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Lehman Bros. used accounting trick amid financial crisis – and earlier

Failed investment bank Lehman Bros. used an accounting trick at the end of each quarter to make its finances appear less shaky than they really were, says a report from an examiner.

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The report also puts fresh focus on a broader issue: Wall Street's culture of risk and sometimes-shoddy accounting. It comes amid debate over where financial stocks are headed. Many investment strategists predict that these stocks will continue to climb from lows reached a year ago, but some argue that the industry's recovery is built on fuzzy accounting for still-troubled real estate portfolios.

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Lehman's Repo 105 ramped up in volume as the firm became more desperate during the crisis. According to the report, then-Treasury Secretary Henry Paulson "urged Fuld to find a buyer" after the collapse of Lehman rival Bear Stearns and Lehman's own reporting of a large second-quarter loss in 2008.

Fuld failed to cut a deal before its third-quarter report in 2008. That was followed by a September weekend of last-minute efforts by other bankers and US officials to avoid a chaotic collapse by the firm. The Lehman bankruptcy was followed by panic in financial markets, the controversial federal rescue of insurance firm AIG, and an extraordinary range of Federal Reserve efforts to prop up the banking system.

'Another drug we r on'

Lehman's use of Repo 105 earlier in the decade signals that it was not merely the crisis itself that prompted the reach into creative bookkeeping. In good times, Wall Street firms can reap big profits by having high leverage – putting money to work that's many times their underlying capital.

The report, released Thursday, quotes one Lehman official in an April 2008 e-mail referring to the deals as "another drug we r on." In interviews, other Lehman employees called the Repo 105 transactions an "“accounting gimmick” and a “lazy way of managing the balance sheet."

Not every financial firm is a lemon, or a Lehman. But since the financial crisis erupted, questions about accounting have resulted in sharp debate over how severe the banking-sector troubles are. Although confidence seems to have returned to financial markets over the past year, it remains more fragile than before the crisis.

"Bad data lead to bad decisions," says William Black, a financial expert at the University of Missouri in Kansas City. Despite the crisis, the US government isn't putting enough resources into pursuing accounting fraud, argues Mr. Black, who led prosecutions during the 1980s savings-and-loan crisis.


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