Lehman Brothers; The Bank with Integrity, and Shameless Fraud

05/20/2010 05:12 am ET | Updated May 25, 2011
  • Lawrence G. McDonald Public Speaker, NY Times Best Selling Author of 'A Colossal Failure of Common Sense'

desert-islandIn recent days, I have spoken to several of the whistle blowers who helped the examiner and the Feds; I received some amazing information, there are fireworks ahead.

From what I am hearing, the SEC, the Justice Dept, US Attorney Southern District New York, US Attorney Eastern District New York, NY AG Andrew Cuomo's Office, the FBI and the New Jersey Securities Bureau are all hot on the trail.

I think they are all working together and have been working closely with the examiner. I think this effort is is much more robust than most people realize.

I believe in my gut there with be both criminal and civil legal action. I'm hearing the key on the criminal side the Feds are working on is "proving a pattern of deception."

Repo 105 is not illegal but a "pattern of Repo 105 use for deceptive purposes" is!

What they are looking at; Repo105 (accounting fraud), QSPEs (from page 161 on our book),
Lehman's Q4 2007, Q1 2008, Q2 2008, Valuations on Archstone and Suncal Commercial Real Estate Positions, Ernst and Young (conflicts of interest) and Lehman Hedge Funds (accounting fraud).

The examiner's report is creating very positive momentum for my book, "A Colossal Failure of Common Sense - The Inside Story of the Collapse of Lehman Brothers." I am so proud of the recent feed back; people keep writing, emailing and saying to me; "you nailed it."

I think the next focus of the investigation which may come to light publicly will be focused on Lehman's use of Qualified Special Purpose Entities (QSPEs).

Here is an excerpt from my book with an easy to read explanation of this complex Wall St. game of three card Monty.

Excerpt from: "A Colossal Failure of Common Sense."

Have you ever noticed how, both in life and in
corporations, one small piece of economy with the truth,
often leads to full-blooded deceit, and then a copperbottomed
southern-fried lie ? Well, that's what often happens.

And following right behind that lie, you usually
find a real shady area, a kind of no-man's land, where no
one goes, not even in discussion with each other. And we
had one of those at Lehman. A deep dark secret. Matter of
fact the deepest, darkest you could get. It's name was
Grand Cayman.

For there, in that sun-drenched Caribbean paradise,
set 170 miles south of the western end of Castro's Cuba,
Lehman, in company with several other investment banks,
held a controlling hand over a succession of hidden
Trusts. And, being Wall Street, they were awarded a truly
fancy title that no one could possibly understand -
Qualified Special Purpose Entities (QSPE). Throw in the
word 'international,' and you could have been talking
about any subject, in any place, at any time on earth.

Obfuscation : Thy name is Wall Street.

And, into those Qualified Special Purpose Entities,
they stored money, bonds, derivatives, and CDO's - all of
which had the glorious advantage of never appearing on
corporate balance sheets.

They were 'selling' the CDO's to the trust, and
reporting the sale as profit on the Lehman balance sheet.
This could be regarded as somewhat eccentric since they
were effectively selling the damn things to themselves!
Altogether, the Grand Cayman Connection provided three
big advantages to a firm like Lehman Brothers, who were
trying desperately to compete with the biggest banks on
Wall Street.

The first was entering false profits from the 'sale'
onto the balance sheet.

The second was receiving all the coupon payments
from the derivatives they still held in the Trusts.
The third was that FASB required them only to put
aside three percent, a tiny amount of capital to cover
any losses in an offshore trust.

This was the highly controversial Rule 140, written
in 2000, and the one which Enron broke most spectacularly
on the way to its universal disgrace. They could not come
up with the three percent when asked by the government,
despite claiming to have made huge profits. That three
percent brought them down, when they were forced to admit
insolvency, and file for bankruptcy.

In 2003 FASB attempted to raise the threshold to 10
percent but the banks reacted with fury, arguing about
the major impact such a Rule would have on them. The
banking lobby had not been so up-in-arms since Bill
Clinton declined to sign the Glass Steagall Repeal into
law nearly 10 years previously.

