A Pretty Lehman Excuse
Don't tell the internet!
Act I, Scene I: A man sits hunched at a shabby desk in a leaky portakabin at the back of a railway station car park. At the sound of someone trying to shoulder their way through a warped portakabin door, he hunches himself lower over his desk and buries his face in his hands, moaning “Woe, woe and thrice woe!”
A man shoulders his way through a warped portakabin door and enters, whistling a merry tune…
Young: (for it is he): Mornin’, Ernst, awwwwight mayyyte?
Ernst: (for it is he): Woe, woe and thrice woe!
Young: Eh? Whassup? I’ve got your Gregg’s Breakfast Pasty, so what’s with the ‘woe’?
(Ernst slings a copy of The Wall Street Journal across to Young’s desk.)
Young: No thanks, Ernst, I’ve got The Sun here.
Ernst: I don’t think The Sun will be carrying details of a “A scathing report in which a US bankruptcy-court examiner investigating the collapse of Lehman Brothers Holdings Inc. blames senior executives” and a certain auditing firm for “serious lapses that led to the largest bankruptcy in US history and the worst financial crisis since the Great Depression”.
Young: Nope, Ernst, I don’t expect it will. So what?
Ernst: The report alleges that Lehman executives manipulated the bank’s balance sheet, withheld information from the board and inflated the value of toxic real estate assets. It is also alleges that in May 2008 a Lehman senior vice-president alerted management to potential accounting irregularities and a certain auditing company seems to have ignored this warning and never raised the issue with the firm’s board.
Young: Oooer. I wouldn’t like to be in that auditing company’s shoes right now, would you Ernst?
Ernst: No I wouldn’t, Young. But unfortunately I am in that auditing company’s shoes right now and if you didn’t insist on wearing those hideous trainers to work you’d realise that you’re in them too.
Young: Gulp! You don’t mean….
Ernst: I sure do, Young, I sure do. I mean that the auditors in question who “took no steps to question or challenge the nondisclosure by Lehman of its use of $50billion of temporary, off-balance sheet transactions” which allowed them to ‘park’ close to $50billion worth of assets out of sight and thus publish healthy accounts figures, turn out to be none other than one Ernst and one Young.
Young: Crikey. But isn’t this sort of thing common and almost expected to be lurking under the umbrella of creative accounting, Ernst?
Ernst: You’d surely think so, Young, you surely would. The trouble is that the collapse of Lehman Brothers goes hand in hand with the collapse of the global banking system and a huge global finger is now being pointed at the auditing firm for not raising concerns with Lehman’s board about the frequent use of things called Repo 105 transactions.
Young: What’s a Repo 105, Ernst?
Ernst: Ooh, it’s a devious little accounting trick which allowed Lehman to sell packages of mortgages, Treasury bonds, Eurobonds etc. on a temporary basis at the end of an accounting quarter with the obligation to buy them back a few days or weeks later. But with a Repo 105 transaction the moved assets represent 105% or more of the cash received, allowing the transactions to be treated as sales rather than financings.
Young: And how exactly did we get involved, Ernst?
Ernst: Well, A US law firm didn’t like the look of this practice so Lehman turned to British firm Linklaters who were prepared to sign it off as legal. Clever, these Americans – If US lawyers won’t say it’s legal, get some British lawyers and British auditors to say everything’s OK.
Young: So what’s the worry, Ernst?
Ernst: Well it appears we were a bit naughty when we met with Lehman’s Board Audit Committee just one day after a Lehman senior vice-president raised questions about the frequent use of the Repo 105 and we didn’t “question or challenge” the distinctly dodgy practice which enabled the bank to publish healthy accounts figures right up to the day it collapsed.
Young: Ah. You’d think we would have questioned or challenged that, wouldn’t you Ernst?
Ernst: Sure would, Young, sure would.
(long and awkward silence)
Young: And remind me again why we didn’t question or challenge it, Ernst?
Ernst: I expect we just forgot, Young.
(long and awkward silence)
Young: Do you think this’ll just blow over, Ernst?
Ernst: Might do, Young; it’s only in the financial sections of the posher papers so far. It might just blow over if it doesn’t get onto the ruddy internet.
(another long and awkward silence)
Young: Want to take a look at the Page Three Stunna, Ernst?
Ernst: Might as well, Young, might as well. And chuck us that Gregg’s pasty, will you?
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