Introduction

TABLE OF CONTENTS Introduction — 2
I. Executive Summary of The Examiner's Conclusions — 15
A. Why Did Lehman Fail? Are There Colorable Causes of Action That Arise From Its Financial Condition and Failure? — 15
B. Are There Administrative Claims or Colorable Claims For Preferences or Voidable Transfers? — 24
C. Do Colorable Claims Arise From Transfers of LBHI Affiliate Assets to Barclays, or From the Lehman ALI Transaction? — 26
II. Procedural Background and Nature of the Examination — 28
A. The Examiner's Authority — 28
B. Document Collection and Review — 30
C. Systems Access — 33
D. Witness Interview Process — 35
E. Cooperation and Coordination With the Government and Parties — 37

¶On January 29, 2008, Lehman Brothers Holdings Inc. ("LBHI"¹¹ There are a significant number of acronyms, abbreviations and other specialized terms used throughout this Report. To avoid the necessity of defining terms repeatedly, the Report will generally use them without definition; the reader should consult the Glossary attached as Appendix 2. Except where the specific identity of an entity is relevant and set out, this Report will use "Lehman" to refer collectively to Lehman Brothers Holdings Inc. ("LBHI") and all of its affiliates and subsidiaries.Show full note) reported record revenues of nearly $60 billion and record earnings in excess of $4 billion for its fiscal year ending November 30, 2007.²² Lehman Brothers Holdings Inc. ("LBHI"), Annual Report for 2007 as of Nov. 30, 2007 (Form 10‐K) (filed Jan. 29, 2008), at p. 29 ("LBHI 2007 10‐K"). LBHI was the holding company for hundreds of individual corporate entities, twenty‐two of which are currently Chapter 11 debtors in jointly administered proceedings. During January 2008, Lehman's stock traded as high as $65.73 per share and averaged in the high to mid‐fifties,³³ Morningstar Document Research Co., LBHI Historic Stock Prices, Jan. 1, 2008 through Sept. 15, 2008, [LBEX‐EXM 000001‐14] (printed from www.10kwizard.com) (last visited Feb. 3, 2010). implying a market capitalization of over $30 billion.⁴⁴ LBHI, Quarterly Report as of Feb. 29, 2008 (Form 10‐Q) (filed on Apr. 9, 2008), at p. 1 ("LBHI 10‐Q Apr. 9, 2008") (554 million common equity shares outstanding times $55 = approximately $30 billion). Less than eight months later, on September 12, 2008, Lehman's stock closed under $4, a decline of nearly 95% from its January 2008 value.⁵⁵ Morningstar Document Research Co., LBHI Historic Stock Prices (Jan. 1, 2008 through Sept. 15, , 2008) [LBEX‐EXM 000001‐14] (printed from www.10kwizard.com) (last visited Feb. 3, 2010). On September 15, 2008, LBHI sought Chapter 11 protection,⁶⁶ Voluntary Petition (Chapter 11), Docket No. 1, Lehman Brothers Holdings Inc., No. 08‐13555 (Bankr. S.D.N.Y. Sept. 15, 2008). in the largest bankruptcy proceeding ever filed.⁷⁷ Yalman Onaran & John Helyar, Fuld Sought Buffet Offer He Refused as Lehman Sank (Update 1), Bloomberg.com (Nov. 10, 2008), at p. 2.

¶There are many reasons Lehman failed, and the responsibility is shared. Lehman was more the consequence than the cause of a deteriorating economic climate. Lehman's financial plight, and the consequences to Lehman's creditors and shareholders, was exacerbated by Lehman executives, whose conduct ranged from serious but non‐culpable errors of business judgment to actionable balance sheet manipulation; by the investment bank business model, which rewarded excessive risk taking and leverage; and by Government agencies, who by their own admission might better have anticipated or mitigated the outcome.

