SEC begins formal inquiry into Lehman 'tricks'

The 2,200-page report which uncovered the murky world of Repo 105 and off-balance sheet accounting at Lehman Brothers has led to a formal investigation by the Securities and Exchange Commission (SEC) into the investment bank's collapse.

People walk under a ticker sign announcing Lehman Brothers financial losses September 10, 2008 in New York. Photo: Getty

Mary Schapiro, the financial regulator's chairman, disclosed for the first time it is looking into the accounting techniques used by the bank, techniques former chairman Dick Fuld yesterday denied any knowledge of at the time.

Ms Schapiro, who took over the running of the SEC in January last year, four months after Lehman's collapse, said there are questions to be asked about financial disclosures by the bank and its senior management team as a result of Anton Valukas's report into the demise of Lehman: "We're also looking very much at the truthfulness of the disclosure that was in the public documents," she said, during a Congressional hearing on the bank's final days.

"Although each firm is fully responsible for providing accurate information to its regulators, in certain instances it appears there was insufficient follow-up on issues that should have raised potential concerns," she said.

Ms Schapiro admitted the SEC didn't have the staff, the resources or the mind-set to be a prudential regulator of the world's biggest financial institutions at the time of Lehman's collapse. But she said the SEC is considering whether new rules are needed to stop techniques such as Repo 105 – which masked Lehman's debt at the end of a quarter – are necessary.

Her comments were backed up by Christoper Cox, her predecessor, who said that the bank could face charges as a result of Mr Valukas's court-appointed report.

The duo made the comments during the House of Representatives' financial services committee's hearing into Lehman's downfall in September 2008, at which Mr Fuld said he took full responsibility for the bank's collapse: "One day we had a firm. The next day we did not. A lot of people got hurt by that, and I have to live with that."

However he put up a robust if at times drawn-out defence to the inquiring politicians present, blaming speculators and the media for exacerbating the company's problems which ultimately led to its bankruptcy filing.

"We did not need a capital bailout," protested Mr Fuld, who said the bank instead needed a "liquidity bridge" which never came. He also branded the accusation that Lehman's leverage was a debt:equity ratio of 30:1 as a "misconception", saying that at least 50pc of its balance sheet was funded by short-term "matchbook" funding with "very little risk".

The hearing was in part to look back on what led up to Lehman's downfall, and what lessons can be learnt from it.

Tim Geithner, the US Treasury Secretary, told the hearing: "Failure is inevitable in financial systems. The challenge for governments is to devise a system where failures of private firms cannot cause catastrophic damage to the economy."

Congressman Paul Kanjorski agreed, saying: "Lehman's unscrupulous practices illustrate exactly why the Senate needs to quickly pass – and the Congress needs to swiftly finalise – a Wall Street reform bill." The House of Representatives has already passed a bill, devised by the financial services committee, that would force banks to hold more capital and reduce leverage.