BLOOMBERG TV: Brad Hintz, an analyst at Sanford C. Bernstein & Co., talks with Bloomberg’s Erik Schatzker about a report on the failure of Lehman Brothers Holdings Inc., which concluded the company used off-balance-sheet transactions to understate its leverage in late 2007 and 2008, deceiving shareholders about its ability to withstand losses.
On whether Dick Fuld knew about the financial engineering going on:
“Dick headed the risk committee of the firms and was very hands-on on the trading side. It strikes me on this one, from reading between the lines, that Dick was a very forceful personality and could easily get into a situation where he’s dominating the people around him and the information isn’t coming to him.”
“On the other hand, what you end up with in a fixed income house is a natural battle between a CFO and a fixed income division. In a yield curve environment, bigger balance sheets are better than smaller balance sheets so you’re going to have a natural battle between revenue and risk going on. What you want is a CEO to balance between the two. I think the question that you have is, over time, did Dick delegate too much to other people?
“On the risk side when I was there he was always tightly in control. He would be very comfortable calling trading desks, so it’s hard for me to see him giving up the risk side. On the balance sheet side, my experience with Wall Street has been they don’t make large radical changes, but they make a lot of…think of them as menial sins…over 10 years a lot of menial sins add up.”
Hintz’s reaction to the report:
“What surprised me was the fact that you were so late in terms of bringing down the balance sheet. The comments about shrinking Lehman’s balance sheet really wasn’t something that occurred until well after the crisis began, which if you’re facing a funding or confidence crisis , the first thing you do is put your balance sheet into a nose dive and raise cash.”
“Of course the other issues all the press is talking about the Citi and JP Morgan, but they were acting purely in their best interest, you grab every dollar of collateral you can when a counterparty gets into trouble and then you worry it with the courts later. What we have here is the courts worrying about it, and JP Morgan and Citi were pretty aggressive in grabbing collateral from them.”
“What surprised me as the CFO was the accounting systems that were in existence back in 1996 which I thought were relatively primitive, in this thing they make it pretty clear there wasn’t a lot of money invested in the accounting systems. Although they didn’t find any accounting shenanigans, what was very clear to a reader of this was that there was an awful lot of stuff being done by hand. The battles that I fought inside the company about leverage in the 1990’s, they were still fighting 10 years later.”
On the transaction REAP0 105:
“No, it wasn’t done at the other firms, so it was clearly an accounting technical approach in order to bring a balance sheet down. But you’re not bringing the balance sheet down….If all you’re doing is hiding behind a curtain, it’s not there.”
“I would call it shenanigans. This made it worse. Remember Lehman was operating at about 31 times leverage, in terms of gross leverage. They weren’t low in terms of their leverage. They were up at Morgan Stanley’s level.”
On whether he thought this was manipulation:
“The issue is what was in that reapo book? Were there less liquid assets in that reapo book that were therefore being held on the balance sheet? The terminology would be: what was the cash capital position of the firm? Which was, could the firm stand a funding crisis? This was a calculation which had to be done daily. The answer probably was not good, but we don’t have that from the report.”