And the Prize Goes To....

... really, there are so many here in the Lehman Brothers mess that it's hard to know whom to honor first.

Like many of you, I suspect, I've been wallowing in the report from court-appointed bank examiner Anton R. Valukas over the past several days. I haven't waded through all nine volumes, 2200 pages plus appendices (which is, thanks to the New York Times' DealBook, all available online here), but I've read some of it, as well as articles and blog posts in the Times and elsewhere.

"Lehman was more the consequence than the cause of a deteriorating economic climate," Valukas writes in the executive summary, "[But] Lehman's financial plight, and the consequences to Lehman's creditors and shareholders, was exacerbated by Lehman executives, whose conduct ranged from serious but non-culpable errors of business judgment to actionable balance sheet manipulation; by the investment bank business model, which rewarded excessive risk taking and leverage; and by Government agencies, who by their own admission might better have anticipated or mitigated the outcome."

There's a lot of good ammunition in the report, based on what I've seen so far, for plaintiffs planning civil lawsuits against Lehman executives. Former CEO Richard S. Fuld Jr., who certified the financial statements, is called "at least grossly negligent".

Accounting gimmicks, chiefly one known internally as Repo 105, used by Lehman to reduce its net leverage ratio are termed "materially misleading" by Valukas. "Unbeknownst to the investing public, rating agencies, government regulators, and Lehman's board of directors, Lehman reverse engineered the firm's net leverage ratio for public consumption," the report states. Questions could be asked here: How is it that the board knew nothing? Isn't that what audit committees are there for? How could the government regulators, who saw it all, have been so blind?

As Andrew Ross Sorkin reports in today's Times, "Almost two years ago to the day, a team of officials from the Securities and Exchange Commission and the Federal Reserve Bank of New York quietly moved into the headquarters of Lehman Brothers. They were provided desks, phones, computers -- and access to all of Lehman's books and records.... [The] mystery is why it took this long for anyone to raise a red flag...."

And serious questions have been raised about how Ernst & Young, Lehman's accounting firm, could have certified accounting results. Still, it seems unlikely that E&Y will go the way of Enron's accountants, the late Arthur Andersen. In a Financial Times article published Sunday, Rachel Sanderson wrote, "Accounting experts do not believe the fallout from the Lehman report will damage E&Y’s reputation in a life threatening way, although damage from litigation costs could be significant as could the longer- term impact on the credibility of the profession particularly among the Big Four."

Sanderson also quoted Steven Thomas, a trial attorney with Thomas Alexander & Forrester LLP, saying that continued disclosures are eroding confidence in the profession “and leaves us asking why do we have auditors”?

It appears as though, as a Times headline put it on Friday (12 March), "findings on Lehman take even experts by surprise."

I know these guys are/were supposed to be the brightest of the bright -- which is why they deserve those billion-dollar bonuses, of course -- but, honestly, and sadly, which one of us is really taken by surprise by this report?