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UNITEDSTATESBANKRUPTCYCOURT

SOUTHERNDISTRICTOFNEWYORK

x
:

Inre
:

:
LEHMANBROTHERSHOLDINGSINC.,
:
etal.,
:

Debtors.
:
x

Chapter11CaseNo.

0813555(JMP)

(JointlyAdministered)

REPORTOF
ANTONR.VALUKAS,EXAMINER

March11,2010

Jenner&BlockLLP
353N.ClarkStreet
Chicago,IL606543456
3122229350

919ThirdAvenue
37thFloor
NewYork,NY100223908
2128911600

CounseltotheExaminer

VOLUME8OF9
Appendices 8 - 22

EXAMINERS REPORT
TABLE OF APPENDICES
VOLUME 6
Tab 1

Legal Issues

VOLUME 7
Tab 2

Glossary, Acronyms & Abbreviations

Tab 3

Key Individuals

Tab 4

Witness Interview List

Tab 5

Document Collection & Review

Tab 6

Lehman Systems

Tab 7

Bibliography

VOLUME 8
Tab 8

Risk Management Organization and Controls

Tab 9

Risk Appetite and VaR Usage Versus Limits Chart

Tab 10

Calculation of Certain Increases in Risk Appetite Limits

Tab 11

Compensation

Tab 12

Valuation - Archstone

Tab 13

Survival Strategies Supplement

Tab 14

Valuation - CDO

Tab 15

Narrative of September 4 Through 15, 2008

Tab 16

Valuation - Residential Whole Loans

Tab 17

Repo 105

Tab 18

Summary of Lehman Collateral at JPMorgan

Tab 19

Lehmans Dealings with Bank of America

Tab 20

Knowledge of Senior Lehman Executives Regarding The


Inclusion of Clearing-Bank Collateral in the Liquidity Pool

Tab 21

LBHI Solvency Analysis

Tab 22

Preferences Against LBHI and Other Lehman Entities

VOLUME 9
Tab 23

Analysis of APB, Journal Entry, Cash Disbursement, and


JPMorgan Collateral

Tab 24

Foreign Exchange Transactions

Tab 25

Intercompany Transactions Occurring Within Thirty Days Before


Bankruptcy

Tab 26

CUSIPs with Blank Legal Entity Identifiers

Tab 27

CUSIPs Not Associated with an LBHI Affiliate

Tab 28

CUSIPs Associated Solely with an LBHI Affiliate

Tab 29

CUSIPs Associated with Both LBI and LBHI Affiliates

Tab 30

CUSIPs Associated with Subordinated Entities

Tab 31

CUSIPs Associated with LBHI Affiliates Not Delivered to LBI in a


Financing Trade

Tab 32

September 19, 2008 GFS Dataset

Tab 33

Summary Balance Sheets of LBHI Affiliates

Tab 34

Tangible Asset Balance Sheet Variations

ii

APPENDIX8:RISKMANAGEMENTORGANIZATIONAND
CONTROLS
This Appendix summarizes: Lehmans risk management function, Lehmans
most pertinent riskrelated controls, who at Lehman was tasked with monitoring and
enforcingthefirmsriskmanagementmetricsandcontrolsandhowLehmansofficers
describedthefirmsriskmanagementfunctiontoitsBoardofDirectors(Board)1,the
ratingagencies,andregulators.
I.

OVERVIEW
Lehman viewed risk management as one of its core competencies.2 Lehman

maintained an extensive risk management system, which was operated by its Global
RiskManagementGroup(GRMG),riskmanagersembeddedinthevariousbusiness
lines, and its Finance Department. The firm allocated substantial resources to
measuring, analyzing, and managing risk.3 By 2008, Lehmans GRMG had grown to
include roughly 450 professionals, with staff in each of the firms trading centers.4

1ReferencestotheBoardofDirectorsinthisAppendixrefertoLehmansoutsidedirectors,nottoFuld,

whowasLehmansChiefExecutiveOfficer,inadditiontoservingasChairmanoftheBoard.
2 Lehman,RiskUpdatePresentationtoLehmanBoardofDirectors(July18,2006),atp.2[LBEXDOCID
2125293].
3Lehman,QuantitativeRiskManagementPolicyManual(Sept.2007),atp.3[LBEXDOCID384020].
4 Lehman, Risk Management Update Presentation to Lehman Board of Directors (Apr.15, 2008),at p. 3
[LBHI_SEC07940_027909]; Madelyn Antoncic, Risk Management Presentation to Standard & Poors
[Draft](Aug.17,2007),atp.14[LBEXDOCID342851],attachedtoemailfromLisaRathgeber,Lehman,
to Jeffrey Goodman, Lehman, et al. (Aug. 15, 2007) [LBEXDOCID 305205]; Lehman, Risk Update
PresentationtoLehmanBoardofDirectors(July18,2006),atp.7[LBEXDOCID2125293].

Within the industry, Lehmans risk management function was widely regarded as
amongthebest.5
GRMGs mission was to protect and enhance the value of the franchise by
proactivelyidentifying,evaluating,monitoringandcontrollingFirmmarket,creditand
operational risks.6 In addition to understanding and measuring the risks associated
withthefirmsbusinessactivities,GRMGwasresponsiblefordevelopingvariousrisk
relatedpolicies,procedures,models,andlimits.7
II.