¶Lehman's business model was not unique; all of the major investment banks that existed at the time followed some variation of a high‐risk, high‐leverage model that required the confidence of counterparties to sustain. Lehman maintained approximately $700 billion of assets, and corresponding liabilities, on capital of approximately $25 billion.⁸⁸ LBHI 2007 10‐K, at p. 29; LBHI 10‐Q Apr. 9, 2008, at pp. 5‐6. But the assets were predominantly long‐term, while the liabilities were largely short‐term.⁹⁹ Examiner's Interview of Paolo R. Tonucci, Sept. 16, 2009, at p. 8. Lehman funded itself through the short‐term repo markets and had to borrow tens or hundreds of billions of dollars in those markets each day from counterparties to be able to open for business.¹⁰¹⁰ Examiner's Interview of Paolo R. Tonucci, Sept. 16, 2009, at pp. 4, 8 (Lehman financed the majority of its balance sheet in the short‐term repo market, more than $200 billion a day in 2008; Lehman was reliant on short‐term secured financing to conduct its daily operations); Examiner's Interview of Raymond Abary, Mar. 12, 2009. Confidence was critical. The moment that repo counterparties were to lose confidence in Lehman and decline to roll over its daily funding, Lehman would be unable to fund itself and continue to operate. So too with the other investment banks, had they continued business as usual. It is no coincidence that no major investment bank still exists with that model.¹¹¹¹ Bank of America, Press Release, Bank of America Buys Merrill Lynch Creating Unique Financial Services Firm (Sept. 15, 2008) (announcing its acquisition of Merrill Lynch); Morgan Stanley, Press Release, Morgan Stanley and Citi to Form Industry‐Leading Wealth Management Business Through Joint Venture (Jan. 13, 2009) (announcing joint venture with Citi's Smith Barney Group to form Morgan Stanley Smith Barney); Federal Reserve, Press Release, Sept. 21, 2008 (announcing that the Federal Reserve granted the applications by Goldman Sachs and Morgan Stanley, the last two major investment banks, to become bank holding companies); Goldman Sachs, Press Release, Sept. 21, 2008 (announcing that Goldman Sachs will become a bank holding company and will be regulated by the Federal Reserve).Show full note

¶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.¹²¹² See David Goldfarb, Lehman, Global Strategy Offsite (Mar. 2006) [LBEX‐DOCID 2489987]. In 2007, as the sub‐prime residential mortgage business progressed from problem to crisis, Lehman was slow to recognize the developing storm and its spillover effect upon commercial real estate and other business lines. Rather than pull back, Lehman made the conscious decision to "double down," hoping to profit from a counter‐cyclical strategy.¹³¹³ Examiner's Interview of Dr. Henry Kaufman, May 19, 2009, at p. 9 (at a March 20, 2007 Board meeting, management advised that "virtually all subprime originators have cut back on their operations or gone out of business," but, despite that fact, it was management's view that "the current distressed environment provides substantial opportunities as in the late 1990s"). As it did so, Lehman significantly and repeatedly exceeded its own internal risk limits and controls.¹⁴¹⁴ Duff & Phelps, High Yield Total ‐ Usage Versus Limits (Nov. 19, 2009), at pp. 4‐9 (showing that Lehman's monthly average risk appetite exceeded its limit by $41 million in July 2007, $62 million in August 2007, $608 million in September 2007, $670 million in October 2007, $508 million in November 2007, $562 million in December 2007, $708 million in January 2008, and $578 million in February 2008).

¶With the implosion and near collapse of Bear Stearns in March 2008, it became clear that Lehman's growth strategy had been flawed, so much so that its very survival was in jeopardy.¹⁵¹⁵ Examiner's Interview of Henry M. Paulson, Jr., June 25, 2009, at p. 11 (former Secretary of the Treasury Paulson stated that after Bear Stearns' near‐collapse he was less optimistic about Lehman's chances than Fuld, and he informed Fuld that Lehman needed to raise capital, find a strategic partner or sell the firm). The markets were shaken by Bear's demise, and Lehman was widely considered to be the next bank that might fail.¹⁶¹⁶ Examiner's Interview of Timothy F. Geithner, Nov. 24, 2009, at p. 2 (former President of the FRBNY and current Treasury Secretary Geithner believed that after Bear Stearns' near‐collapse, Lehman was the most vulnerable investment bank); Examiner's Interview of Ben S. Bernanke, Dec. 22, 2009, at p. 3 (Chairman of the Federal Reserve Bernanke believed that, after Bear Stearns, Lehman was the next most vulnerable bank); Examiner's Interview of Henry M. Paulson, Jr., June 25, 2009, at p. 2 (Paulson thought Lehman could be next to fail after Bear Stearns); Examiner's Interview of Christopher Cox, Jan. 8, 2010, at p. 8 (former Chairman of the SEC Cox said that after Bear Stearns collapsed Lehman was the SEC's "number one focus." Lehman had suffered "diminution of value" and had "troubled assets").Show full note Confidence was eroding. Lehman pursued a number of strategies to avoid demise.

