The Lehman debacle grows even darker Ernst & Young, in a massive class action for its collusion in the Repo 105 scandal which allowed Lehman Brothers to hide toxic assets and stick them off its balance sheet.
Repo 105 helped Lehman keep its crucial credit rating intact while creating a mountain of toxic assets, much as Enron had done. A repo is short for a repurchase agreement where collateral is exchanged for cash. The trade can be unwound overnight. Lehman could temporarily exchange assets in return for short-term loans and by doing so, temporarily park assets off the books to make those debt levels look better than they did.
This lawsuit has been a long time coming. As I pointed out in my recent column, the defunct investment bank's auditor insolvency examiner Anton Valukas noted in his 2200-page report that claims could be brought against E&Y for ''malpractice'' and ''negligence'' and ''failure to exercise professional care''. Valukas said there was ''sufficient evidence for a trier of fact to conclude that Ernst & Young knew or should have known that those statements were materially misleading and failed to provide necessary disclosures concerning Lehman's use of Repo 105 transactions''. Valukas was in effect putting up a big neon invitation for shareholders itching to take a class action against anyone they could blame.
The big question is whether this will bring down Ernst & Young in the same way that Enron destroyed Andersen. Probably not.
The problem is that Repo 105 accounting trick was totally legal and that will be the defense. If the law allows it, and others were doing it, where's the problem? As Reuters blogger Felix Salmon says, the list of Repo 105 abusers is likely to be long because US accounting rules allow it.
So if are to to fix this situation, regulators will need to review and remove the accounting trickery. But because banks and securities firms make so much money out of it, will they have the guts to do it?
As Tyler Durden notes in the zerohedge blog , some might say it's the beginning of the end for Ernst & Young, but you have to remember we are in a system that endorses accounting trickery so who are we kidding?
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