Demystify the Lehman Shell GameFLOYD NORRIS
April 1, 2010
Making unattractive assets disappear from corporate balance sheets was one of the great magical tricks performed by accountants over the last few decades. Whoosh went assets into off-balance-sheet vehicles that seemed to be owned by no one. Zip went assets into securitizations that turned mortgage loans for poor credit risks into complicated pieces of paper that somehow earned AAA ratings.
As impressive as those accomplishments were, they did not make the assets vanish altogether. If you dug deep enough, you could find the structured investment vehicle or the underlying assets of that strange securitization.
Now there is another possibility in the world of accounting magic.
Did accountants find a way to make some assets disappear altogether? Was it possible for everybody with an interest in them to disclaim ownership?
Until recently, it never would have occurred to me that companies would want to do that — particularly if the assets in question were perfectly respectable ones. But now that we have learned Lehman Brothers did it, the question arises of how far the practice went.
Lehman’s reasons for doing it were simple: to mislead investors into thinking the company was not overleveraged. Were other firms doing that? Are they still? Lehman thought not, but no one really knows. snip
Lehman’s practices, outlined in a bankruptcy examiner’s report released last month, showed the creative use of accounting for repos.
Don’t let your eyes glaze over. I’ll try to keep it simple.
A repo is simply a “sale” of a financial asset to someone else, with an agreement to repurchase it at a fixed price and date. That amounts to borrowing secured by the asset, often a Treasury bond, with the added security that the lender has the bond, and so can sell it quickly if need be.
Normally, such transactions are accounted for as loans, as they should be. They are often the cheapest way for a brokerage firm to borrow money.
I had taken for granted that repos were always accounted for as loans, but it turns out there was a loophole. The Financial Accounting Standards Board had accepted that under some conditions a repo could be treated as a sale. One condition: if the securities securing the transaction were worth significantly more than the loan, that could be a sale.
In the examples the board provided, it concluded that securing the loan with assets worth 102 percent of the amount borrowed did not produce a sale, but that 110 percent would push the deal over the line. In between was a gray area.
Lehman appears to have concluded that 105 percent was enough if the assets being borrowed against were bonds. If they were equities, it set the bar at 108 percent.
By doing such sales repos at the end of each quarter, and reversing them a few days later, the firm could seem to have less debt than it really did. It started the practice in 2001 but really accelerated it in 2007 and early 2008, when investors belatedly discovered there were risks to high leverage ratios. At the end of 2007, the bankruptcy examiner concluded, Lehman’s real leverage ratio was 17.8 — meaning it had $17.80 in assets for every dollar of equity. It reported a ratio of 16.1.
By the end of June 2008 — Lehman’s last public balance sheet — it was hiding $50 billion of debt that way, enabling it to appear to be reducing its leverage far more than it was. When investors asked how it was doing that, Lehman officials chose not to explain what was actually happening. snip
http://www.nytimes.com/2010/04/02/business/02norris.html?scp=1&sq=norris%20banks%20assets%20&st=Search********************************************************************************
Pay Garnishments Rise as Debtors Fall Behind "
When the bank sued Leann Weaver for not paying her credit card balance, her reaction was typical for someone in that situation. Personal and financial setbacks weighed her down, and she knew she owed the $2,470. So she never went to court to defend herself. “Where did all this money go that I paid them?”
With an interest rate on his debt of 27.55 percent, $10,000 in pay was seized over six years.
She was startled by what happened next. When she swiped her debit card at the grocery store, it was declined.
It turned out Capital One Bank had taken $224.25 from her paycheck, a quarter of her wages for two weeks of work at a retail chain, and her bank account was overdrawn. “They’re kicking somebody who’s already in the dirt,” she said.
One of the worst economic downturns of modern history has produced a big increase in the number of delinquent borrowers, and creditors are suing them by the millions. Concern is mounting in government and among consumer advocates that the debtors are not always getting a fair shake in these cases.
Most consumers never offer a defense, and creditors win their lawsuits without having to offer proof of the debts, much less justify to a judge the huge interest charges and penalties they often tack on.
After winning, creditors can secure a court order to seize part of the debtor’s paycheck or the funds in a bank account, a procedure called garnishment. No national statistics are kept, but the pay seizures are rising fast in some areas — up 121 percent in the Phoenix area since 2005, and 55 percent in the Atlanta area since 2004. In Cleveland, garnishments jumped 30 percent between 2008 and 2009 alone.
Debt collectors say they are being forced into the action by combative debtors who dodge attempts to settle. “I think there’s a lack of accountability among debtors, and a lack of interest in reaching out to their creditors to resolve things amicably,” said Fred N. Blitt, president of the National Association of Retail Collection Attorneys.
Bankruptcy can clear away most debts. Yet sweeping changes to federal law in 2005 — pushed by the banking lobby — complicated that process and more than doubled the average cost of filing, to more than $2,000. Many low-income debtors must save for months before they can afford to go broke.
In some states, courts allow creditors to charge high interest rates for years after a lawsuit is decided in their favor. In others, creditors can win lawsuits by default and seize wages and bank accounts without a case ever appearing before a judge.
Lack of participation is the most fundamental problem. Some consumers do not even know they are being sued; the people who are supposed to serve them with formal notice have sometimes been caught skipping that step and doctoring the paperwork.
In far more cases, consumers are served but still do not offer a defense. Few can afford lawyers; others are intimidated or confused. In their absence, judges can offer little relief.
In the rare event that a consumer battles back, creditors frequently lack the documentation to prove their claim, and cases are dropped. That is because many past-due debts are owned not by the banks that issued them, but by debt collectors who bought, for cents on the dollar, a list of names and amounts due.
snip
By default, Beneficial won a judgment of $4,750, plus $900 in lawyers’ fees, with the debt accruing interest at 27.55 percent until paid in full. The bank started garnishing his wages in March 2003.
Over the next six years, the bank deducted more than $10,000 from Mr. Jones’s paychecks, but he made little headway on his debt. According to a court order secured by Beneficial’s lawyers last spring, he still owed the company $3,965, a sum nearly equal to the original loan amount.
snip
http://www.nytimes.com/2010/04/02/business/economy/02garnish.html?scp=1&sq=wage%20garnishment&st=cse
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