Social relationships may glitter like diamonds, but not all will
last forever. And we need to accept that relationships that promise high
benefits will also carry high costs.
IN our brief lives, we
always look out for good company. Like butterflies, we constantly
flutter in the air, gazing at flowers, and sometimes landing on a petal
which gives us a good feeling like we’ve never had before.
Although
rarely do we linger for long, deep inside we all secretly hope to find
that perfect petal to rest upon forever till the end of our brief lives.
Sometimes, people want much more than a social contract.
They yearn for a closer social relationship, with greater social commitments.
They are willing to invest all their efforts and emotions on a single relationship.
It
can revolve around family, friendship, work or even a political,
religious or social organisation. Wel- come to the Social Company.
Finding
the right petal is very much like starting the right business company. A
company is formed by business people of similar business interests.
They
become shareholders and partners, and they have rights and
responsibilities against each other. Whilst a contract is used for a
one-off transaction, a company is used to get down to serious business
for the long haul.
When a company is riding the high tide of
success, its members have every reason to grow in confidence of greater
things to come.
Why fear for the future? When the party is
rocking, everybody’s singing and dancing, and nobody cares too much
about who’s cleaning up the pool and picking up the broken shards later
on.
But sometimes it’s good to turn on the lights, and check that
everything’s alright. When the party’s over, and it will be over,
there’s a heavy hangover waiting the morning after.
Likewise,
when a company collapses, and no company is too big to fail, its
shareholders, creditors and employees are bound to suffer heavy losses.
Think of Enron, Lehman Brothers and Kodak.
That’s the difference
between a mere social contract, and a social company. In a breach of
contract, only the parties involved will be busy squabbling with each
other.
However, in a breakdown of a company, there’s collateral damage to various third parties.
Thus,
as much as it’s important and cool to live the moment, it’s also
important (though less cool) to occasionally stop to think, have a
sobering reality check, and account for what’s been said and done.
Under the law, it is mandatory for a company to perform annual audits on their financial affairs.
Likewise,
people should constantly review their deep social relationships, to
make sure that their company doesn’t turn from good to bad.
A
simple example of a social company is marriage. It’s about two people
exchanging vows to stick together through good times and bad times.
Sadly,
nowadays, many people fail to follow through such vows. Divorces may be
hard on the innocent spouse, but it’s definitely devastating to the
innocent children.
They are robbed from enjoying a normal
childhood filled with love and affection, and sometimes, deprived from
sufficient maintenance and educational support.
So before
entering into a marriage, think hard about the serious commitments that
come with it, and the catastrophic consequences that follow if the
marriage falls apart.
Think about your future children. Think
about your relatives who will be forced to take sides, and spilt into
irreconcilable clans.
Problems may also arise during the
courtship stage, prior to marriage. Many of us are guilty of being
consumed by love, or at least what we perceive as love.
After
all, two’s a company, three’s a crowd. It’s easy to manage a company of
two, whilst letting the rest of our family and friends fall by the
wayside.
We ignore their calls and advice. We tell them to mind their own business and get the hell out of our lives.
But the easy thing to do is not always the best. Someday, you will long for their company.
Being married to our career can also be taxing on our social lives.
We burn all our days and nights for the sake of levelling up our corporate status.
We console ourselves that it’s only momentarily, until comes harvest time when we can reap the fruits of our labour.
But
there is truly no end to the cycle. By the time we eventually find the
pot of gold at the end of the rainbow, chances are we are too old, too
weak and too late to share our riches with our loved ones.
These are mere examples of the larger problem, which is putting one’s entire mind, heart and soul into a single social company.
The key is to be aware that every deep social relationship takes a toll on our other relationships.
Social relationships may glitter like diamonds, but not all will last forever.
And we need to accept that relationships that promise high benefits will also carry high costs.
Hence, we need to think deeply before we leap into any social company. If we cannot bear the high cost, then don’t.
But if we do, we need to be bold enough to back out from a social company once the cost spirals beyond what we can bear.
