these questions multiple times a day. That’s just the way things work.

    So spare all of us the disingenuity. Here is my version of the more likely “truth” – McDade knew, the Risk Committee knew, the Repo desk knew, the Financial Division knew, the Operations Department knew, the senior MDs knew, the Credit Department knew, the Board knew, the Auditors knew, the Management Committee knew, the Traders knew, the salesmen who trafficked in this repo leverage knew, the competition knew, the short term investors knew, the trade press knew, the regulators knew, perhaps even the shoe shine guy, the security team and the kitchen staff knew. Yet the CEO was not aware of the implications?! Sounds logical to me…in a Clintonian sort of way…

    At the end of the day, it is shameful that a number of unethical, self-serving lowlifes can be so arrogant that they can direct the destruction of a firm so irresponsibly, at the expense of thousands of good employees, of hundreds of good customers, of us – the taxpayers, and of the global economy…there should be a special place in jail for these folks – perhaps solitary confinement where a recording would endlessly loop a reading of the accounting rules governing Repo 105!

    • LD


      Your insights are outstanding and deeply appreciated!!

  • Tom

    Fuld was either incompetent or criminal. If the former, he should relinquish all bonuses, if the latter, he should be prosecuted.

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