¶But to buy itself more time, to maintain that critical confidence, Lehman painted a misleading picture of its financial condition.

¶Lehman required favorable ratings from the principal rating agencies to maintain investor and counterparty confidence; and while the rating agencies looked at many things in arriving at their conclusions, it was clear – and clear to Lehman – that its net leverage and liquidity numbers were of critical importance.¹⁷¹⁷ Erin M. Callan, Lehman Brothers Leverage Analysis (Apr. 7, 2008), at p. 1 [LBEX‐DOCID 1401225] ("Reducing leverage [i]s necessary to remove refinancing risk and win back the confidence of the market, lenders, and investors."); Examiner's Interview of Richard S. Fuld, Jr., Sept. 25, 2009, at p. 8 (rating agencies looked at net leverage); Examiner's Interview of Michael McGarvey, Sept. 11, 2009, at p. 5 (senior management made a "concerted effort" to manage and reduce the balance sheet with a view towards the rating agencies); Examiner's Interview of Eileen A. Fahey, Fitch, Sept. 17, 2009, at p. 6; Standard & Poor's RatingsDirect, Liquidity Management In Times Of Stress: How The Major Broker‐Dealers Fare (Nov. 8, 2007), at p. 3 [LBHI_SEC07940_439424].Show full note Indeed, Lehman's CEO Richard S. Fuld, Jr., told the Examiner that the rating agencies were particularly focused on net leverage;¹⁸¹⁸ Examiner's Interview of Richard S. Fuld, Jr., Sept. 25, 2009, at p. 7. Lehman knew it had to report favorable net leverage numbers to maintain its ratings and confidence. So at the end of the second quarter of 2008, as Lehman was forced to announce a quarterly loss of $2.8 billion – resulting from a combination of write‐downs on assets, sales of assets at losses, decreasing revenues, and losses on hedges – it sought to cushion the bad news by trumpeting that it had significantly reduced its net leverage ratio to less than 12.5, that it had reduced the net assets on its balance sheet by $60 billion, and that it had a strong and robust liquidity pool.¹⁹¹⁹ Final Transcript of Lehman Brothers Holdings Inc. Second Quarter Preliminary Earnings Call (June 9, 2008), at pp. 7‐8.

¶Lehman did not disclose, however, that it had been using an accounting device (known within Lehman as "Repo 105") to manage its balance sheet – by temporarily removing approximately $50 billion of assets from the balance sheet at the end of the first and second quarters of 2008.²⁰²⁰ LBHI 2007 10‐K, at p. 63; LBHI 10‐Q Apr. 9, 2008, at p. 72; Lehman Brothers Holdings Inc., Quarterly Report as of May 31, 2008 (Form 10‐Q) (filed on July 10, 2008), at p. 88 ("LBHI 10‐Q July 10, 2008"); Examiner's Interview of Martin Kelly, Oct. 1, 2009; Examiner's Interview of Ed Grieb, Oct. 2, 2009. In an ordinary repo, Lehman raised cash by selling assets with a simultaneous obligation to repurchase them the next day or several days later; such transactions were accounted for as financings, and the assets remained on Lehman's balance sheet. In a Repo 105 transaction, Lehman did exactly the same thing, but because the assets were 105% or more of the cash received, accounting rules permitted the transactions to be treated as sales rather than financings, so that the assets could be removed from the balance sheet.²¹²¹ See Section III.A.4 (discussing Repo 105). With Repo 105 transactions, Lehman's reported net leverage was 12.1 at the end of the second quarter of 2008; but if Lehman had used ordinary repos, net leverage would have to have been reported at 13.9.²²²² LBHI 10‐Q July 10, 2008, at p. 89; Duff & Phelps, Repo 105 Balance Sheet Accounting Entry and Leverage Ratios Summary (Oct. 2, 2009), at p. 7. See also Section I.A of this Report, which discusses net leverage.

