Lehman Brothers was cooking the books far more than we ever imagined, if the allegations of bankruptcy court examiner Anton Valukus can be trusted.

At the height of the financial crisis in 2008, Lehman used what Valukas describes as an "accounting gimmick" to make it appear as if it had off-loaded risky assets and reduced its balance sheet.

The gimmick was known inside of Lehman as a "Repo 105." In an ordinary repo transaction, Lehman would raise cash by selling assets with a promise to buy them back later. It's a common form of short-term financing. And because it was really a financing rather than a sale, the assets remained on Lehman's balance sheet.

But in a Repo 105, Lehman would treat the transaction as a genuine sale and take the risky assets off its books. Apparently, accounting rules permitted this because the assets valued at 105% or more of the cash recieved. Lehman never disclosed it was doing these transactions.

This was no small thing. In the first and second quarters of 2008, Lehman Brothers used the Repo 105 deals to reduce its balance sheet by $50 billion. That had a large and material effect on its leverage ratio, bringing it down from 13.9 to 12.1.

Here's perhaps the most damning quote from the report (via Michael Corkley at the WSJ):

“Lehman’s own accounting personnel described Repo 105 transactions as an “accounting gimmick” and a “lazy way of managing the balance sheet as opposed to legitimately meeting balance sheet targets at quarter end.” Lehman used Repo 105 “to reduce balance sheet at the quarter end.” In 2008, Lehman knew that net leverage numbers were critical to the rating agencies and to counterparty confidence. Its ability to deleverage by selling assets was severely limited by the illiquidity and depressed prices of the assets it had accumulated.”

Tyler Durden at Zero Hedge has a great discussion of the report, which runs over 2,000 pages.

It's useful to remember the context in which this book-cooking took place. At the time, Lehman was involved in a very public battle with David Einhorn. Einhorn had given a detailed analysis of Lehman at the Ira Sohn conference in May of 2008 that hammered Lehman for its "accounting ingenuity." (You can download a pdf of his presentation here. Months before that Einhorn made a less-damning presenation that argued that Lehman needed to delever and raise capital. As time went on his view of Lehman's health got more negative.)

As it turns out, Einhorn was underestimating how badly Lehman was manipulating its balance sheet.