In our brief lives, someday our wings will turn brittle and our favourite flowers will wilt away.
Until that day comes, we should cherish the freedom of the skies.
Sometimes, we may flutter too closely to a pretty petal in a thicket of thorns, and get our wings clipped.
But even then, we should never fear to flutter away. For there will always be a bed of flowers below to catch our fall.
Putik Lada By Raphael Kok
> The
writer is a young lawyer. Putik Lada, or pepper buds in Malay, captures
the spirit and intention of this column – a platform for young lawyers
to articulate their views and aspirations about the law, justice and a
civil society. For more information about the young lawyers, visit www.malaysianbar.org.my
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Showing posts with label Lehman Brothers. Show all posts
Showing posts with label Lehman Brothers. Show all posts
Friday, October 5, 2012
Wednesday, May 16, 2012
How will JPMorgan's $2 billion loss affect American banking rules? Senior executives to leave!
A JPMorgan office building is shown, Monday, May 14, 2012, in New York. JPMorgan Chase, the largest bank in the United States, said Thursday that it lost $2 billion in the past six weeks in a trading portfolio designed to hedge against risks the company takes with its own money. (AP Photo/Mark Lennihan)
WASHINGTON—The $2 billion
trading loss at JPMorgan Chase has renewed calls for stricter oversight
of Wall Street banks. Two years after Congress passed an overhaul of
financial rules, many of those changes have yet to be finalized.
JPMorgan's misstep gives advocates of stronger regulation an opening to argue that regulators should toughen their approach.
The
Obama administration has argued that it went as hard on banks as
possible without further upsetting global finance. Now Democratic
lawmakers and administration officials say JPMorgan case proves that
more change is needed.
Still,
many in the industry warn against reading too much into one trading
loss. They say losing money is an inevitable part of taking risk, as
banks must.
Some fear that
after JPMorgan's announcement, regulators will greet industry concerns
with more skepticism as they flesh out key parts of the overhaul law.
Here's a look at four key parts of the financial overhaul and how they might be affected by JPMorgan's losses:
This
provision restricts banks' ability to trade for their own profit, a
practice known as proprietary trading. It is named for former Federal
Reserve Chairman Paul Volcker.
--
Battle lines: Banks say it disrupts two of their core functions:
Creating markets for customers who want to buy financial products and
managing their own risk to prevent major losses.
They
say proprietary trading was not a cause of the 2008 financial crisis
and the rule is a means of political revenge on an unpopular industry.
Advocates of stronger regulation argue that the rule would have
prevented JPMorgan's loss. They say the trades were made to boost bank
profits, not to protect against market-wide risk.
--
State of play: A draft of the rule satisfied neither side. It includes
exceptions for hedging against risk and for market-making, but banks say
they the exceptions are too narrow and difficult to enforce. It's
nearly impossible to tell whether a bank bought or sold something for
itself or for customers.
--
JPMorgan effect: Attitudes about the Volcker rule are likely to shift as
a result of JPMorgan's disclosure, experts say. Even if JPMorgan's
trades truly were a failed attempt to protect against risk, the
resulting loss strengthens the argument that regulators should err on
the side of scrutinizing trades.
During
the 2008 financial crisis and the bailouts that followed, the
government was unwilling to let the biggest banks fail, for fear of
upending the financial system. As part of the overhaul, Congress created
a process to shut down financial companies whose failure could threaten
the system.
-- Battle lines: Most players agree that this is a good idea, despite some differences on the details.
--
State of play: The Federal Deposit Insurance Corp., the agency
responsible for closing smaller banks that falter, has taken the lead on
writing rules to shut down big firms. Most observers believe that the
FDIC, under acting chairman Martin Gruenberg, is on track toward
creating a system that markets would trust to close a big bank.
Banks have been working with
regulators to create "living wills" detailing how they would wind
themselves down without disrupting markets. This exercise has forced
them to look more deeply at their operations -- a defense against the
accusation that banks have grown "too big to manage."
