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Lehman's Fuld on Repo 105s: Accounting Made Us Do It

Richard Fuld, the former chief executive officer of defunct Lehman Brothers Holdings Inc., said the Wall Street firm reported certain repo transactions as sales because accounting rules required it to do so.

“Lehman should not be criticized for complying with the applicable accounting standards,” Fuld said in the prepared text of testimony to be presented to Congress tomorrow.

The transactions, nicknamed Repo 105s by Lehman executives at the time, were highlighted by the bankruptcy court’s examiner in a report last month. The examiner, Anton Valukas, said Lehman didn’t disclose the transactions properly and used them to hide billions of dollars of assets.

Fuld reiterated that he had “absolutely no recollection whatsoever hearing about Repo 105 transactions while I was CEO of Lehman.” His testimony about them was based on information he learned after the firm’s collapse, Fuld said.

The Financial Accounting Standards Board published rules in 2000 about transactions like Repo 105s, and Lehman incorporated them into its accounting framework the next year, Fuld said in his testimony. The firm’s auditor, Ernst & Young LLP, reviewed the new policy and backed the approach to incorporating the FASB rule, according to Fuld.

Fuld and Valukas were asked by the House Financial Services Committee to testify about the issues raised in the report. It will be Fuld’s first public appearance since he appeared before another House committee in October 2008, weeks after Lehman’s collapse.

‘Accounting Technicality’

Valukas said in his written testimony for tomorrow that a Repo 105-like transaction was an “accounting technicality” used to “temporarily remove significant amounts of assets off balance sheet for no apparent reason other than to artificially and deceptively reduce Lehman’s reported net leverage and, therefore, the market perception of Lehman’s viability.”

Valukas said he doesn’t have a view on whether accounting rules permitted this type of transaction. He objected to the firm’s decision to engage in “significant amounts of such transactions without disclosure,” according to the testimony.

Fuld also said in his remarks to the committee that the examiner’s report made it clear that Lehman wasn’t insolvent when it collapsed. Even after applying reductions in values of assets that Valukas found were overvalued, Lehman would be left with $26 billion of capital, Fuld calculated.

‘Capital Hole’ Disputed

“The world is still being told that Lehman had a huge capital hole,” Lehman said. “It did not.”

Valukas’s prepared testimony focused on the role of regulators in the bankruptcy. The Securities and Exchange Commission and the Federal Reserve, monitoring Lehman in the six months before it collapsed, were concerned about its future yet didn’t act to avert disaster, Valukas said. The SEC, as the firm’s main regulator, should have told Lehman what to do, he said.

“It’s one thing for Lehman to have exercised the business judgment,” he said. “But it was quite another for the supposed regulator -- a regulator who had been told by Lehman that its risk controls were binding and not meant to be exceeded under any circumstances -- to stand by idly and simply acquiesce to management’s decision.”

SEC Chairman Mary Schapiro, who is also scheduled to testify tomorrow, said her agency may not have been able to prevent Lehman’s collapse.

“It’s not clear that anything the SEC could have done would have prevented Lehman’s bankruptcy,” Schapiro said in her prepared remarks. “It’s also clear that the SEC did not do enough as consolidated supervisor to identify certain risks and require additional capital and liquidity.”

The SEC didn’t audit Lehman’s balance sheet and wasn’t aware of Repo 105, Schapiro said, depending on the firm’s auditors instead, she said. Valukas’s report raised questions about how widespread the practice is, and the SEC is probing whether others might have inadequate disclosures about their repo transactions, said Schapiro, who was named to her post four months after Lehman’s demise.

To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

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