The autopsy is meticulous, with novelistic touches, and runs 2,200 pages.
Inside lies the tale of excess and blindness behind the demise of Lehman Brothers Holdings Inc., the largest U.S. bankruptcy ever and the calamity at the centre of the global financial crisis.
A new report details how Lehman executives made business decisions that would ultimately prove suicidal, then used financial manoeuvres to mask the depths of their predicament. Finally, demands for payment by competitors helped push the firm over the cliff.
The report, produced by a U.S. court-appointed lawyer and released late Thursday, will have immediate ramifications. It provides a green light for lawsuits against Lehman's top executives, who allegedly manipulated the company's books, and its auditor, Ernst & Young, which the report says was aware of the scheme.
The allegations surrounding the manipulation of Lehman's balance sheet have not been proven. Richard Fuld Jr., Lehman's former chief executive officer, denied any wrongdoing, as did accounting firm Ernst & Young. "Mr. Fuld did not know what those transactions were," his lawyer said in a statement.
The intricate postmortem comes as congressional Democrats are set to begin a final push next week to pass a major overhaul of the U.S. financial system - a move that in many ways is a direct response to the devastation unleashed by Lehman's collapse in mid-September, 2008.
The report supplies fodder for some of the regulatory changes under discussion. Officials at the Federal Reserve and Treasury Department flailed as Lehman veered toward disaster, the report shows, attempting to find potential suitors for the investment bank but lacking the legal authority to take it over. One of the reforms now moving through Congress would give the government the ability to seize and break up large financial institutions other than banks.
But the report also points to vulnerabilities that remain to be addressed. One of its major revelations is that Lehman used an accounting sleight-of-hand at several key junctures in 2008 to make its debt level appear smaller than it actually was.
Under the move, known as a "Repo 105," Lehman shifted tens of billions of dollars of assets off its books as though they had been sold. In fact, they had been pledged as collateral in exchange for short-term loans, on terms favourable to the lender, and would return to Lehman's balance sheet within days. During that time, however, Lehman would take its quarterly snapshot of its financial health and present those figures to investors.
"It's basically window-dressing," wrote one Lehman executive in an e-mail, according to the report. It also revealed that lawyers in the U.S. didn't endorse such accounting, so Lehman turned to a U.K. law firm and routed the transactions through Europe.
While Lehman had employed the manoeuvres since 2001, it expanded its use of them in mid-2007, sailing through internal limits. "I am very aware," of the impact of the transactions, one executive wrote in April 2008. "It is another drug we' r on."
The controversy "goes back to this idea that you can actually get stuff off a balance sheet that is toxic," said Charles Geisst, a professor of finance at Manhattan College. "That whole thing is going to get tightened up."
Perhaps one of the report's major lessons for financial reform is that the ultimate causes of Lehman's downfall - bad business decisions and hubris - do not respond well to legislation. The report shows in excruciating detail how Lehman's bankers made bets that turned out to be disastrously wrong and ignored repeated warnings to rein in risk-taking.
To prepare the study, Anton Valukas, chairman of Chicago-based law firm Jenner & Block, and his team reviewed five million documents and interviewed more than 250 people.
Mr. Fuld, the company's hard-charging leader, comes in for tough criticism. He was a person "who heard only what he wanted to hear," former Treasury secretary Henry Paulson Jr. told the lawyers preparing the report.
Few parties escape blame in events leading to the collapse. In the spring of 2008, the Federal Reserve Bank of New York created two scenarios to test Lehman's ability to withstand financial stress: It failed both. The Fed revised the assumptions involved in the tests, but Lehman still failed. "It does not appear that any agency required any action from Lehman in response to the results," the report notes dryly.Report Typo/Error