Why Lehman Brothers really went belly up

"The Wall Street equivalent of a coroner's report." That's what the New York Times calls the 2,200 page tome delivered by bank examiner Anton Valukas about the demise of Lehman Brothers (Lehman Brothers news). It's something of a bombshell and the legal ramifications, at least at the civil level, may well be severe, as it accuses the likes of Dick Fuld (Richard Fuld news) with "manipulation" and "at least grossly negligent."

The reports found that Lehman "used what amounted to financial engineering to temporarily shuffle $50 billion of troubled assets off its books in the months before its collapse in September 2008 to conceal its dependence on leverage, or borrowed money. Senior Lehman executives, as well as the bank's accountants at Ernst & Young, were aware of the moves." Fuld signed off on them. In addition, JPMorgan Chase (NYSE: JPM) and Citigroup (NYSE: C) contributed to the liquidity crunch at Lehman by asking for more collateral. 

The report details the bank's "Repo 105" ploy, the main method of masking the troubled securities. Fuld's lawyer told the paper he "did not know what those transactions were--he didn't structure or negotiate them, nor was he aware of their accounting treatment." Another executive wrote this in email about Repo 105: "I am very aware...it is another drug we're on."  

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