It took about a year and a half and a 2200 page report by the court-appointed examiner, Anton R. Valukas, to explain what most of us instinctively knew: Lehman Brothers used some rather creative accounting enabling them to "keep on dancing while the music was still playing". One of the most popular catch phrases this week has been "Repo 105", an inside term for an accounting practice enabling Lehman to have as much as $50bn vanish from its balance sheet and temporarily reduce its debt levels.
The Financial Times has a nice explanation of how this Repo 105 worked: http://www.ft.com/cms/s/0/f0581674-2df0-11df-b85c-00144feabdc0.html
With these new revelations, finger-pointing has already begun. Apparently, US regulators (SEC and New York Fed) were warned about potential liquidity problems at Lehman prior to their collapse. The New York Fed was not able to confirm this and the senior staff at the SEC overseeing Lehman Brothers are no longer working with the SEC - how convenient.
While these revelations are yet another indication of how horribly wrong everything went within the financial services industry, what is much more concerning is the unsettling feeling - correction - the implicit knowledge that this was only the tip of an iceberg and that there is more to come. As they say, it always takes two to Tango...
Moreover, if Lehman engaged in this practice, others must have done the same. This seems like a perfect time to quote Jedi Masters from the Movie Star Wars...
Mace Windu: There's no doubt that the mysterious warrior was a Sith.
Master Yoda: Always two there are. No more, no less. A master... and an apprentice.
Mace Windu: But which was destroyed? The master or the apprentice?