Going for the auditors

Ernst & Young sued over Lehman
The ultimate target of the lawsuit may be Lehman’s former bosses

Dec 29th 2010 | NEW YORK | from PRINT EDITION : The Economist

WAS the collapse of Lehman Brothers in 2008 aided by a fraudulent cover-up of balance-sheet shenanigans? Andrew Cuomo, New York’s outgoing attorney-general and incoming state governor, thinks so, and has filed suit against Ernst & Young, Lehman’s auditors.

Mr Cuomo alleges that E&Y committed fraud by signing off on an accounting maneuver used by Lehman, known as Repo 105. Under this scheme, towards the end of each quarter Lehman temporarily swapped some of its assets for cash with another bank or investor, but booked this as if it were a permanent sale of the assets. By doing this, it and the other banks that used this maneuver in the run-up to the credit crunch made themselves look less indebted in their quarterly results.

Lehman files for bankruptcy, plans to sell units

By Dan Wilchins

NEW YORK (Reuters) – Lehman Brothers Holdings Inc filed for bankruptcy protection, after trying to finance too many risky assets with too little capital, making it the largest and highest-profile casualty of the global credit crisis.

Based on its assets at the time of filing, Lehman surpassed WorldCom as the largest U.S. bankruptcy ever. Lehman had about $639 billion in assets at the time of filing, while WorldCom had about $107 billion when it filed for bankruptcy protection in 2002.

The Chapter 11 filing did not include Lehman’s broker-dealer operations and other units, such as asset management firm Neuberger Berman. Those businesses will continue to operate, although Lehman is expected to liquidate them. It said it is in advanced talks on selling its investment management division.

Lehman is one of the biggest investment banks to collapse since 1990, when Drexel Burnham Lambert filed for bankruptcy protection amid a collapse in the junk bond market.

Lehman Endgame Looks Ugly

It’s looking like Lehman Brothers may not be able to count on the federal government for any help in its hour of need and that has all of Wall Street shaking. Shares of Lehman sunk deeper into penny stock territory on Friday, as the beleaguered firm races to find another bank to buy it in a bid to stave-off an imminent collapse of the historic 158-year-old firm.

In early Friday trading, Lehman’s stock fell 10% to $3.80, continuing a downward death spiral that began Sept. 8. Now that Wall Street has concluded Lehman CEO Dick Fuld won’t be able to pull-off his previously announced plan for shoring-up the investment firm’s balance sheet, it’s pretty much become a race against time for Fuld to find a buyer—at any price—for the firm. The speculation on Wall Street is that Bank of America, Barclays and consortium of private equity firms are the most interested suitors.