Finally, finally, finally, we’ve started the process of holding bankers responsible for the shipwreck of the financial crises.
“Accountancy giant Ernst & Young has been sued by New York’s attorney general over its role in the collapse of Lehman Brothers during the financial crisis in 2008.
“Andrew Cuomo claimed the firm was complicit in a “massive accounting fraud” perpetrated by Lehman.
“Ernst & Young said that it would “vigorously defend” itself.
“There is no factual or legal basis for a claim to be brought against an auditor in this context,” it said.
“Lehman’s audited financial statements clearly portrayed Lehman as a highly leveraged entity operating in a risky and volatile industry.”
Matt Taibbi, of course, is on the case:
“In advance of its quarterly reports in 2007, the firm executed a series of something called Repo 105 transactions in an attempt to make their balance sheet look healthier than it was.
“These Repo 105 transactions are just loans that Ernst and Young and Lehman Brothers conspired to book as revenue from sales. If I go to you and I ask you to lend me a hundred bucks to pay for Knicks tickets, that’s a loan, and you and I and the SEC and every investor on Wall Street all know I’m in debt to you, that I owe you a hundred bucks.
“Here’s how Lehman Brothers paid for their Knicks tickets: a week before the game, they went to you and offered to “sell” you their worthless puke-stained lava lamp for a hundred bucks, with the understanding that two days after the Knicks game, it would come back and “buy” the lamp back for the same $100 (plus a small commission for your trouble). And when Lehman pocketed that $100 from the initial transaction, they decided to call that not borrowing but a true sale, i.e. they booked that hundred bucks as revenue from an honest sale of a worthless piece-of-shit lava lamp.
“In 2007 and 2008 Lehman would do this before the end of every quarter. They would “sell” billions of dollars of assets, typically bonds, to various companies, and use that money to pay down debt before the quarter’s end, so that they didn’t look so flat-ass broke to investors. Then, a week or so after the end of the quarter, they would go out and borrow more money, and then “buy” the assets back. The reasons they did this were myriad, but in most cases the assets they were “selling” were depressed in value at the time and could not have been sold at anything like face value had they really gone out on the market and tried. So instead of really “selling” these items on their balance sheet, they worked together with other companies to jury-rig these “repurchase” agreements that looked like sales but were actually loans.
“Lehman was doing massive amounts of these deals every quarter. In the second quarter of 2008, they lightened up their balance sheets with $50 billion worth of Repo agreements.”
Ernst & Young’s arguments, of course, will be that even though these Repo 105 transactions were manipulative, underhanded and morally repugnant to anyone doing business in good faith, they weren’t outrightly illegal. Change the laws to enforce this from now on, but don’t hold E & Y criminally liable for recording transactions (discreetly) that, at the time, were perfectly legal accounting maneuvers.
This fraud case will not be the slam-dunk we would wish it to be. But a successful prosecution will be a powerful precedent for future fraud and malfeasance actions against a host of other opportunist fatcats. Cross your fingers.