¶Contemporaneous Lehman e‐mails describe the "function called repo 105 whereby you can repo a position for a week and it is regarded as a true sale to get rid of net balance sheet."²³²³ E‐mail from Anthony Jawad, Lehman, to Andrea Leonardelli, Lehman (Feb. 29, 2008) [LBEX‐DOCID 224902]. Lehman used Repo 105 for no articulated business purpose except "to reduce balance sheet at the quarter‐end."²⁴²⁴ E‐mail from Raymond Chan, Lehman, to Paul Mitrokostas, Lehman, et al. (Jul. 15, 2008) [LBEX‐DOCID 3384937]. Rather than sell assets at a loss, "[a] Repo 105 increase would help avoid this without negatively impacting our leverage ratios."²⁵²⁵ Joseph Gentile, Lehman, Proposed Repo 105/108 Target Increase for 2007 (Feb. 10, 2007), at p. 1 [LBEX‐ DOCID 2489498], attached to e‐mail from Joseph Gentile, Lehman, to Ed Grieb, Lehman (Feb. 10, 2007) [LBEX‐DOCID 2600714]. Lehman's Global Financial Controller confirmed that "the only purpose or motive for [Repo 105] transactions was reduction in the balance sheet" and that "there was no substance to the transactions."²⁶²⁶ Examiner's Interview of Martin Kelly, Oct. 1, 2009, at p. 9.

¶Lehman did not disclose its use – or the significant magnitude of its use – of Repo 105 to the Government, to the rating agencies, to its investors, or to its own Board of Directors.²⁷²⁷ Lehman did not disclose its use of Repo 105 in public filings. Examiner's Interview of Ed Grieb, Oct. 2, 2009, at p. 14; Examiner's Interview of Marie Stewart, Sept. 2, 2009, at p. 15; Examiner's Interview of Matthew Lee, July 1, 2009, at p. 16. Lehman did not disclose its use of Repo 105 to rating agencies. See Lehman, S&P Ratings Q2 2008 Update (June 5, 2008) [S&P‐Examiner 000946] (Lehman did not disclose its use of Repo 105 to Standard & Poor's in its ratings presentation); Lehman, Fitch Ratings Q2 2008 Update (June 3, 2008) [LBHI_SEC07940_513239] (Lehman similarly did not disclose its use of Repo 105 to Fitch as part of its presentation where Lehman touted its balance sheet reduction). The Examiner interviewed representatives from the three leading ratings agencies, Fitch, S&P and Moody's, and none had knowledge of Lehman's use of Repo 105/108 transactions, either by name or by description. Examiner's Interview of Eileen A. Fahey, Sept. 17, 2009, at p. 7; Examiner's Interview of Diane Hinton, Sept. 22, 2009, at p. 6; Examiner's Interview of Peter E. Nerby, Oct. 8, 2009, at p. 5. Lehman did not disclose its use of Repo 105 to Government regulators. Examiner's Interview of Ronald S. Marcus, Nov. 4, 2009, at p. 11; Examiner's Interview of Timothy F. Geithner, Nov. 24, 2009, at p. 5; Examiner's Interview of Jan H. Voigts, Oct. 1, 2009. Lehman did not disclose its use of Repo 105 to its Board of Directors. Examiner's Interview of Dr. Henry Kaufman, Sept. 2, 2009, at p. 21; Examiner's Interview of Jerry A. Grundhofer, Sept. 16, 2009, at p. 10; Examiner's Interview of Roland Hernandez, Oct. 2, 2009; Examiner's Interview of Sir Christopher Gent, Oct. 21, 2009, at p. 22; Examiner's Interview of Roger Berlind, Dec. 18, 2009, at p. 4.Show full note Lehman's auditors, Ernst & Young, were aware of but did not question Lehman's use and nondisclosure of the Repo 105 accounting transactions.²⁸²⁸ Examiner's Interview of Ernst & Young, Repo 105 session, Oct. 16, 2009, at pp. 8‐9 (statement of William Schlich); Examiner's Interview of Ernst & Young, Nov. 3, 2009, at pp. 14‐15 (statement of Hillary Hansen).

