Report · 2010
Report of Anton R. Valukas, Examiner, In re Lehman Brothers Holdings Inc., et al. — Volume 1
The court-appointed examiner's report on why Lehman Brothers, the largest bankruptcy in U.S. history, collapsed in September 2008. Drawing on some 34 million pages of documents and more than 250 interviews, it traces the firm's move into risky, hard-to-sell assets, and sets out Repo 105, the accounting device Lehman used to move $50 billion of assets off its balance sheet at quarter-end.
Introduction by Reports that Matter. Only words in quotation marks are the report's own; every link opens them in context.
Background
On 15 September 2008 Lehman Brothers Holdings filed for Chapter 11 protection, the largest bankruptcy ever filed, after a weekend in which the U.S. Government declined to fund a rescue and a sale to Barclays fell through. The Dow Jones index fell 504 points that day; within weeks AIG had been bailed out and Congress had passed the $700 billion Troubled Asset Relief Program.
In January 2009 the U.S. Bankruptcy Court for the Southern District of New York ordered the appointment of an examiner to investigate why Lehman failed and whether its estate had claims against anyone. The U.S. Trustee appointed Anton R. Valukas, who retained the law firm Jenner & Block as counsel and Duff & Phelps as financial advisers; his team reviewed some 34 million pages of documents and interviewed more than 250 people. The report, about 2,200 pages in nine volumes, was made public on 11 March 2010. An examiner's report is not a verdict: a "colorable" claim, in the examiner's terms, is one with enough credible evidence to go before a court, not a finding of liability.
This edition is Volume 1: the introduction, the executive summary of all the examiner's conclusions, how the investigation was run, and Section III.A.1 on Lehman's business and risk management. The full analysis of Repo 105 (Section III.A.4, in Volume 3) is coming next; the executive summary here sets out its main findings.
In December 2010 New York's Attorney General sued Ernst & Young over Repo 105; the firm settled in 2015 for $10 million without admitting wrongdoing. The SEC closed its investigation in 2012 without bringing charges, and no Lehman executive was prosecuted.
What it found
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The examiner finds that Lehman failed because it lost the confidence of the lenders it borrowed from every day, and that the blame is shared between its executives, the investment bank business model and Government agencies. p. 2 p. 3 p. 3
“There are many reasons Lehman failed, and the responsibility is shared. Lehman was more the consequence than the cause of a deteriorating economic climate.”
p. 2 · Read in context → -
From 2006 Lehman chose to grow aggressively, taking on commercial real estate, leveraged loans and private equity that it could not sell in a downturn, and kept going after the subprime crisis began, repeatedly exceeding its own risk limits. p. 4 p. 43 p. 57
“In 2006, Lehman made the deliberate decision to embark upon an aggressive growth strategy, to take on significantly greater risk, and to substantially increase leverage on its capital.”
p. 4 · Read in context → -
The examiner concludes that these risk decisions, though poor in hindsight, were within the business judgment rule, and finds no colorable claims against Lehman's officers or directors over risk management. p. 47 p. 52 p. 55
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To keep that confidence, the report finds, Lehman painted a misleading picture of its finances. Through Repo 105 it temporarily removed about $50 billion of assets from its balance sheet at the end of two quarters in 2008, and disclosed this to no one, not even its own Board. p. 5 p. 6 p. 7
“Although Repo 105 transactions may not have been inherently improper, there is a colorable claim that their sole function as employed by Lehman was balance sheet manipulation.”
p. 18 · Read in context → -
Lehman also overstated its liquidity. The pool it reported as $41 billion held, two days later, less than $2 billion that could readily be turned into cash. p. 9
“By September 12, two days after it publicly reported a $41 billion liquidity pool, the pool actually contained less than $2 billion of readily monetizable assets.”
p. 9 · Read in context → -
The examiner finds colorable claims against CEO Richard Fuld and three chief financial officers for certifying misleading financial statements, and against the auditor Ernst & Young, which was told about Repo 105 by a Lehman senior vice president, Matthew Lee, and did not pass his allegations on to the Board's Audit Committee. p. 16 p. 21
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In the final weekend the Government concluded that it had no legal authority to put capital into Lehman, and a rescue by Barclays collapsed when the U.K. regulator would not waive a shareholder vote. p. 11 p. 12
Where to start reading
Short on time? These sections carry the report's argument. Each opens at the start of the section.
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Introduction
p. 1 · Read →
The whole story in fourteen pages, from record earnings in January 2008 to bankruptcy in September.
“But to buy itself more time, to maintain that critical confidence, Lehman painted a misleading picture of its financial condition.”
p. 5 · Read in context → -
Why Did Lehman Fail? Are There Colorable Causes of Action That Arise From Its Financial Condition and Failure?
p. 16 · Read →
The examiner's conclusions in brief, including Repo 105 and the case against Ernst & Young, and what he means by a "colorable" claim.
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Business and Risk Management
p. 44 · Read →
How Lehman overrode its own risk limits, removed a senior manager judged not aggressive enough, and committed to the Archstone deal.
“Months later, Antoncic, for example, reflected back on the general consensus that the markets were in trouble: "every one saw the train wreck coming. 64k question is why didn't anyone get out of the way???"”
p. 120 · Read in context → -
Document Collection and Review
p. 31 · Read →
The scale of the investigation, from three petabytes of Lehman data down to the 34 million pages the examiner reviewed.
Contents
- INTRODUCTION Read →
- Why Did Lehman Fail? Are There Colorable Causes of Action That Arise From Its Financial Condition and Failure? Read →
- Document Collection and Review Read →
- Systems Access Read →
- Witness Interview Process Read →
- Cooperation and Coordination With the Government and Parties Read →
- Business and Risk Management Read →
- Notes not linked in the text Read →