05/16/2010 05:12 am ET | Updated May 25, 2011

Lehmangate and Enron

What do Enron, Greece and Lehman Brothers have in common?

The world is about to find out.

The latest disturbing news to crawl out from under a rock this weekend was that Lehman's used offshore accounting gimmicks to mislead the world about its financial problems. This was the conclusion reached by Anton Valukas, a Chicago prosecutor and fraud expert and contained in his 2,200-page report. He was commissioned by the bankruptcy court to pore over millions of documents to get to the bottom of the biggest bankruptcy in U.S. history involving US$613 billion in debts.

Among his findings and opinions:

  • Valukas believes that Lehman executives were involved in "balance sheet manipulation" in order to shift tens of billions of dollars of bad assets off its books.

  • The shift was done, as was the case with Greece, using the repo market or an eyebrow-raising buy-sell arrangement.

  • Valukas said Ernst & Young, Lehman's auditors, did not "question and challenge improper or inadequate disclosures" in the firm's professed results.

  • Lehman could not get their offshore gimmick "papered" (which means a legal opinion approving the maneuver) by any credible American law firm so they shopped around and used Linklaters, a legal shop in London, he alleged.

  • The New York Federal Reserve Bank, run at the time by Timothy Geithner (now U.S. Treasury Secretary), imposed no restraints on Lehman even though the firm failed to pass several smell tests conducted by Fed staff, alleged Valukas.

  • Valukas said he questioned Lehman executives in the past few months and they said full and complete information was disclosed to government agencies (stock markets, SEC, the Fed) about the repo transactions and the governments never raised objections nor did they demand corrective action.

The report raises questions. Were the market's "cops" then the same people who are still in charge and advising Obama and Congress? Did they have any inkling of trouble or not?
If regulators knew, why didn't they do something? If they knew, why didn't they force disclosure to the investing public?

Conversely, if they were not told the truth, then why haven't charges been laid?

The revelations may take down some very prominent people, send a few others to jail and explain why the former administration refused to bail out Lehman Brothers.