The Lehman Scandal Breaks Wide Open

Will Repo 105 be the Chewco and JEDI of this crisis, and are we finally about to see some people on Wall Street go to jail?

Yesterday’s blockbuster 2,200 page report on Lehman Brothers by a court-appointed examiner shows Lehman Brothers executives moving $50 billion in toxic assets off-balance-sheet to deceive investors about its financial health. Finally it seems it’s taken Anton Valukas and $38 million to put the scandal in the scandal. Shades of Enron, as Wall Street Journal reporter Peter Lattman said on the paper’s “News Hub” webcast this morning.

Expect to be reading about the repercussions of this report for a good long while. Already there’s lots of thread to pull on here. Take your pick, from Dick Fuld and Erin Callan of Lehman (no wonder Callan wouldn’t talk to Fortune) to accounting firm Ernst & Young to British law firm Linklaters all the way up to JPMorgan Chase and Citigroup to its counterparties. The FT’s John Gapper James Mackintosh has a good rundown of the “Lehman perp walk” here.

Essentially what Lehman did was make its balance sheet look much better than it actually was by taking those $50 billion in assets and arranging short-term transactions just before the end of each quarter—all so it wouldn’t have to report that it held these assets.

The Journal is good to put this up high in its front-pager:

In one instance from May 2008, a Lehman senior vice president alerted management to potential accounting irregularities, a warning the report says was ignored by Lehman auditors Ernst & Young and never raised with the firm’s board.

That’s pretty damning.

All this makes it worthwhile to visit Jonathan Weil’s excellent column on Lehman’s fraud from last month—one that looks quite prescient now.

It is so widely accepted that Lehman Brothers Holdings Inc.’s balance sheet was bogus that even former Treasury Secretary Hank Paulson can say it in his new memoir. And still, the government hasn’t found anyone who did anything wrong at the failed investment bank.

How could that be, 17 months after Lehman collapsed and sent the global credit crisis into overdrive? While Congress and the White House dither about reforming the U.S. financial system, the wheels of justice are grinding so slowly, if at all, that it seems there’s no appetite in Washington for holding Wall Street executives accountable for anything.

Spin these questions forward for the press with what we know now: Why did it take a court-appointed examiner to uncover this rather than the Justice Department—or even the press itself?

Here’s a quote from the Journal’s good October 2008 leder on Lehman’s collapse—this from a September 10 conference call:

Mike Mayo, a Deutsche Bank AG bank analyst, asked whether Lehman would need to raise $4 billion as part of the plan, according to a transcript of the call. Lehman’s chief financial officer, Ian Lowitt, replied: “We don’t feel that we need to raise that extra amount.” At another point, Mr. Lowitt said: “Our capital position at the moment is strong.”

Right. And this is a good point to bring up another Weil stemwinder, this one appearing the day after Lehman’s bankruptcy:

Is there anybody left in the government with a pulse? Where’s the yellow police tape? How about a cease-and-desist order to prevent document destruction? Are we supposed to believe that everything carted out of Lehman this weekend was a personal effect?

Can anyone give me a good reason why Lehman offices shouldn’t be treated as a crime scene now? Or why there has been no sign of any investigation by the Securities and Exchange Commission into any aspect of Lehman’s accounting or disclosure practices? Where is the Justice Department? Where is New York Attorney General Andrew Cuomo? How about the Financial Industry Regulatory Authority?

We still have no good answers for those questions.

And if you watched stocks editor Bob O’Brien this morning on “The News Hub,” you might think journalists don’t have any interest in answering them. I couldn’t believe he actually said this:

Is there any indication that these accounting shenanigans are pervasive across Wall Street… otherwise this is a $38 million exercise in finger-pointing.

Not a good sentiment for a journalist to have.

Thankfully, it wasn’t one Anton Valukas held. Now, who the heck is he, and can we get him on Bear Stearns, AIG, Goldman, and the Angelides Commission?

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.