There's a good chance, it seems, that no Lehman Brothers executive will be charged with civil or criminal wrongdoing. This after Lehman's bankruptcy examiner found numerous instances of Lehman executives jumping through hoops to mislead shareholders about the true state of the company's balance sheet.
At the center of the mess is an accounting maneuver called Repo 105. It goes like this: Banks often use transactions called repurchase agreements (repos) to fund their balance sheets. In a repo transaction, a bank lends assets to an outside investor in exchange for cash, and promises to repurchase those assets at a set date and slightly higher price. These transactions are typically booked as loans, which is important because they show up as a liability and increases the bank's leverage ratios.
But there's a loophole. These transactions only have to be booked as loans if the assets are worth less than 102% of the loan's value. If the assets are worth more -- say 105% -- it counts as an asset sale, even though the bank is obligated to repurchase the assets at a later date. Bottom line: Lehman was able to make its leverage look far lower than it really was.
Yet as The Wall Street Journal now reports:
SEC officials have grown more worried they could lose a court battle if they bring civil charges that allege Lehman investors were duped by company executives. The key stumbling block: The accounting move, while controversial, isn't necessarily illegal.
This actually explains something many wonder about the financial crisis: Why haven't any major financial executives been sent to jail? The answer all too often is that what blew the system apart was immoral, unethical, incalculably risky, and intentionally misleading, but, alas, legal.
It's also a reason I've vowed to avoid the common stocks of big financial institutions. Even post financial crisis, there are examples of ridiculous accounting shenanigans at Goldman Sachs (NYSE: GS), Wells Fargo (NYSE: WFC), Citigroup (NYSE: C) and Bank of America (NYSE: BAC). All of these examples have a common thread: They blatantly mislead shareholders, but in a perfectly legal way.
To a certain extent, accounting gimmicks are rife among public companies, regardless of industry. Banks, however, consistently take it to a different level.
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