However,
U.S. regulators can't do it alone. A big problem after the failure of
Lehman Brothers investment bank in 2008 was what to do with its overseas
operations. It wasn't clear which regulators were in charge, or whose
bankruptcy court would control the disposal of Lehman's assets.
Regulators
are negotiating with their European counterparts, but it could take
years before they agree on rules that would allow a global company to
dismantle itself without spreading confusion through the financial
markets.
-- JPMorgan effect:
Like other banks, JPMorgan supports giving the government the power to
dismantle a failing bank. CEO Jamie Dimon said so clearly in an
appearance on "Meet the Press" on Sunday.
JPMorgan's loss probably doesn't affect the likelihood that regulators will break up a bank in the future. The loss wasn't nearly big enough to threaten JPMorgan with failure.
JPMorgan's loss probably doesn't affect the likelihood that regulators will break up a bank in the future. The loss wasn't nearly big enough to threaten JPMorgan with failure.
JPMorgan's
bets involved complex investments known as derivatives whose value is
based on the value of another investment. Before 2008, many derivatives
were traded as individual contracts between banks and hedge funds,
without any transparency for regulators. The financial overhaul sought
to bring more derivatives onto regulated exchanges and force derivatives
traders to put up more cash in case their bets turned against them.
--
Battle lines: Overhauling the rules governing this market, estimated at
$650 trillion, has proved as complex as the investments themselves.
Banks support many parts of the overhaul but generally argue that
forcing too much transparency would make it harder and more expensive
for companies to use derivatives as a hedge against risk. They say it is
an unnecessary cost that would be spread across all types of companies.
The
agency most responsible for implementing these rules, the Commodity
Futures Trading Commission, faces the threat of a much smaller budget
than it says it needs to write the rules and increase its oversight of
the derivatives market.
Advocates
for stronger regulation argue that the new rules apply to the sorts of
derivatives believed to have magnified the financial crisis -- and
JPMorgan's losses -- but do not threaten investments like energy
futures, for example, which airlines use to control fuel costs. They say
banks are just trying to protect a lucrative business that other
companies can't compete in today.
--
State of play: About half the rules are done, but many crucial
questions have yet to be decided. The rules will be phased in this fall
through next spring. Banks are lobbying hard to protect their hold on
this profitable business. Banks support pending legislation that would
limit U.S. regulators' control over derivatives trades by their overseas
affiliates.
-- JPMorgan
effect: Fairly or not, JPMorgan's big loss on derivatives trades is
likely to revive scrutiny of that market. That could give advocates of
tighter rules some juice in ongoing negotiations with regulators. It
also could empower those who believe the budgets of the CFTC and
Securities and Exchange Commission should be increased to reflect the
need for broader oversight.
BANK OVERSIGHT
The
overhaul calls on the Federal Reserve to oversee the biggest and most
important financial companies and apply a stricter set of standards for
financial fitness. For example, the companies must hold more capital as a
buffer against future losses. Before, the biggest banks were overseen
by a patchwork of regulations.
--
Battle lines: Industry officials say they're working with regulators to
fine-tune how big companies will be overseen. They are concerned, for
example, about the extra costs imposed on the big companies to offset
the extra risk they create in the financial system.
--
State of play: Industry officials say many of these changes were
happening behind the scenes even before the financial overhaul was
passed in 2010. They say banks already are better capitalized and meet
other standards laid out by regulators.
It's
still not known exactly which financial companies will fall into this
category. The biggest banks are included automatically. Regulators have
more discretion when it comes what are known as non-bank financial
companies, such as huge insurance companies. Companies on the margin
reportedly are lobbying hard to avoid this designation.
--
JPMorgan effect: As the nation's biggest bank, JPMorgan automatically
will face stricter oversight. The trading loss there is unlikely to
affect detailed negotiations about how exactly such companies will be
overseen.
By
Daniel Wagner AP Business WriterTuesday, July 12, 2011
A new dawn in world economy?