¶In mid‐March 2008, after the Bear Stearns near collapse, teams of Government monitors from the Securities and Exchange Commission ("SEC") and the Federal Reserve Bank of New York ("FRBNY") were dispatched to and took up residence at Lehman,²⁹²⁹ Examiner's Interview of Matthew Eichner, Nov. 23, 2009, at p. 5 (Eichner told the Examiner that after Bear Stearns nearly collapsed, the SEC had monitors on‐site at Lehman "almost all the time." Eichner also told the Examiner that the FRBNY had people "in residence" with actual offices at Lehman); Examiner's Interview of Jan H. Voigts, Aug. 25, 2009, at p. 1 (Voigts monitored Lehman's liquidity position, embedded on‐site with the firm, from March 16, 2008 through mid‐September, 2008).Show full note to monitor Lehman's financial condition with particular focus on liquidity.³⁰³⁰ Examiner's Interview of Timothy F. Geithner, Nov. 24, 2009, at p. 4 (after Bear Stearns nearly collapsed, Geithner met with Lehman and other investment banks about moving the banks to a "more conservative place" regarding capital and liquidity. Geithner indicated that his primary concern was Lehman's funding structure. He told the Examiner that he was "consumed" with figuring out how to make Lehman "get more conservatively funded").Show full note Lehman publicly asserted throughout 2008 that it had a liquidity pool sufficient to weather any foreseeable economic downturn.³¹³¹ Final Transcript of Lehman Brothers Holdings Inc. Second Quarter 2008 Preliminary Earnings Call (June, 9, 2008), at p. 8 (Lehman's liquidity pool reported at $45 billion); Final Transcript of Lehman Brothers Holdings Inc. Second Quarter 2008 Earnings Call (June 16, 2008), at p. 6 (Lehman's liquidity pool reported at $45 billion); Final Transcript of Lehman Brothers Holdings Inc. Third Quarter 2008 Preliminary Earnings Call (Sept. 10, 2008), at p. 10 (Lehman's liquidity pool reported at $42 billion).Show full note

¶But Lehman did not publicly disclose that by June 2008 significant components of its reported liquidity pool had become difficult to monetize.³²³² Lehman, Liquidity Pool Table Listing Collateral and Ability to Monetize (Sept. 12, 2008) [LBEX‐WGM 784607] (listing $30.1 billion of assets as "low ability to monetize"). As late as September 10, 2008, Lehman publicly announced that its liquidity pool was approximately $40 billion;³³³³ Final Transcript of Lehman Brothers Holdings Inc. Third Quarter 2008 Preliminary Earnings Call (Sept. 10, 2008), at p. 10. but a substantial portion of that total was in fact encumbered or otherwise illiquid.³⁴³⁴ Examiner's Interview of Paolo R. Tonucci, Sept. 16, 2009, at p. 19 (Lehman included $2 billion that it pledged to Citibank as a comfort deposit in its liquidity pool); Security Agreement between LBHI and Bank of America, N.A. (Aug. 25, 2008) [LBEX‐DOCID 000584] (providing for a $500 million security deposit from Lehman to BofA); Lehman, Liquidity Pool Table Listing Collateral and Ability to Monetize (Sept. 9, 2008), at p. 2 [LBHI_SEC07940_557815] (showing the $500 million BofA deposit in the liquidity pool); Lehman, Liquidity Update (Sept. 10, 2008), at p. 3 ($1 billion in Lehman's liquidity pool was earmarked to HSBC and listed as "Low ability to monetize.").Show full note From June on, Lehman continued to include in its reported liquidity substantial amounts of cash and securities it had placed as "comfort" deposits with various clearing banks; Lehman had a technical right to recall those deposits, but its ability to continue its usual clearing business with those banks had it done so was far from clear.³⁵³⁵ See Section III.A.5 (discussing potential claims against secured lenders). By August, substantial amounts of "comfort" deposits had become actual pledges.³⁶³⁶ Id. 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.³⁷³⁷ See Lehman, Liquidity Pool Table Listing Collateral and Ability to Monetize (Sept. 12, 2008) [LBEX‐ WGM 784607] (listing $1.4 billion of assets as "high ability to monetize" and $934 million of assets as "mid ability to monetize").

