Chicago Confidential: Lehman Brothers bankruptcy examiner believes lessons not heeded

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By early 2008, Lehman wanted to reduce its leverage, but selling its assets at a fire sale would send a signal there was a problem, Valukas said. Lehman also didn't want to raise more money, because it would make existing shareholders' stock less valuable.

"So Lehman found a third way to lower its leverage," Valukas said. "It fudged the numbers."

This is what's known as Repo 105. And this is where the story becomes really complex.

"Three days before a quarterly reporting period, Lehman shipped tens of billions of dollars of assets from the U.S. and the U.K., where the Lehman U.K. subsidiary used the Repo 105 process to remove the assets from the balance sheet," Valukas said in the simplest terms possible. "Three days after the reporting period, the assets were shipped back to the U.S. and put back on the balance sheet. Lehman thus removed $50 billion from its balance sheet at the end of the first and second quarter."

And Lehman also included in its liquidity pool, which is supposed to contain stuff that can be easily converted to cash, billions of dollars that were, in fact, pledged to its banks. That meant the cushion was much smaller than the public had been told.

Now we come to the government.

"The (Securities and Exchange Commission) knew Lehman was blowing past its risk limits," Valukas said. "What did the SEC do about it? Not a thing. What did the SEC tell the investing public it was charged with protecting? Not a word."

Same goes for the liquidity problem, Valukas said.

The government also knew that "off-balance-sheet transactions" led to Enron's implosion — and Valukas accuses regulators of failing to scour Lehman's books for them or ask executives about it.

"It is far from clear that anyone or anything could have saved Lehman after it had committed itself to its countercyclical strategy," referring to its big commercial real estate bet, Valukas concluded in his remarks. "But had the government questioned rather than acquiesced and required disclosure, there might have been a softer landing — at least for the U.S. economy, if not for Lehman itself."

So how did Valukas find Repo 105 when no one else, including the government, did? Well, he had unprecedented cooperation. Only one person, a British regulator involved in blocking a last-ditch rescue effort for Lehman, declined an interview request for his report.

"The constant recurring point was that people wanted to say, 'It wasn't me. It wasn't our organization,'" Valukas said. "That's one of the reasons they were so forthcoming. They wanted to get their explanations out."

The second reason he found Repo 105 was that he listened to Jenner partner Matt Basil and then second-year associate Sofia Biller, now with law firm Ulmer & Berne. They were the ones who first heard of Repo 105 during an interview with a Lehman executive in the global balance sheet group, who had told Ernst & Young auditors about Repo 105. The day after the whistle-blower told the auditors about it, the auditors failed to pass that information on to Lehman's audit committee, according to the report.

"I was very, very skeptical about that," Valukas said. "So I pushed back very hard and said, 'Well, go poke around' (about Repo 105). … Then they started coming back with emails. And I started reading the emails, and I was like, 'Oh, my God. They really did do this.'"

Again, Valukas thought Enron had stamped out those behaviors.

"I thought I was going to run into everyone saying, 'Yes, I saw this coming. Yes, I understood this,'" Valukas said. "But you come away with the fact that no one understood what the hell was going on."

Valukas said he has "no opinions" on the lack of prosecutions that have resulted from his report. (I find this implausible, but I let it go.)

"Even if you had prosecutions, what would that bring you?" Valukas asked. "If there's anything I've learned, being both in the government as a prosecutor and on the civil side as a defense attorney, is that it's effective regulation that prevents it from happening in the first place, which is the critical part of the process."

Melissa Harris can be reached at or 312-222-4582. Twitter @chiconfidential or

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