High Stakes Staredown

Mary Schapiro is the Chairman of the SEC. Richard Fuld is the ex-CEO of bankrupt Lehman Brothers

Classify this under speculative rumor, I suppose.  In a story by Jean Eaglesham and Lis Rappaport, “Lehman Probe Stalls; Chance of No Charges,” it is reported that SEC officials are considering dropping thoughts of filing charges against former Lehman Brothers executives.

The U.S. government’s investigation into the collapse of Lehman Brothers Holdings Inc. has hit daunting hurdles that could result in no civil or criminal charges ever being filed against the company’s former executives, people familiar with the situation said.

In recent months, Securities and Exchange Commission officials have grown increasingly doubtful they can prove that Lehman violated U.S. laws by using an accounting maneuver to move as much as $50 billion in assets off its balance sheet, which made it appear that the securities firm had reduced its debt levels.

SEC officials also aren’t confident they could win any lawsuit …

Qué lástima! (What a pity!)  Qué pena! (What a shame!) Eso apesta! (That sucks!)

I don’t care if the case can’t be won.  Bringing them to trial for Repo 105 schenanigans is a symbolic act that will cheer investors.  Sometimes in war it is appropriate to fight to the death.

This is the porn viewing SEC, the Madoff enabling SEC.  Does it also want to be known as the federal agency that let Lehman Brothers off the hook?

Better go after Ernst & Young, a seemingly more winnable case.

Debit and credit – – David Albrecht

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Repo 105 Explained With Numbers and Detail

Lehman Brothers used an accounting gimmick to increase a key percentage in its balance sheet, thereby appearing to be better off that it actually was.  This accounting gimmick was used to hit certain target numbers in an attempt to (1) keeping stock prices from dropping, and (2) forestall regulators from stepping in and forcing bankruptcy at an earlier date.

In the end, it was not enough to save the company.

Lehman capitalized on a “bad” accounting rule that allows what is called off-balance sheet financing.  Specifically, Lehman was able to remove liabilities from the balance sheet, thereby reducing leverage (the relative percentage of financial liabilities) and increasing the relative percentage of capital (or stockholders equity).

Was it an attempt to deceive?  Obviously, but activities that fudge some number happen every day in every company.  Was it material, or large enough to deceive?  At first glance the numbers involved are pretty small.  I’ll walk you through the analysis, but you have to go through a lot to find any percentages boosted a material amount.  But materiality is a judgment call, and Ernst & Young might not have reasoned the Repo 105 use was material (I’ll explain how to justify E&Y’s position).

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Repo 105 Explained With Barbie Dolls

How well does the average person understand financial statement manipulation?  Sometimes the numbers are gimmicked up because of odd nonsensical transactions, ala Lehman Brothers.  Sometimes the numbers are out and out fictionalized.  Sometimes investor attention is simply distracted away.

Bob Jensen passed along a post over at the AECM listserv, in which he used a few Barbie dolls to make a point.  Sprucing it up just a bit, here’s the story. [Disclaimer: I do not support the “culture of thinness” promoted by Barbie Dolls.]

Lehman Brothers Balance Sheet “Before”

Lehman Brothers balance sheet bloated with too many financial liabilities

Lehman Brothers Balance Sheet “After”

The balance sheet after cash from Repo 105/108 has paid down financial liabilities

SEC’s Mary Schapiro Called to the Rescue

There were no pictures of Barbie as a white knight in shining armor

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Switching the subject, just a bit.  Over the years, Mattel (producer of Barbie dolls) has used child actors to promote its toys.  Recently, it used two of the cutest to present a disclaimer that precedes an interactive edition of its annual report.  I can’t embed the video (as much as I’d like to), so click on the following link and press the start button.  In my opinion, this is inappropriate.  Financial reporting is serious business for serious people.  It shouldn’t be made light of.  And, after watching this “kid” disclaimer, I think the viewer is happy enough to cut Mattel some slack for whatever follows.

http://corporate.mattel.com

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My apologies to the copyright owners of these images.  I’ve borrowed without permission.  If you come across this page, would you grant me permission to use these images?

Debit and credit – – David Albrecht

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