Tweet
A new dawn in world economy?
Title: Uprising
Will Emerging Markets Shape or Shake the World Economy?
Author: George Magnus
Publisher: John Wiley & Sons Ltd
At first glance, the title Uprising gives one the impression that the book is concerned about rebellion or revolt, or matters related to violent political conflicts involving armed resistance.
However, after reading its small-print sub-title Will Emerging Markets Shape or Shake the World Economy? and a quick browsing through its content, one realises that the book is actually an in-depth analysis of the contemporary global economy, in particular the influence and impact of the new emerging markets with the focus on the shift of economic power from the West to the Orient, especially China.
Its author George Magnus is a prominent investment banker and global economist, who has been acknowledged as the key analyst who had predicted the recent world financial crisis in early 2007. He is a senior economic adviser at the UBS Investment Bank in London, and had held similar posts at the Union Bank of Switzerland and SG Warnurg.
Magnus is also a popular and respected public commentator on world financial matters, contributing frequently to the Financial Times of London, the BBC, Bloomberg, the CNBC and several other prominent economic, business or financial publications. He is also author of the 2008 definitive international economic analytical book The Age of Aging: How Demographics are Changing the Global Economy and Our World.
Hence, Uprising is not simply any ordinary run-of-the-mill book, but a major authoritative book which anyone concerned with the contemporary global economy and the direction it is moving should read and reflect deeply on. What Magnus said in his book should not be treated lightly as he is no false prophet when it comes to matters of international economic wheeling and dealing.
Magnus begins his book with an incisive narration and analysis of the world events building up from the first year of the new 21st century to the current global economic scenario. He gives a sharp observation, and penetrating and critical analysis of events in China, including the implications of a world sporting event like the August 2008 China Olympic Games, which took place sandwiched between the May 2008 Great Sichuan Earthquake which claimed nearly 70,000 lives, and the October 2008 world financial earthquake following the collapse of the US investment bank Lehman Brothers, which, as Magnus puts it, “brought the world economy to the brink of an economic Armageddon, unrivalled since the Great Depression of the 1930s”.
In his 358-page book, Magnus sets out to explain the impact and effect that the 2008 financial crisis has on the major emerging markets, and why the rich developed Western nations is going all out to challenge and curb their increasing threats, especially of China and India, in the global economic order.
A major theme of the book as Magnus puts it, is that “the West’s financial crisis sparked a major change in the structure of the world economy, and that China’s capacity to also embark on structural change voluntarily is weak, unless it is specially geared to the long-run interests of the Communist Party’s grip on power”.
This authoritative definitive book examines the two major economic powers and leading emerging markets in Asia – China and India – and several minor but significant markets in Eastern Europe, and also Turkey.
Currently, the emerging markets are headline news. And the question uppermost in the minds of political and business leaders in all these emerging markets of the world is what will happen following the 2008 world financial crisis and what does the future mean and hold for global finance, trade and commerce.
Magnus provides significant suggestions and pragmatic guidelines to resolve this global economic dilemma.
He presents a persuasive and cogent perspective on China and the other emerging markets from a post-financial crisis situation, urging those with economic potency to seriously reconsider their attitude and approach to the emerging new world economic order. A fundamental matter to critically and analytically examine is the question of what economic reforms are needed to meet the new global goals.
Magnus should most be appreciated for offering a convincing critical analysis of what the future global economy may look like – not merely for the emerging markets, but for policy-makers, businesses, financiers, investors, economists, and even ordinary citizens concerned with the economic well-being of their nation and the world.
Magnus deals with matters such as climate change, commodity prices, and world demographic trends, and gives valuable insights into the implications of these issues for the world economy.
One significant question Magnus deals with is whether the 21st century belongs to China. The Communist nation operating on enterprise capitalism for the last 30 years is now all set to regain what Magnus has pointed out in his book as its premier economic power it held from ancient times till the early part of the 19th century.
