More on Lehman and Repo 105: The Auditors Attempt to Explain
Ever since we began following the storyline of "Repo 105," a sly balance-sheet maneuver performed by Lehman Brothers that helped it hide billions in dodgy assets, we noted that Lehman auditor Ernst & Young had some explaining to do. That explaining has begun.
Contrarian Pundit posted a letter that Ernst & Young sent out yesterday, defending itself: not to the media, but to its clients. Check out both pages of the letter (PDFs).
A few choice bits:
Lehman's bankruptcy was the result of a series of unprecedented adverse events in the financial markets. The months leading up to Lehman's bankruptcy were among the most turbulent periods in our economic history. Lehman's bankruptcy was caused by a collapse in its liquidity, which was in turn caused by declining asset values and loss of market confidence in Lehman. It was not caused by accounting issues or disclosure issues.
....
While no specific disclosures around Repo 105 transactions were reflected in Lehman's financial statement footnotes, the 2007 audited financial statements were presented in accordance with US GAAP, and clearly portrayed Lehman as a leveraged entity operating in a risky and volatile industry.
In other words, we at Ernst & Young didn't point out that Lehman was doing things to hide its risks, but you should've known Lehman was in trouble anyway.
Felix Salmon points out that at least they're no longer denying that they knew about Repo 105.
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4 comments
Contrarian Pundit
March 25, 2010, 10:54 p.m.
Thanks for the link. The letter is, of course, laughable. But it also reveals some glaring weaknesses in its defense.
How E&Y dealt with the whistleblower is particularly revealing. After all, on whom was Lee blowing the whistle? Not just Lehman. He was blowing it on E&Y as well. He was charging accounting breaches. How could it not be about E&Y as much as about Lehman? This is *crucial* to understand.
E&Y was charged with investigating Lee’s allegations. How did they do? E&Y’s letter focuses on the whistleblower’s letter (the word “letter” is bizarrely repeated six times in five sentences in the E&Y letter I leaked). But the case really rests on the whistleblower’s *allegations*, not just what was in his letter. If you read the Valukas report carefully, you will see that E&Y effectively squelched Lee’s key allegation: the E&Y partners met with Lee, heard his claims about Repo 105, and never brought them up to Lehman’s audit committee. Why would they do that? Because the allegations were just as damning for E&Y as for Lehman.
More here: http://www.contrarianpundit.com/?p=626
Francine McKenna
March 25, 2010, 11:43 p.m.
The letter form Ernst & Young to Audit Committee members was posted first on my site, re: The Auditors.com on Saturday March 20th. http://retheauditors.com/2010/03/20/an-ernst-young-response-dear-audit-committee-member/
It was linked to by FT Alphaville, Reuters and ZeroHedge.com amongst many other sites earlier this week. You and Contrarian Pundit are behind on this.
http://retheauditors.com/2010/03/21/ernst-young-and-lehman-brothers-a-summary-of-quotes-stories-and-links/
Francine McKenna
March 26, 2010, 10:02 a.m.
@Contrarian Pundit. Yes, I agree. EY’s actions are suspect and smell of coverup. In their slight defense, they should never have been asked to and never accepted being part of an internal investigation. They ended up between a rock and a hard place. I have written about this extensively, since the business of the auditors is my primary focus.
Contrarian Pundit
March 26, 2010, 11:10 a.m.
Hi Francine,
I posted an actual copy of the letter, rather than just quoting from its contents. It’s helpful, because readers and reporters can never be sure whether anything has been omitted (or even whether an actual letter was sent).
Here’s another interesting aspect: The Repo 105 allegation didn’t make it into Lee’s letter, and E&Y’s letter tries to use that to suggest perhaps it wasn’t as big a deal as it’s made out to be.
But we can just as easily conclude the opposite: Lee didn’t want to put it in writing, because it was scandalous, and he was equally as implicated as others responsible for Lehman’s balance sheet.
The anecdote from the Valukas report about Hansen and Schlich (E&Y partners) bringing up Repo 105 with Lehman’s Gerard Reilly is also interesting. (Note: The supposed meeting depends solely on Hansen and Schlich’s memories, since Reilly is dead and Hansen conveniently did not take notes.) Here’s one way to read it: Hansen and Schlich were testing how well known the Repo 105 transactions were. When Reilly said he didn’t know about them, it perhaps gave Hansen and Schlich the green light they wanted to bury it.
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