¶Months earlier, on June 9, 2008, Lehman pre‐announced its second quarter results and reported a loss of $2.8 billion, its first ever loss since going public in 1994.³⁸³⁸ Lehman Brothers Holdings Inc., Press Releases (Mar. 14, 2007, June 12, 2007, Sept. 18, 2007, Dec. 13, 2007, Mar. 18, 2008 and June 9, 2008). Despite that announcement, Lehman was able to raise $6 billion of new capital in a public offering on June 12, 2008.³⁹³⁹ Lehman Brothers Holdings Inc., Press Release (June 12, 2008); Lehman Brothers Holdings Inc., Press Release (June 16, 2008). But Lehman knew that new capital was not enough. Treasury Secretary Henry M. Paulson, Jr., privately told Fuld that if Lehman was forced to report further losses in the third quarter without having a buyer or a definitive survival plan in place, Lehman's existence would be in jeopardy.⁴⁰⁴⁰ Fuld does not recall that warning. Examiner's Interview of Richard S. Fuld, Jr., Sept. 30, 2009, at p. 3, but Paulson told the Examiner that he consistently communicated to Fuld how dire Lehman's situation was and that he pointedly urged Fuld to find a buyer after Lehman announced a $2.8 billion loss for the second quarter of 2008, Examiner's Interview of Henry M. Paulson, June 25, 2009, at pp. 11‐15.Show full note

¶On September 10, 2008, Lehman announced that it was projecting a $3.9 billion loss for the third quarter of 2008.⁴¹⁴¹ Final Transcript of Lehman Brothers Holdings Inc. Third Quarter 2008 Preliminary Earnings Call (Sept. 10, 2008), at p. 8; Lehman Brothers Holdings Inc., Press Release (Sept. 10, 2008), at p. 1 [LBHI_SEC07940_042866]. Although Lehman had explored options over the summer, it had no buyer in place; its only announced survival plan was to spin off troubled assets into a separate entity. Secretary Paulson's prediction turned out to be right – it was not enough.

¶By the close of trading on September 12, 2008, Lehman's stock price had declined to $3.65 per share, a 94% drop from the $62.19 January 2, 2008 price.⁴²⁴² Morningstar Document Research Co., LBHI Historic Stock Prices (Jan. 1, 2008 through Sept. 15, 2008) [LBEX‐EXM 000001‐14] (printed from www.10kwizard.com) (last visited on Feb. 3, 2010).

70.00 $62.19 60.00 50.00 40.00 $31.75

¶Lehman Stock Price $27.50

30.00 $20.96 20.00 $7.79 $7.25 10.00 $3.65 0.00 2-Jan-08 17-Mar-08 10-Jun-08 1-Jul-08 9-Sep-08 10-Sep-08 12-Sep-08 Landmark Dates