For all intent and purpose, China is set for an economic renaissance. It will soon regain its ancient mantle as a world economic power it lost when its reticent conservative bureaucracy forced it into international relation isolation while Europe moved economically forward with an industrial revolution in the 19th century.
The Uprising by the plucky economic seer Magnus is certainly essential reading for anyone who wants to understand and care about the future of the global economy.
Understanding the context, content and challenges of the world economic scenario during the first decade of this century is certainly vital for those responsible for making policies, plans and programmes to chart the direction, set the trend, and strive for vigorous economic success in their nations.
Thanks to Magnus, his book has provided the seeds for the planting, growing and harvesting of serious objective thinking, critical pragmatic evaluation, constructive practical ideas, and effective and efficient creative implementation of economic policies, plans and programmes.
http://www.dump.com/2011/01/
A new dawn in world economy?
Review by Thomas Lee tomlee48@gmail.com
Title: Uprising
Will Emerging Markets Shape or Shake the World Economy?
Author: George Magnus
Publisher: John Wiley & Sons Ltd
At first glance, the title Uprising gives one the impression that the book is concerned about rebellion or revolt, or matters related to violent political conflicts involving armed resistance.
However, after reading its small-print sub-title Will Emerging Markets Shape or Shake the World Economy? and a quick browsing through its content, one realises that the book is actually an in-depth analysis of the contemporary global economy, in particular the influence and impact of the new emerging markets with the focus on the shift of economic power from the West to the Orient, especially China.
Its author George Magnus is a prominent investment banker and global economist, who has been acknowledged as the key analyst who had predicted the recent world financial crisis in early 2007. He is a senior economic adviser at the UBS Investment Bank in London, and had held similar posts at the Union Bank of Switzerland and SG Warnurg.
Magnus is also a popular and respected public commentator on world financial matters, contributing frequently to the Financial Times of London, the BBC, Bloomberg, the CNBC and several other prominent economic, business or financial publications. He is also author of the 2008 definitive international economic analytical book The Age of Aging: How Demographics are Changing the Global Economy and Our World.
Hence, Uprising is not simply any ordinary run-of-the-mill book, but a major authoritative book which anyone concerned with the contemporary global economy and the direction it is moving should read and reflect deeply on. What Magnus said in his book should not be treated lightly as he is no false prophet when it comes to matters of international economic wheeling and dealing.
Magnus begins his book with an incisive narration and analysis of the world events building up from the first year of the new 21st century to the current global economic scenario. He gives a sharp observation, and penetrating and critical analysis of events in China, including the implications of a world sporting event like the August 2008 China Olympic Games, which took place sandwiched between the May 2008 Great Sichuan Earthquake which claimed nearly 70,000 lives, and the October 2008 world financial earthquake following the collapse of the US investment bank Lehman Brothers, which, as Magnus puts it, “brought the world economy to the brink of an economic Armageddon, unrivalled since the Great Depression of the 1930s”.
In his 358-page book, Magnus sets out to explain the impact and effect that the 2008 financial crisis has on the major emerging markets, and why the rich developed Western nations is going all out to challenge and curb their increasing threats, especially of China and India, in the global economic order.
A major theme of the book as Magnus puts it, is that “the West’s financial crisis sparked a major change in the structure of the world economy, and that China’s capacity to also embark on structural change voluntarily is weak, unless it is specially geared to the long-run interests of the Communist Party’s grip on power”.
This authoritative definitive book examines the two major economic powers and leading emerging markets in Asia – China and India – and several minor but significant markets in Eastern Europe, and also Turkey.
Currently, the emerging markets are headline news. And the question uppermost in the minds of political and business leaders in all these emerging markets of the world is what will happen following the 2008 world financial crisis and what does the future mean and hold for global finance, trade and commerce.
Magnus provides significant suggestions and pragmatic guidelines to resolve this global economic dilemma.
He presents a persuasive and cogent perspective on China and the other emerging markets from a post-financial crisis situation, urging those with economic potency to seriously reconsider their attitude and approach to the emerging new world economic order. A fundamental matter to critically and analytically examine is the question of what economic reforms are needed to meet the new global goals.
