We present the first two volumes (out of 9) of the massive 2,200 page compendium that represents the just declassified examiner's report in the Lehman bankruptcy case. We will post the other volumes shortly. Below are the key findings from a quick perusal of Anton Valukas' report, which we will be combing through over the next week. Pay particular attention to the Repo 105 scam which allows banks to materially misrepresent their leverage ratios whenever they so choose, thank you FASB, corrupt auditors (in this case E&Y) and Federal Reserve.

Some observations:

Lehman actively misrepresented its capital ratio with the benefit of Fed complicity, because instead of using traditional Repo transactions, it used "Repo 105" which allowed repos to be treated as asset sales instead of financings. Will someone please ask uberregulator Fed how many other banks are using this borderline illegal accounting scheme RIGHT NOW to misrepresent their net leverage ratios?

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.

, that it had reduced the net assets on its balance sheet by $60 billion, and that it had a strong and robust liquidity pool. 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. 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 . 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

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. . 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 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. Lehman’s auditors, Ernst & Young, were aware of but did not question Lehman’s use and nondisclosure of the Repo 105 accounting transactions. [And why should auditors question anything even remotely shady? After all they need to feed the monkey too.]

The case for why the Fed would be a truly horrible systemic regulator. Here is what happened at Lehman according to Valukas

Lehman decided to exceed the firm?wide risk appetite limit at several junctures.

First, though Lehman dramatically increased the limit for fiscal 2007, Lehman nevertheless approached the new limit by May 2007.

Then, in early October 2007, when Lehman’s risk appetite excesses were at their peak, at least some members of Lehman’s senior management discussed the limit breaches and decided to grant a temporary reprieve from the limits based on the difficult conditions in the real estate and leveraged loan markets.

Rather than reduce its risk usage, Lehman cured its risk appetite overages by increasing the firm?wide risk appetite limit yet again.

The firm cooked its books:

Lehman also failed to apply its balance sheet limits in late 2007. Application of these limits would also have restricted Lehman’s risk?taking. Instead, Lehman dramatically increased the size of its balance sheet, and used increasingly large volumes of Repo 105 transactions to create the appearance that the firm’s net leverage ratio remained within a reasonable range of such ratios established by the rating agencies.

The SEC was aware of the BS going on at Lehman:

Lehman’s stress tests suffered from a significant flaw. Although Lehman made a strategic decision in 2006 to take more principal risk, Lehman did not modify its stress tests to include the risks arising from many of its principal investments – including its real estate investments other than commercial mortgage backed securities (“CMBS”), its private equity investments, and, during a crucial period, its leveraged loan commitments.

The SEC was aware that Lehman’s stress tests excluded untraded investments and did not question the exclusion, because historically it had been the norm to limit stress tests only to traded positions.

The firm overindulged in speculative garbage LBO loan positions:

Lehman’s principal investment strategy also included participating in leveraged loan transactions. This business grew spectacularly in 2006 and the first half of 2007. Many of these loans were made to private equity firms, or sponsors, who were purchasing companies as part of leveraged buy?outs.

These transactions were risky for Lehman because they consumed tremendous amounts of capital, were made on terms that strongly favored the borrowers, and often involved bridge equity or bridge debt that Lehman hoped to distribute to other financial institutions (but was committed to keep for itself if it was unable to do so).

Lastly, Lehman directors can sleep well. Once again, nobody in the world is guilty for the biggest corporate bankruptcy in history:

The Examiner Does Not Find Colorable Claims That Lehman’s Senior Officers Breached Their Fiduciary Duty to Inform the

Board of Directors Concerning the Level of Risk Lehman Had Assumed

Board of Directors Concerning the Level of Risk Lehman Had Assumed The Examiner Does Not Find Colorable Claims That Lehman’s Directors Breached Their Fiduciary Duty by Failing to Monitor

Lehman’s Risk?Taking Activities

Lehman’s Risk?Taking Activities Lehman’s Directors are Protected From Duty of Care Liability by the Exculpatory Clause and the Business Judgment Rule

Lehman’s Directors Did Not Violate Their Duty of Loyalty

Lehman’s Directors Did Not Violate Their Duty to Monitor

On the much prevalent conflict of interest of selling portfolios that one has originated (especially as pertains to Goldman's assorted CDOs held by AIG):

In one memorandum, Lehman’s Head of Global Strategy expressed the concern that “the team responsible for selling down these positions is the same one that originated them.”628 But several witnesses denied there was any incentive not to sell down the portfolio because they knew that no one in GREG would be getting a 2008 bonus

Attached are Volume one of the report (just the first 240 pages, including the 45 page table of contents) and Volume two. We will upload the remainder shortly.