10 Things You May Not Have Known About Lehman Brothers

Short list:

1. At the Ira Sohn Investment Research Conference in May 2008, hedge fund manager David Einhorn explained why he believed Lehman Brothers was insolvent. At the time, Lehman was already significantly off its highs but still trading above $40.

2. Lehman’s accounting was especially opaque, even relative to other investment banks (and that’s really saying something). Their Level 3 assets were described as “mark-to-make-believe.” The firm was especially evasive when asked for hard numbers for its liabilities. After the collapse of Bear Stearns they were the next obvious bank to collapse. They were smaller, more heavily leveraged and with greater exposure to the mortgage market. Even a cursory review of Lehman’s books revealed lots of red flags.

3. The WSJ pointed out the complicity of Lehman’s accountants in their collapse. Management 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. In May 2008, a Lehman Sr VP alerted management about accounting irregularities, a warning ignored by Lehman auditors Ernst & Young.

4. The infamous REPO 105 — a fraudulent accounting gimmick that temporarily removed over $50 billion in securities inventory from its balance sheet — existed for the sole purpose of hiding liabilities from shareholders. By creating a materially misleading picture of the firm’s financial condition in late 2007 and 2008, Lehman’s management and its accountants were engaging in fraud. This also suggests that LEH was much more leveraged and at far greater risk for insolvency than was realized at the time (So, no, short-sellers did not kill Lehman).

5.  Warren Buffett made an offer to Lehman, one that turned out to be more generous than the offer later accepted by Goldman Sachs. (One may surmise that Fuld’s rejection of Buffett’s bid was the last straw as far as the Fed and Treasury were concerned. If they were unwilling to help themselves, why should the taxpayer write another $30 billion check?)

6. Many potential suitors kicked the tires at Lehman – but none could get past their massive liabilities or their opaque accounting. Too many toxic assets on books that were untrustworthy led to no serious buyer appearing.

7. Once Lehman filed for bankruptcy, Barclays scooped up most of the U.S. and U.K. operations—without any of that toxic junk paper to worry about. Nomura Securities took over Lehman’s Asian operations.

8. Neuberger Berman had been bought by Lehman Brothers in the 1990s. Its management purchased the wealth management unit post bankruptcy. They essentially bought themselves back at a huge discount.

9. Lehman Brothers CEO Dick Fuld was wildly over-compensated. A Harvard study calculated that Fuld earned $522.7 million from 2000 to 2007. He garnered $461.2 million of that from selling 12.4 million shares of Lehman. (BusinessWeek)

10.  Lehman Brothers was dissolved 158 years after its founding.

Did I miss any of the lesser known factoids about Lehman Brothers?

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