Magnus should most be appreciated for offering a convincing critical analysis of what the future global economy may look like – not merely for the emerging markets, but for policy-makers, businesses, financiers, investors, economists, and even ordinary citizens concerned with the economic well-being of their nation and the world.
Magnus deals with matters such as climate change, commodity prices, and world demographic trends, and gives valuable insights into the implications of these issues for the world economy.
One significant question Magnus deals with is whether the 21st century belongs to China. The Communist nation operating on enterprise capitalism for the last 30 years is now all set to regain what Magnus has pointed out in his book as its premier economic power it held from ancient times till the early part of the 19th century.
For all intent and purpose, China is set for an economic renaissance. It will soon regain its ancient mantle as a world economic power it lost when its reticent conservative bureaucracy forced it into international relation isolation while Europe moved economically forward with an industrial revolution in the 19th century.
The Uprising by the plucky economic seer Magnus is certainly essential reading for anyone who wants to understand and care about the future of the global economy.
Understanding the context, content and challenges of the world economic scenario during the first decade of this century is certainly vital for those responsible for making policies, plans and programmes to chart the direction, set the trend, and strive for vigorous economic success in their nations.
Thanks to Magnus, his book has provided the seeds for the planting, growing and harvesting of serious objective thinking, critical pragmatic evaluation, constructive practical ideas, and effective and efficient creative implementation of economic policies, plans and programmes.
Understanding The Rise Of China [VIDEO]
http://www.dump.com/2011/01/ 25/understanding-the-rise-of- china-video/
Tuesday, March 23, 2010
Ernst & Young: Lehman accounting in accordance with US's GAAP
Auditors at Ernst & Young [ERNY.UL] are firing back at allegations that the "Big Four" auditor failed to detect accounting tricks at collapsed investment bank Lehman Brothers Holdings Inc
Following are excerpts from a letter sent by Ernst & Young partners to client audit committees in the past few days.
--------------------------------------------------------
The concept of an examiner's report is a feature of U.S. bankruptcy law. It does not represent the views of a court or a regulatory body, nor is the Report the result of a legal process. Instead, an examiner's report is intended to identify potential claims that, if pursued, may result in a recovery for the bankrupt company or its creditors.
EY is confident we will prevail should any of the potential claims identified against us be pursued.
We wanted to provide you with EY's perspective on some of the potential claims in the Examiner's Report. We also wanted to address certain media coverage and commentary on the Examiner's Report that has at times been inaccurate, if not misleading.
A few key points are set out below. General Comments:
-- EY's last audit was for the year ended November 30, 2007. Our opinion stated that Lehman's financial statements for 2007 were fairly presented in accordance with U.S. GAAP, and we remain of that view. We reviewed but did not audit the interim periods for Lehman's first and second quarters of fiscal 2008.
-- Lehman's bankruptcy was the result of a series of unprecedented adverse events in the financial markets. The months leading up to Lehman's bankruptcy were among the most turbulent periods in our economic history. Lehman's bankruptcy was caused by a collapse in its liquidity, which was in turn caused by declining asset values and loss of market confidence in Lehman. It was not caused by accounting issues or disclosure issues.
-- The Examiner identified no potential claims that the assets and liabilities reported on Lehman's financial statements (approximately $691 billion and $669 billion respectively, at November 30, 2007) were improperly valued or accounted for incorrectly.
Accounting and Disclosure Issues Relating to Repo 105 Transactions:
-- There has been significant media attention about potential claims identified by the Examiner related to what Lehman referred to as "Repo 105" transactions. What has not been reported in the media is that the Examiner did not challenge Lehman's accounting for its Repo 105 transactions.
-- As recognized by the Examiner, all investment banks used repo transactions extensively to fund their operations on a daily basis; these banks all operated in a high-risk, high-leverage business model. Most repo transactions are accounted for as financings; some (the Repo 105 transactions) are accounted for as sales if they meet the requirements of SFAS 140.
