Opinion Letter from Linklaters Why did Lehman Bros. use an opinion letter from a British law firm to support its interpretation of FAS 140?
FAS 140 financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. The transferor has surrendered control over transferred assets if and only if all of the following conditions are met: The transferred assets have been isolated from the transferor-put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership. Each transferee (or, if the transferee is a qualifying special-purpose entity (SPE), each holder of its beneficial interests) has the right to pledge or exchange the assets ( or beneficial interests) it received, and no condition both constrains the transferee (or holder) from taking advantage of its right to pledge or exchange and provides more than a trivial benefit to the transferor. The transferor does not maintain effective control over the transferred assets through either (1) an agreement that both entitles and obligates the transferor to repurchase or redeem them before their maturity or (2) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call.
FAS 140 – Appendix A Isolation beyond the Reach of the Transferor and Its Creditors 27. The nature and extent of supporting evidence required for an assertion in financial statements that transferred financial assets have been isolated— put presumptively beyond the reach of the transferor and its creditors, either by a single transaction or a series of transactions taken as a whole—depend on the facts and circumstances. All available evidence that either supports or questions an assertion shall be considered. That consideration includes making judgments about whether the contract or circumstances permit the transferor to revoke the transfer. It also may include making judgments about the kind of bankruptcy or other receivership into which a transferor or SPE might be placed, whether a transfer of financial assets would likely be deemed a true sale at law, whether the transferor is affiliated with the transferee, and other factors pertinent under applicable law. Derecognition of transferred assets is appropriate only if the available evidence provides reasonable assurance that the transferred assets would be beyond the reach of the powers of a bankruptcy trustee or other receiver for the transferor or any consolidated affiliate of the transferor that is not a special-purpose corporation or other entity designed to make remote the possibility that it would enter bankruptcy or other receivership (paragraph 83(c)).
Lehman’s Accounting Policy for Repo 105 Transactions
Lehman Bros Notes to Financial Statements -- November 30, 2007 Financial Instruments and Other Inventory Positions Collateralized Lending Agreements and Financings Treated as collateralized agreements and financings for financial reporting purposes are the following: Repurchase and resale agreements. Securities purchased under agreements to resell and securities sold under agreements to repurchase are collateralized primarily by government and government agency securities and are carried net by counterparty, when permitted, at the amounts at which the securities subsequently will be resold or repurchased plus accrued interest. We take possession of securities purchased under agreements to resell. The fair value of the underlying positions is compared daily with the related receivable or payable balances, including accrued interest. We require counterparties to deposit additional collateral or return collateral pledged, as necessary, to ensure the fair value of the underlying collateral remains sufficient.
Matthew Lee was a Senior VP Moral Courage Project April 28, 2012 In June 2008, Lee was let go as part of a wave of firm wide lay-offs. While there is no direct evidence that Lee was laid off because of his memo, the circumstances are certainly suspicious. Stephen Kohn, director of the National Whistleblowers Center based in Washington, D.C., acknowledged that “If you’re a company and want to get rid of a whistleblower, it’s common to stick them in a round of layoffs…” Furthermore, Kohn believes the whistleblower protections set forth in U.S. federal legislation have not worked. ”Publicly traded companies are required to have an audit committee that will look at employee concerns and companies are not allowed to retaliate. People are supposed to be protected but those protections haven’t worked.” Although Lee’s memo did not prevent the fall of the bank, it is now being used as evidence in the investigation of Lehman Brothers and Ernst & Young. In a 2,200 page report released last year, bankruptcy examiner Anton Valukas noted that repo 105 was used excessively and questionably. He also noted that not everyone at Lehman was comfortable with it – among others, Matthew Lee. Lee has been unable to find work since being laid off and, ironically, believes it has to do with his association with the auditing department at Lehman. His attorney, Erwin Shustak, confirms that, “He has been living off of his now depleted 401(k) and is unable to find work…It’s been a difficult time.” As time passes, the truth is coming out, clearing Lee’s reputation and giving him new opportunities to find work.