Friday, March 12, 2010

Lehman Brothers: “Another Drug We R On”

Editor’s Note: We will, as promised, soon conclude “What We Learned Writing A Book About Warren Buffett” in these virtual pages. This morning’s headline in our online Wall Street Journal, however, is too timely and important to go without a comment right here, right now.

This just in: short-sellers had nothing to do with the collapse of Lehman Brothers.

You’re reading that correctly. Summarizing the 2,200 page report of the bankruptcy-court examiner who investigated Lehman Brothers, the Journal’s headline says, “Lehman Torpedoed Lehman.”

Not—despite the misinformed yammering of hysterical Congresspersons driven near-mad during the financial crisis by the thought that, lacking any other employable skills as they do, their fat government pensions and healthcare benefits would be at risk if their country collapsed; and fueled by the highly misleading commentary of at least one self-appointed crusading CEO whose chief aim seemed to be to shift the spotlight away from his own shortcomings—short-sellers.

In fact, short-selling is not mentioned in today’s Wall Street Journal—just a lot of really bad management by people desperate to keep a sinking ship afloat any way they could, including “accounting maneuvers,” one of which was referred to by an insider in an email as “another drug we r on.”

But don’t listen to us—after all, in addition to investing in many fine American companies for the long run, we also sell certain not-so-fine companies short.

Listen to the Wall Street Journal:

A scathing report by a U.S. bankruptcy-court examiner investigating the collapse of Lehman Brothers Holdings Inc. blames senior executives and auditor Ernst & Young for serious lapses that led to the largest bankruptcy in U.S. history and the worst financial crisis since the Great Depression.

In the works for more than a year, and costing more than $30 million, the report by court-appointed examiner Anton Valukas paints the most complete picture yet of the free-wheeling culture inside the 158 year-old firm, whose chief executive Richard S. Fuld Jr. prided himself on his ability to manage market risk.

The document runs thousands of pages and contains fresh allegations. In particular, it alleges that Lehman executives manipulated its balance sheet, withheld information from the board, and inflated the value of toxic real estate assets.

Lehman chose to "disregard or overrule the firm's risk controls on a regular basis,'' even as the credit and real-estate markets were showing signs of strain, the report said.

In one instance from May 2008, a Lehman senior vice president alerted management to potential accounting irregularities, a warning the report says was ignored by Lehman auditors Ernst & Young and never raised with the firm's board….

—The Wall Street Journal

There is more—much more.

2,200 pages more, in fact, with 300 pages alone devoted to “balance-sheet manipulation” according to the Journal.

Read it yourself:

And say goodbye to the made-up, non-existent, never-happened, figment of their imagination “naked short-selling scandal” that brought down America.

Jeff Matthews
I Am Not Making This Up

© 2010 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.


Hayseed said...

yet another tricky dick. the other argument from the braniacs on capitol hill was that CDS caused lehman's collapse, as if each CDS contract had a mind of its own, an ability to jump around onto firm's balance sheets without notice... therefore, outlaw all CDS and all like kind securities. simple fact as this article says is that these guys had no idea about and/or no control over risk, and were using shenanigans to hide their shortcomings. this was not unlike LTCM - they played for the + or - 3 standard deviation events, always expecting mean revesion... and they got one outlier market that blew up the firm.

Wilber said...


You might also mention the interesting revelation that Buffett spent a morning going over Lehman's 10-K to see if he might be interested. In the end, there were too many red flags, but the other 2 things he mentioned not liking were a lack of transparency on Fuld's part (not mentioning some problems in Japan), and Fuld complaining about short sellers trying to bring the firm down (which Buffett saw as a poor explanation of the company's troubles.) see

Regards, wd

Reginald said...

Jim Cramer was out there every day blaming short-sellers, pleading for the up-tick rule and alleging rampant naked short-selling.

John said...

Hi Jeff,
If short sellers had been the cause of Lehman's bankruptcy then the inherent value of the company's assets would have been protected by the bankruptcy filing. As the company was unwound in court, the bondholder's and other creditor's would have been made whole as those assets were sold. GGP and USG are two recent companies that had to file for bankruptcy for circumstances outside their financial performance. I believe their bondholders were (will be) paid in full and even the common shareholders (will) retained equity. I understand that the process could cause some slippage in the value of Lehman's assets but if they were truly driven to bankruptcy by outside forces then the bondholders/creditors would eventually have been made whole or near to it. From what I have read, they will not come close. Which backs up the point of the most analytical short sellers - Lehman was vastly overvaluing its assets.

wsf said...

Kudos for getting the longest clause ever (despite the misinformed yammering...) between em dashes.

Press250 said...

And to think the Federal "Brain Trust" was considering bailing out these crooks; remember that shortly after Lehman went under, Hank Paulson said he greatly regretted the decision. This report ought to force a serious re-evaluation of the decisions made vis-a-vis the bailouts, and serve as stark example that when a bank gets itself into this level of trouble it is due to incompetence at best and fraud at worst. Incompetence and fraud should be rewarded with Ch. 11 and/or indictments ... not bailouts.

Anonymous said...

Professor Jeff:

I am continually amazed when investors like David Einhorn, who was one of the first and one of the few who got it right on Lehman, were demonized by journalists in the media (hello, CNBC) for "misunderstanding" Lehman's situation when Mr. Einhorn, along with a few other investors, knew all along what a fraud Lehman was.

For what it's worth, I have David Einhorn's book queued up on my Amazon wish list of books to purchase and read in the coming months.

Think for yourself - it should be the investment theme of the year, Professor.

P.S.- The other issue which amazes me, and makes me so mad, is how Lehman's auditor, Ernst and Young, got Lehman's financial condition so wrong. I can only hope that when cases go to court, Ernst and Young will go down much like Arthur Andersen did in the wake of Enron's bankruptcy for their gross negligence.

Jeff Matthews said...

Hayseed brings up an excellent corallary: it wasn't the CDS market that killed the beast, either.

Wilber brings in Buffett, and, yes, the smartest financial mind decided against investing in Lehman even though he has never had qualms about buying heavily shorted companies during financial panics (Wells Fargo in the early 90s and USG, to name two).

Reginald makes a good point: I like Jim and while he is a day trader and nobody should ever make long-term decisions based on his short-term calls, he shows a lot of Wall Street's dirty laundry to the little guy. However, he was dead wrong on the shorts bringing down the financials--dead wrong. Short-selling is an effect, not a cause.

John makes an excellent and logical point. Nuf said on the shorts.

Press250 likewise makes an excellent point, and one worth remembering as Connecticut's own 'Senator Forehead', Chris Dodd, tries to come up with a way to re-regulate the industry he failed to oversee in his 40 years in Congress, because he has been taking hedge fund money and bank money--not to mention sweetheart home loans--from the very industry he was supposedly overseeing.

As for WSF's note on our 'longest clause'...well, thanks!


Andrew said...

The Lehman Bros. executives may face criminal charges to, which is justified as they steal from the taxpayers.

Next up, Blankfein, Paulson, Geithner, Dodd and many others coming soon!