-- The Repo 105 transactions involved the sale by Lehman of high quality liquid assets (generally government-backed securities), in return for which Lehman received cash. The media reports that these were "sham transactions" designed to off-load Lehman's "bad assets" are inaccurate.
-- Because effective control of the securities was surrendered to the counterparty in the Repo 105 arrangements, the accounting literature (SFAS 140) required Lehman to account for Repo 105 transactions as sales rather than financings.
-- The potential claims against EY arise solely from the Examiner's conclusion that these transactions ($38.6 billion at November 30, 2007) should have been specifically disclosed in the footnotes to Lehman's financial statements, and that Lehman should have disclosed in its MD&A the impact these transactions would have had on its leverage ratios if they had been recorded as financing transactions.
-- While no specific disclosures around Repo 105 transactions were reflected in Lehman's financial statement footnotes, the 2007 audited financial statements were presented in accordance with US GAAP, and clearly portrayed Lehman as a leveraged entity operating in a risky and volatile industry. Lehman's 2007 audited financial statements included footnote disclosure of off balance sheet commitments of almost $1 trillion.
-- Lehman's leverage ratios are not a GAAP financial measure; they were included in Lehman's MD&A, not its audited financial statements. Lehman concluded no further MD&A disclosures were required; EY did not take exception to that judgment.
-- If the Repo 105 transactions were treated as if they were on the balance sheet for leverage ratio purposes, as the Examiner suggests, Lehman's reported gross leverage would have been 32.4 instead of 30.7 at November 30, 2007. Also, contrary to media reports, the decline in Lehman's reported leverage from its first to second quarters of 2008 was not a result of an increased use of Repo 105 transactions. Lehman's Repo 105 transaction volumes were comparable at the end of its first and second quarters.
Handling of the Whistleblower's Issues:
-- The media has inaccurately reported that EY concealed a May 2008 whistleblower letter from Lehman's Audit Committee. The whistleblower letter, which raised various significant potential concerns about Lehman's financial controls and reporting but did not mention Repo 105, was directed to Lehman's management. When we learned of the letter, our lead partner promptly called the Audit Committee Chair; we also insisted that Lehman's management inform the Securities and Exchange Commission and the Federal Reserve Bank of the letter. EY's lead partner discussed the whistleblower letter with the Lehman Audit Committee on at least three occasions during June and July 2008.
--In the investigations that ensued, the writer of the letter did briefly reference Repo 105 transactions in an interview with EY partners. He also confirmed to EY that he was unaware of any material financial reporting errors. Lehman's senior executives did not advise us of any reservations they had about the company's Repo 105 transactions.
-- Lehman's September 2008 bankruptcy prevented EY from completing its assessment of the whistleblower's allegations. The allegations would have been the subject of significant attention had EY completed its third quarter review and 2008 year-end audit.
Should any of the potential claims be pursued, we are confident we will prevail.
Following are excerpts from a letter sent by Ernst & Young partners to client audit committees in the past few days.
--------------------------------------------------------
The concept of an examiner's report is a feature of U.S. bankruptcy law. It does not represent the views of a court or a regulatory body, nor is the Report the result of a legal process. Instead, an examiner's report is intended to identify potential claims that, if pursued, may result in a recovery for the bankrupt company or its creditors.
EY is confident we will prevail should any of the potential claims identified against us be pursued.
We wanted to provide you with EY's perspective on some of the potential claims in the Examiner's Report. We also wanted to address certain media coverage and commentary on the Examiner's Report that has at times been inaccurate, if not misleading.
A few key points are set out below. General Comments:
-- EY's last audit was for the year ended November 30, 2007. Our opinion stated that Lehman's financial statements for 2007 were fairly presented in accordance with U.S. GAAP, and we remain of that view. We reviewed but did not audit the interim periods for Lehman's first and second quarters of fiscal 2008.