¶Over the weekend of September 12‐14, an intensive series of meetings was conducted by and among Treasury Secretary Paulson, FRBNY President Timothy F. Geithner, SEC Chairman Christopher Cox, and the chief executives of leading financial institutions.⁴³⁴³ Examiner's Interview of Henry M. Paulson, Jr., June 25, 2009, at p. 15; Examiner's Interview of Christopher Cox, Jan. 8, 2010, at pp. 15‐17; Examiner's Interview of Thomas C. Baxter, Jr., May 20, 2009 at p. 9. Secretary Paulson began the meetings by stating the Government was there to do all it could – but that it could not fund a solution.⁴⁴⁴⁴ Examiner's Interview of Henry M. Paulson, Jr., June 25, 2009, at pp. 15‐16 (Paulson told the Examiner that these meetings were part of the Government's attempt to "pull a rabbit out of a hat" and save Lehman); Examiner's Interview of Thomas C. Baxter, Jr., May 20, 2009 at pp. 9‐10 (FRBNY General Counsel Baxter told the Examiner that Paulson explained to the group that the purpose of the meeting was twofold ‐ (1) to attempt to facilitate the acquisition of Lehman; and (2) in the alternative, to resolve the consequences of Lehman's failure).Show full note The Government's analysis was that it did not have the legal authority to make a direct capital investment in Lehman, and Lehman's assets were insufficient to support a loan large enough to avoid Lehman's collapse.⁴⁵⁴⁵ Examiner's Interview of Henry M. Paulson, Jr., June 25, 2009, at pp. 16‐17 (Paulson told the Examiner that he concluded that the Federal Government lacked authority to inject capital into Lehman, even via an "exigent circumstances" loan from the Federal Reserve, because Lehman was not an institution "perceived to have capital and able to provide a guarantee."); Chairman of the Federal Reserve Ben S. Bernanke, Speech at the Kansas City Federal Bank Conference in Jackson Hole, Wyoming (Aug. 21, 2009) ("[T]he company's available collateral fell well short of the amount needed to secure a Federal Reserve loan of sufficient size to meet its funding needs."); Examiner's Interview of Ben S. Bernanke, Dec. 22, 2009, at p. 2 (Lehman's assets and securities fell "considerably short of the obligations that would become due").Show full note

¶It appeared by early September 14 that a deal had been reached with Barclays which would save Lehman from collapse.⁴⁶⁴⁶ Examiner's Interview of Richard S. Fuld, Jr., Apr. 28, 2009, at p. 9 (Fuld told the Examiner that on the morning of September 14, 2008, he woke up thinking he had a transaction in place with Barclays); Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (Sept. 13, 2008), at p. 1 [LBEX‐ AM 003927‐003931] (The Lehman Board met at 5:00 p.m. to discuss a potential deal with Barclays).Show full note But later that day, the deal fell apart when the parties learned that the Financial Services Authority ("FSA"), the United Kingdom's bank regulator, refused to waive U.K. shareholder‐approval requirements.⁴⁷⁴⁷ Examiner's Interview of Henry M. Paulson, Jr., June 25, 2009, at pp. 19‐20; Examiner's Interview of Richard Fuld, Jr., Apr. 28, 2009, at 9. In a written statement to the Examiner, the FSA said that it never received a formal request to waive the shareholder‐approval requirement. According to the FSA's statement, the FSA had serious concerns about the lack of precedent for such waivers. The FSA was also concerned about Lehman's liquidity and funding. FSA, Statement of the Financial Services Authority to the Examiner (Jan. 20, 2010), at pp. 8, 10.Show full note

¶Lehman no longer had sufficient liquidity to fund its daily operations.⁴⁸⁴⁸ Lehman, Liquidity of Lehman Brothers [Draft] (Oct. 7, 2008), at p. 9 [LBHI_SEC07940_844701] (LBIE faced a cash shortage of $4.5 billion on September 15, 2008). On the evening of September 14, SEC Chairman Cox phoned the Lehman Board and conveyed the Government's strong suggestion that Lehman act before the markets opened in Asia.⁴⁹⁴⁹ Examiner's Interview of Christopher Cox, Jan. 8, 2010, at pp. 16‐17 (Cox called Lehman's Board to urge that Lehman take whatever action it decided upon as soon as possible, before the markets opened. During the call, Cox related, FRBNY General Counsel Thomas C. Baxter, Jr., added that it had been made clear in the meetings earlier that day that the "action" should be that Lehman declare bankruptcy. Cox told the Examiner that the SEC was not "offering guidance or trying to influence the fiduciary responsibilities of [Lehman's] directors.").Show full note On September 15, 2008, at 1:45 a.m., LBHI filed for Chapter 11 bankruptcy protection.⁵⁰⁵⁰ Voluntary Petition (Chapter 11), Docket No. 1, Lehman Brothers Holdings Inc., Case No. 08‐13555 (Bankr. S.D.N.Y. Sept. 15, 2008); Docket Activity Report, Lehman Brothers Holdings Inc., Case No. 08‐13555 (Bankr. S.D.N.Y. Sept. 15, 2008).

