The case against Lehman Brothers

Update: A statement from Ernst and Young: Lehman's bankruptcy occurred in the midst of a global financial crisis triggered by dramatic increases in mortgage defaults, associated losses in mortgage and real estate portfolios, and a severe tightening of liquidity.

We firmly believe that our work met all applicable professional standards, applying the rules that existed at the time. Lehman's demise was caused by the global financial crisis that impacted the entire financial sector, not by accounting or financial reporting issues.

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(CBS News) It's hard to overstate the enormity of the 2008 collapse of Lehman Brothers. It was the largest bankruptcy in history; 26,000 employees lost their jobs; millions of investors lost all or almost all of their money; and it triggered a chain reaction that produced the worst financial crisis and economic downturn in 70 years.

Yet four years later, no one at Lehman has been held responsible. Steve Kroft investigates the collapse of Lehman Brothers: what the SEC did and didn't know about the firm's finances, the role of a top accounting firm, and why no one at Lehman has been called to account.

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The following script is from "The Case Against Lehman" which originally aired on April 22, 2012. Steve Kroft is the correspondent. James Jacoby and Michael Karzis, producers.

On September 15, 2008, Lehman Brothers, the fourth largest investment bank in the world, declared bankruptcy -- sparking chaos in the financial markets and nearly bringing down the global economy. It was the largest bankruptcy in history -- larger than General Motors, Washington Mutual, Enron, and Worldcom combined. The federal bankruptcy court appointed Anton Valukas, a prominent Chicago lawyer and former United States attorney to conduct an investigation to determine what happened.

60 Minutes Overtime

Kroft: When to give up on accountability »

Included in the nine-volume, 2,200-page report was the finding that there was enough evidence for a prosecutor to bring a case against top Lehman officials and one of the nation's top accounting firms for misleading government regulators and investors. That was two years ago and there have been no prosecutions. Anton Valukas has never given an interview about his report until now.

Steve Kroft: This is the largest bankruptcy in the world. What were the effects?

Anton Valukas: The effects were the financial disaster that we are living our way through right now.

Steve Kroft: And who got hurt?

Anton Valukas: Everybody got hurt. The entire economy has suffered from the fall of Lehman Brothers.

Steve Kroft: So the whole world?

Anton Valukas: Yes, the whole world.

When Lehman Brothers collapsed, 26,000 employees lost their jobs and millions of investors lost all or almost all of their money, triggering a chain reaction that produced the worst financial crisis and economic downturn in 70 years. Anton Valukas' job was to provide the bankruptcy court with accurate, reliable information that the judges could use to resolve the claims of creditors picking over Lehman's corpse.

Steve Kroft: Had you ever done anything like this before?

Anton Valukas: I've never done anything like Lehman Brothers. I don't think anybody else has ever done anything like Lehman Brothers.

Steve Kroft: So your job, I mean, in some ways, your job was to assess blame?

Anton Valukas: Our job is to determine what actually happened, put the cards face up on the table, and let everybody see what the facts truly are.

Valukas' team spent a year and a half interviewing hundreds of former employees, and pouring over 34 million documents. They told of how Lehman bought up huge amounts of real estate that it couldn't unload when the market went south -- how it had borrowed $44 for every one it had in the bank to finance the deals -- and how Lehman executives manipulated balance sheets and financial reports when investors began losing confidence and competitors closed in.

Steve Kroft: Did these quarterly reports represent to investors a fair, accurate picture of the company's financial condition?

Anton Valukas: In our opinion, they did not.

Steve Kroft: And isn't that against the law?

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1/5

[BigAssFan]

I love the "Well, it was the government that forced us to make those loans! We all knew they were risky!!" I know....we'll chop them up in little pieces and sell them as subprime mortgage securities! Who did they sell these subprime mortgage securities to anyways? The world?

[TimeToEvolve]

Go see Inside Job and you will see how Wall Street and the Banksters playing us and this whole thing for their own personal greed.

[UForgotPoland]

The whole board of higher-ups should be executed!

[Oh David]

The event that "triggered" the financial and other market crash, bringing down worldwide economies was not the collapse of Lehman Bros. on September 15, 2008. The markets and economies took that bad news in stride as one more in a series of high-profile investment institutions bankruptcies. In fact, the broad U.S. market fully recovered the approximate 4% loss incurred on that day.