-- Lehman's bankruptcy was the result of a series of unprecedented adverse events in the financial markets. The months leading up to Lehman's bankruptcy were among the most turbulent periods in our economic history. Lehman's bankruptcy was caused by a collapse in its liquidity, which was in turn caused by declining asset values and loss of market confidence in Lehman. It was not caused by accounting issues or disclosure issues.
-- The Examiner identified no potential claims that the assets and liabilities reported on Lehman's financial statements (approximately $691 billion and $669 billion respectively, at November 30, 2007) were improperly valued or accounted for incorrectly.
Accounting and Disclosure Issues Relating to Repo 105 Transactions:
-- There has been significant media attention about potential claims identified by the Examiner related to what Lehman referred to as "Repo 105" transactions. What has not been reported in the media is that the Examiner did not challenge Lehman's accounting for its Repo 105 transactions.
-- As recognized by the Examiner, all investment banks used repo transactions extensively to fund their operations on a daily basis; these banks all operated in a high-risk, high-leverage business model. Most repo transactions are accounted for as financings; some (the Repo 105 transactions) are accounted for as sales if they meet the requirements of SFAS 140.
-- The Repo 105 transactions involved the sale by Lehman of high quality liquid assets (generally government-backed securities), in return for which Lehman received cash. The media reports that these were "sham transactions" designed to off-load Lehman's "bad assets" are inaccurate.
-- Because effective control of the securities was surrendered to the counterparty in the Repo 105 arrangements, the accounting literature (SFAS 140) required Lehman to account for Repo 105 transactions as sales rather than financings.
-- The potential claims against EY arise solely from the Examiner's conclusion that these transactions ($38.6 billion at November 30, 2007) should have been specifically disclosed in the footnotes to Lehman's financial statements, and that Lehman should have disclosed in its MD&A the impact these transactions would have had on its leverage ratios if they had been recorded as financing transactions.
-- While no specific disclosures around Repo 105 transactions were reflected in Lehman's financial statement footnotes, the 2007 audited financial statements were presented in accordance with US GAAP, and clearly portrayed Lehman as a leveraged entity operating in a risky and volatile industry. Lehman's 2007 audited financial statements included footnote disclosure of off balance sheet commitments of almost $1 trillion.
-- Lehman's leverage ratios are not a GAAP financial measure; they were included in Lehman's MD&A, not its audited financial statements. Lehman concluded no further MD&A disclosures were required; EY did not take exception to that judgment.
-- If the Repo 105 transactions were treated as if they were on the balance sheet for leverage ratio purposes, as the Examiner suggests, Lehman's reported gross leverage would have been 32.4 instead of 30.7 at November 30, 2007. Also, contrary to media reports, the decline in Lehman's reported leverage from its first to second quarters of 2008 was not a result of an increased use of Repo 105 transactions. Lehman's Repo 105 transaction volumes were comparable at the end of its first and second quarters.
Handling of the Whistleblower's Issues:
-- The media has inaccurately reported that EY concealed a May 2008 whistleblower letter from Lehman's Audit Committee. The whistleblower letter, which raised various significant potential concerns about Lehman's financial controls and reporting but did not mention Repo 105, was directed to Lehman's management. When we learned of the letter, our lead partner promptly called the Audit Committee Chair; we also insisted that Lehman's management inform the Securities and Exchange Commission and the Federal Reserve Bank of the letter. EY's lead partner discussed the whistleblower letter with the Lehman Audit Committee on at least three occasions during June and July 2008.
--In the investigations that ensued, the writer of the letter did briefly reference Repo 105 transactions in an interview with EY partners. He also confirmed to EY that he was unaware of any material financial reporting errors. Lehman's senior executives did not advise us of any reservations they had about the company's Repo 105 transactions.
-- Lehman's September 2008 bankruptcy prevented EY from completing its assessment of the whistleblower's allegations. The allegations would have been the subject of significant attention had EY completed its third quarter review and 2008 year-end audit.
Should any of the potential claims be pursued, we are confident we will prevail.
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