As we’ve reported before, Valukas previously said that Lehman used an accounting trick called a Repo 105 transaction to disguise its level of leverage at the end of each financial quarter. The SEC never investigated these transactions. “I saw nothing in my investigation to suggest that the SEC asked even the most fundamental questions that might have uncovered this practice early on, before Lehman escalated it to a $50 billion issue,” Valukas said in his prepared testimony.
As to former chief executive Richard Fuld’s potential culpability, Valukas said during testimony that “we concluded in the report that a fact finder could find that Fuld did know [about the transactions].” One witness testified that Fuld knew, there were documents sent to Fuld about the transactions, and two presidents and three chief financial officers knew about the transactions. (Fuld, who testified later in the day, said he does not recall seeing any documents related to Repo 105 transactions).
Valukas was asked at one point if the Repo 105 transactions were meant to fool investors. “There’s no reason to do a Repo 105 transaction if you’re going to disclose it,” he replied.
Valukas also testified that Lehman told the SEC in writing that its firmwide risk appetite limit was a “binding restraint on risk taking” that “could not be exceeded under any circumstances.” But the SEC never batted an eye, he said, when Lehman breached those risk limits. That happened repeatedly in 2007, he said. “Lehman ultimately cured the breaches at the end of the year, not by reducing risk, but by raising risk appetite limits again.”
After Bear Stearns collapsed in March 2008, the SEC and the Federal Reserve Bank of New York embedded teams within Lehman to gather information and monitor Lehman’s condition. As has been reported elsewhere, the regulators repeatedly urged Lehman to raise capital or find a strategic partner. But they didn’t take any action, Valukas said.
Valukas said that in his interviews, officials from both agencies had told him that they were not Lehman’s primary regulator. (Valukas concludes that the SEC was, in fact, Lehman’s regulator). Most disturbing was the SEC’s failure to sound a warning that Lehman’s liquidity claims were wildly off base. In early September, Lehman claimed it had $41 billion in liquid assets–the examiner said the real total was less than half that.
All in all, it was a good performance–Valukas refused to take lawmakers bait and weigh in on the policy debate. But he left little doubt that he believed the regulators charged with safeguarding investors against a catastrophic bank failure had turned a blind eye to the decay on Lehman’s balance sheets.
“They gathered information,” he said. “But no agency regulated.”