No, the event that "triggered the chain reaction" that led to the deep market decline and economic crisis of confidence from which we are still struggling to recover today occurred almost two weeks later, when a handful of House Republicans led by Eric Cantor reneged at the last minute on their vote to pass TARP on the flimsy premise that then Speaker Nancy Pelosi had said something that hurt their feelings earlier that day.

That day, September 29, 2008, the market fell almost double what it did on Sept. 15, it did NOT bounce back over the next several months and worldwide economies did indeed fall into paralysis on the new awareness that the great United States of America, with an obstructionist minority of Republicans in Congress, might not have the political will or the smarts to do what the world had learned decades earlier was the way you avert a Great Depression.

Look at the market charts for the timeline. The collapse of Lehman Bros. on September 15, 2008 wasn't a good day in the market or in worldwide economiies, but they quickly recovered their loss in both market value and confidence because, after all, the great USA was already planning to pass TARP to keep the bank doors open and commerce moving, right? Wrong. A handful of House Republicans headed by Eric Cantor proved that little theory dead wrong.

Odd that CBS' 60 Minutes did a lovely fluff piece on Eric Cantor just a few months ago and there was no mention of that critical turning point in worldwide economic confidence re this latest massive downturn and Cantor's key role in it. Instead, they continue to promote the cover story about the "trigger" being the collapse of Lehman Bros. when the timeline for the truly big "trigger" occurred two weeks later. Look at an S&P Index chart for that time period and you'll see.

[JRBSVB]

by: jrbsvb

Although the 60 Minute Report on the collapse of Lehman Brothers was very interesting, It still begs the question of what really allowed uncontrolled greed and risk-filled practices (repackaging of highly speculative loans as securities and excessive leveraging on derivitives) to take place in our American financial establisments.

What interests me is why there has not been more light shed on what apprears to be the key which unlocked the "Pandor's Box" that allowed the systemic risks taken by financial institutions, like Lehman Borthers and others, to take place at all. Financial markets should be the servants of our economy not the masters.

The Glass Steagall Act enacted in 1934 was a created to maintain functional separation between investment banking and commercial banking. It was meant to help prevent a future financial meltdown of the U.S. Financial System by maintaining diversity. This law effectively maintained restrictions on commercial banks owning investment banks and investment banks from taking over commercial banks. It also allow better govenmnetal oversight to protect the public from the obviously risky and even illegal practices which have subsequently occurred in the last 12 years

The Financial Services Modernization Act of 1999, known as the Gramm-Leach-Bliley Act effectively removed the restrictions that Glass Steagall had in place for over 50 years. Without the walls which prohibited banks from owning full-service borkerage firms and vice-versa, financial institutions like Citigroup went for the "gold". Thus, bank depositors, for example, were no longer protected from the risks of a stock market collapse like the one that precipitated the "Great Depression".

My concern is that very little scrutiny has been directed at Congress, and the Senate in particular, who overwhemingly passed the Financial Services Modernization Act of 1999, and what rational thought process, if any, took place in the forming of the bill's proposal.

This might be an even more appropriate subject for another "60 Minutre" to investigate.

JRB

[TimeToEvolve]

Lehman and the who Wall Street ponzi scheme scam is an accident waiting to happen. Notice how they ALWAYS get their take. And can do criminal activities and nothing happens. It's disgusting and has to stop.

[lesserof2evil]

But corporations are people too.

[TimeToEvolve]

Only if you are the idiot plastic parasite Milter Robmee :)

[toddboyle]

As a former CPA working for Ernst & Young I did tax returns for Lehman Bros. executives for years. I hang my head in shame at both firms (and both professions). What I cannot forgive is the so-called "regulators" and "prosecutors" who are supposed to be doing their jobs, are PAID big salaries to do their jobs and are absolutely sickening, irresponsible bums. Obviously, the politicians at the top, who control their agencies, are the root of the problem. The next president needs to fire EVERY ONE in the top 5 or 6 levels deep, at the SEC and Federal Reserve.

[TimeToEvolve]

Even Reagan (who would now be a Democrat) prosecuted people for Bankster fraud. I knew that America was done when 1) the Congress refused to impeach Bush Cheney and 2) no one on Wall Street was prosecuted for fraud

[TimeToEvolve]

You forgot already about the Butch-Cheney Crime Family reign of terror? Already? You are worried about $500,000 for Air Force One when Bushoccio spent $2,000,000,000,000 ( and counting) on two un-necessary wars? Wow!

BTW the criminals are already running America. It's called Wall Street.