Citigroup had massive holdings offshore, and their
comptroller almost had apoplexy. He publicly stated on
behalf of the global giant that Citi would be
'significantly impacted,' if the rule was changed to 10

Citigroup estimated they would have to raise $20
billion in fresh cash, which was a measure of their
offshore, off-the-record, off-the-hook, off-balance sheet
holdings on the Caribbean island of dreams, sorry,

In late 2003, after intense political pressure, FASB
backed down. Thus proving that the Securities Exchange
Commission was definitely still asleep, allowing Wall
Street to careen forward, unchecked, unregulated, and

Wall Street right here needed, at the very least,
some quite serious attention from the regulators, who
were, as we've already established, fast asleep. Wall
Street, of course, knew they were asleep, and generally
speaking hoped to hell they would stay asleep. The place
was awash with Liberal rules.

This allowed Lehman Brothers to visit continually
the short-term commercial paper market, and borrow more
and more money, massive amounts, billions of dollars,
always pledging their new toys as collateral. You'd have
thought someone might have yelled "STOP!" or "BASSA!" or
"ARRETE! or "ACHTUNG! or even "HOLY SHIT!" - because the
toys were bought with borrowed money ! And those toys
were time-bombs despite their fancy names, CDO, CLO, ABS,

It was like an arms race of leverage on Wall Street,
and it all started with the demise of Glass Steagall,
that fire-wall which, like an Act of God, kept the mighty
commercial banks separate from the ambitious, fleetfooted
investment houses.

But now they were legally together, with one bank
outdoing the next, pushing the leverage envelope,
borrowing on an unprecedented scale, getting rid of the
evidence which said they couldn't afford it. And there
was no way for anyone to measure the risk.
But the battle to change the rules, between some
members of the government and the Wall Street heavies -
the guys who came up with the big political contributions
- was developing into a knock-down-drag-out contest. And
with a presidential election not so far away, the bankers
were punching way above their weight.

The issue was truly simple. Leverage. If a new rule
came in which forced the banks to haul their billions
down the Cayman beaches, and back to Wall Street, back
onto the public balance-sheets, all hell might break
loose. Because they would no longer be dealing with three
percent offshore. They'd be looking at a domestic 10 per
cent hold-back, to cover US losses, standard procedure in
banks throughout the nation, standard since the
Revolutionary War.

This would have the obvious effect of depleting the
balance-sheets. Capital would have to be held back, which
was not only unacceptable, emotionally, most of the banks
simply did not have it. Especially Lehman, who were now
leveraged 30:1 !

If that Rule was changed, the US Government might
have to face up to a rash of bankruptcies in the
financial capital of the world. Alan Greenspan was
plainly wary of damaging the banking system with
regulations and controls while the game was still in
progress. But the risks and the leverage kept right on
piling up.

The regulators continued to delay, never imposing
the stricter rules, which would bring the inevitable
deleveraging - the only solution to slow-down a market
like this. They had let the lawn grow to four feet high
because they were afraid of damaging the grass.
Once more utilizing my perfectly astounding grasp of
events aided by hindsight, I have to say, that this was
not obvious at the time; not even to the line of crystal
balls which decorated the desks of my group at Lehman.
But it was one giant SEC procrastination, fuelled by an
overriding sense of not wishing to face the harsh
discordant music of de-leverage, which means getting
smaller, fast.

At that time, however, Ashish Shah and I did speak
about the situation, and concluded that there was a clear
danger the way everyone was dragging their feet about
disclosure of off balance-sheet assets. It plainly could
not last. Somehow it would have to come to light.
But, looking back, the revenues were always what
really mattered in the secretive boardrooms of Manhattan.
Because those revenues mean bigger bonus pools, and that
meant more money for the partners, very flash houses in
the Hamptons, beautiful cars and fine art collections.
Wasn't life absolutely great ?

For all of us, the bonus pool was of paramount
importance because the bonus represented most of our
salary. That's how we were paid. We also were paid half
of our compensation in our own corporate stock. And
everyone knew the inevitabilities of life. We had to earn
the money to keep the profits and the stock high.
Otherwise we were all spinning our wheels financially.
Many of us were naturally far less ruthless than others,
and many of us had a clear moral code about what was
right and what was clearly wrong, but we were all working
at the very sharp end of Wall Street, and making money
was our game.