¶Sorting out whether and the extent to which the financial upheaval that followed was the direct result of the Lehman bankruptcy filing is beyond the scope of the Examiner's investigation. But those events help put into context the significance of the Lehman filing. The Dow Jones index plunged 504 points on September 15.⁵¹⁵¹ Alexandra Twin, Stocks Get Pummeled, CNNMoney.com, Sept. 21, 2008, at p. 1 (stating "Wall Street sees worst day in 7 years with Dow down 504 points . . . "), available at http://money.cnn.com/2008/09/15/markets/markets_newyork2/index.htm (last visited Jan. 28, 2010). On September 16, AIG was on the verge of collapse; the Government intervened with a financial bailout package that ultimately cost about $182 billion.⁵²⁵² Sewell Chan, Bernanke Wants an Audit of Fed's Bailout of AIG, N.Y. Times, Jan. 19, 2010 (stating that the FRBNY and Treasury Department made about $182 billion available to AIG). On September 16, 2008, the Primary Fund, a $62 billion money market fund, announced that – because of the loss it suffered on its exposure to Lehman – it had "broken the buck," i.e., its share price had fallen to less than $1 per share.⁵³⁵³ See Markus K. Brunnermeier, Deciphering the Liquidity and Credit Crunch 2007‐2008, 23 J. Econ. Perspectives, Winter 2009, at 87 (2009); NewYorkFed.org, Financial Turmoil Timeline, http://www.newyorkfed.org/research/global_economy/Crisis_Timeline.pdf (last visited Jan. 26, 2010). On October 3, 2008, Congress passed a $700 billion Troubled Asset Relief Program ("TARP") rescue package.⁵⁴⁵⁴ David M. Herszenhorn, A Curious Coalition Opposed Bailout Bill, N.Y. Times, Oct. 3, 2008, at p. 1.

¶In his recent reconfirmation hearings, Federal Reserve Chairman Ben Bernanke, speaking of the overall economic crisis, candidly conceded that "there were mistakes made all around" and "we should have done more."⁵⁵⁵⁵ Edmund L. Andrews, Bernanke Says Fed "Should Have Done More," N.Y. Times, Dec. 4, 2009, at p. 1. The official transcript of Chairman Ben S. Bernanke's Confirmation Hearing Before the Senate Committee on Banking, Housing, and Urban Affairs, Dec. 3, 2009, was not available at the time this Report was released. Lehman should have done more, done better. Some of these failings were simply errors of judgment which do not give rise to colorable causes of action; some go beyond and are indeed colorable.

¶Part I of this Report provides an executive summary of the Examiner's findings and conclusions.

¶Part II discusses the procedural background of the Examiner's appointment, the Examiner's authority, and the manner in which the Examiner conducted his investigation.

¶Part III details the facts and analysis on the topics assigned by the Court to the Examiner and contains the Examiner's analysis and conclusions.

¶I. EXECUTIVE SUMMARY OF THE EXAMINER'S CONCLUSIONS

¶The Order appointing the Examiner (the "Examiner Order") assigns ten specific bulleted topics for the Examiner to investigate; in addition, the Examiner Order directs the Examiner to perform the duties specified in Section 1106(a)(3) and (4) of the Bankruptcy Code, that is, to "file a statement of . . . any fact ascertained pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor, or to a cause of action available to the estate."⁵⁶⁵⁶ Order Directing Appointment of an Examiner Pursuant to Section 1104(c)(2) of the Bankruptcy Code, at pp. 3‐5, Docket No. 2569, Lehman Brothers Holdings Inc., Case No. 08‐13555 (Bankr. S.D.N.Y. Jan. 16, 2009). Because the ten bulleted topics set out at pages 3‐4 of the Examiner Order overlap, the Examiner has grouped them into three substantive areas: (A) Why Did Lehman Fail? Are There Colorable Causes of Action That Arise From Its Financial Condition and Failure? (B) Are There Administrative Claims or Colorable Claims for Preferences or Voidable Transfers? and (C) Are There Colorable Claims Arising Out of the Barclays Sale Transaction?