How Did Lehman Shrink $400 Billion Before Bankruptcy Filed?

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Here is the link to a post I did several days ago about the Fury at Pledged 2.5 Billion to Executives of Lehman. This is the update in the ongoing investigation that smells of corruption from the top executives that stand to gain the most from Barclays Capital which acquired Lehman last week.

Bloomberg has uncovered today that Lehman’s assets shrank by over 80% from the-bankruptcy Sept. 15 claiming $639 billion in assets, using four-month-old data-brokerage unit had shrunk to less than $100 billion in assets from $500 billion “a few months ago,” according to a Sept. 19 court statement by James Giddens. How do you lose over $400 billion in assets in a few months? This is Giddens explanation.

The loss in value was caused by “changes in the market,” according to Giddens, a partner at law firm Hughes Hubbard & Reed, who spoke at a bankruptcy court hearing in Manhattan. The runoff may indicate Lehman’s customers, including many hedge funds, canceled and closed out trades as they began to doubt the firm’s ability to navigate the credit crunch, bankruptcy analysts and lawyers said.

“There was the proverbial run on the bank” at Lehman, said Martin Bienenstock of the law firm Dewey & LeBoeuf, who is advising clients including Walt Disney Co. on recovering their money from Lehman. There was a similar capital flight from Bear Stearns earlier this year, he said.

Most of Lehman’s pre-bankruptcy assets were securities, according to its balance sheets. Lehman said on Sept. 10 that the consolidated gross assets of the firm stood at $600 billion and net assets at $311 billion. The difference between net and gross is the so-called matched book, which is overnight lending or securities pledged for overnight borrowing.

Another issue that Bloomberg didn’t mention that is a real problem for me is Auditing Firms. Amidst the mayhem, we need to ask questions about the role of auditors, who have been paid millions of dollars to give opinions on company financial statements. Yet companies are sinking within weeks of getting a clean bill of health. Does someone other than me see a Very Large Problem with this. Here is what the Guardian uncovered on this issue.

Lehman Brothers, incorporated in the tax haven of Delaware, was audited by the New York office of Ernst & Young. On January 28 2008, the firm gave a clean bill of health to Lehman accounts for the year to November 30 2007. The auditor’s report (page 75 of the accounts) says, “Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances”. Lehman Brothers filed quarterly accounts with the SEC for the period of May 31 2008 and on July 10 2008 and these (see page 52) too received a clean bill of health.

As you see Ernst & Young found absolutely nothing to raise any red flags over-the auditors did not express any reservations about the value of the derivatives or any scenarios under which the company may be unable to honor its obligations. I ask you this; if your financial institution is given a clean bill of health wouldn’t you find it odd that it collapsed approximately two months later? I’m feeling another Enron nightmare in our future and with their demise we saw Arthur Anderson one of the most prestigious Accounting and Auditing Firms worldwide fall also. In my opinion, someone needs to start investigating Ernst & Young and see if anyone has a new offshore account that didn’t have one before this audit was over. Absolute greed does corrupt absolutely.

**A special thanks to House of Roberts for finding the accounting link when I did my first post.

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6 thoughts on “How Did Lehman Shrink $400 Billion Before Bankruptcy Filed?

  1. Hi Freedomrebel, you are most very welcome to the humble yet eager efforts of this tech-challenged guy.
    I looked some more today, and found mostly that the rank and file in the UK are very angry, because their jobs are only good to the end of September. Maybe Nomura is going to rescue them, but all the money is still going to the top as in the US deal.
    No one is mentioning the 4.4 billion pounds.
    I will look more in the early after work.

  2. Good to see you House of Roberts šŸ™‚

    I can’t blame the UK workers for being angry, it is such a shame they have to pay the price for all of this greed and mis-management.

    I found it odd that no one mention the 4.4 billion pounds either.

    Having an accounting background myself, I know what hardwork it is to comb through all those transactions and figure out what was going on. I realize they have hundreds working on this but, even with that much help we could still be looking at a month before they can piece alot of this together. Maybe longer depending on how many 1,000’s of transaction they have to put under a microscope, so to speak.

    I truly appreciate your help, I’m having serious computer problems. So it has limited my capacity at times to doing major research.

    Have a good night…

  3. I looked some more, but I found nothing later than Tuesday except the same Bloomberg article you have here.

    I did run across an unrelated “heads up”: The United Steelworkers contract with the oil refineries in the US is up at the end of 2008, or early 2009, and BP said they would shut down their 7% of US production rather than risk less qualified replacements running their plants. We could be seeing a new spike in prices and shortages if a strike were to occur.

  4. Thanks HoR, I will check it out..

    This does not surprise me, another way they can hurt us at the pumps… It is painful enough with my Nissan. I have to admit it gets great gas mileage.

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