RISKMANAGEMENTGROUPDIVISIONSANDDIVISIONAL
FUNCTIONS
GRMG was organized into various departments, including: Market Risk

Management (MRM); Credit Risk Management (CRM); Operational Risk


Management (ORM); Quantitative Risk Management (QRM); Sovereign Risk
Management (SRM); Investment Management Division Risk Management
(IMDRM)andRiskControlandAnalysis.8OutsideoftheUnitedStates,GRMGwas

5 See, e.g., Bill Brodows & Til Schuermann, FRBNY, Primary Dealer Monitoring: Initial Assessment of
CSEs (May 12, 2008), at pp. 1213 [FRBNY to Exam. 000017]; Lehman, Risk Update Presentation to
LehmanBoardofDirectors(July18,2006),atp.9[LBEXDOCID2125293].
6Lehman,RiskManagementUpdatePresentationtoLehmanBoardofDirectors(Apr.15,2008),atp.2
[LBHI_SEC07940_027909].
7 SEC Division of Market Regulation, Lehman Brothers Consolidated Supervised Entity Market and
CreditRiskReview(2005),atp.3[LBEXDOCID2125011],attachedtoemailfromMichelleDavis,SEC,
toDavidOman,Lehman,etal.(Apr.21,2006)[LBEXDOCID2068428].
8 MadelynAntoncic,RiskManagementPresentationtoStandard&Poors[Draft](Aug.17,2007),atp.11
[LBEXDOCID342851],attachedtoemailfromLisaRathgeber,Lehman,toJeffreyGoodman,Lehman,et
al.(Aug.15,2007)[LBEXDOCID305205].

9
dividedfurtherintoregionaldepartments. EachdepartmentwithinGRMGwasledby
aglobalorregionalheadwhoreportedtothefirmstopriskmanagerdirectly.10
A. MarketRiskManagement
Market risk refers to the possibility that changes in market rates, prices and
volatilitiescouldcauseaninvestmentportfolioorfinancialinstrumenttolosevalue.11
Typically,sourcesofmarketriskfallintothreecategories,includingmovementsin:(1)
interestrates;(2)equityprices;or(3)foreignexchangerates.12
MRM was responsible for measuring, monitoring, reporting, and analyzing the
firmsexposuretomarketrisk.13Inaddition,MRMwaschargedwithensuringthatthe
market risks associated with the firms business activities were captured by an
appropriate metric14 and monitoring the business lines adherence to certain risk
limits.15

Id.
Lehman,RiskUpdatePresentationtoLehmanBoardofDirectors(July18,2006),atp.4[LBEXDOCID
2125293].
11Lehman,ICAAPSupportingDocument:MarketRiskManagementOverview[Draft](May2008),atp.4
[LBEXDOCID383057],attachedtoemailfromPaulShotton,Lehman,toLisaRathgeber,Lehman,etal.
(July31,2008)[LBEXDOCID258308].
12 JaredPedowitz,E&Y,BMRMMarketRiskManagementWalkthroughTemplate(Nov.30,2007),atp.5
[EYLELBHIKEYPERS1015089].
13 SEC Division of Market Regulation, Lehman Brothers Consolidated Supervised Entity Market and
CreditRiskReview(2005),atp.8[LBEXDOCID2125011],attachedtoemailfromMichelleDavis,SEC,
toDavidOman,Lehman,etal.(Apr.21,2006)[LBEXDOCID2068428].
14Lehman,RiskUpdatePresentationtoLehmanBoardofDirectors(July18,2006),atp.5[LBEXDOCID
2125293].
15JaredPedowitz,E&Y,BMRMMarketRiskManagementWalkthroughTemplate(Nov.30,2007),atp.6
[EYLELBHIKEYPERS1015089].
9

10

TheGlobalHeadofMRMwasresponsibleformaintainingregularcontactwith

each trading area.16 To encourage the development of a close working relationship


betweenMRMandthebusinesses,Lehmanstationedmarketriskmanagersphysically
onthetradingfloorsthattheycovered.17
In May 2004, Paul Shotton became Lehmans Global Head of MRM after
MadelynAntoncicwaspromotedfromthatpositiontoChiefRiskOfficer(CRO).18In
late 2006, Shotton shifted roles to become Lehmans Global Head of Risk Control.19
Throughout2007and2008,thetopMRMpositionremainedvacant.20
B. CreditRiskManagement
Credit risk is defined as the possibility that [a] counterparty or an issuer of
securities or other financial instruments . . . will be unable to honour its contractual
obligations.21CRMwasresponsibleforthecontinuousmonitoringofcounterparties
internal ratings, credit limits and exposures to ensure they remain[ed] appropriate in
light of market events and each counterpartys financial condition.22 Additionally,
CRMwaschargedwithidentifyingandmonitoringconcentrationsandcorrelationsin

Id.atp.5.
Id.
18ExaminersInterviewofPaulShotton,June5,2009,atp.4.
19Seeid.atpp.45,24.
20Id.atp.24.
21Lehman,ICAAPSupportingDocument:CreditRiskManagementOverview[Draft](May2008),atp.4
[LBEXDOCID383061],attachedtoemailfromPaulShotton,Lehman,toLisaRathgeber,Lehman,etal.
(July31,2008)[LBEXDOCID258308].
22Id.atp.8.
16
17

counterparty credit risk exposures across counterparties, . . . industries, . . . products,


andcountries.23
TheGlobalHeadofCRMreporteddirectlytotheCRO.24FromAugust2006to
June 2007, Lehmans top CRM post was unoccupied.25 In June 2007, Lehman hired
VincentDiMassimotofilltheGlobalHeadofCRMpositionwithinGRMG.26
C. QuantitativeRiskManagement
QRM was charged with developing, implementing and maintaining the risk
methodologiesandsystemsused[tomeasuremarket,creditandoperationalrisks,]...
aswellasvalidatingthepricingandvaluationmodelsusedbythetradingunitsofthe
Firm.27QRMwascomprisedoffoursubgroups,including:(1)MarketRiskAnalytics;
(2) Credit Risk Analytics; (3) Operational Risk Analytics; and (4) Model Validation.28
The Market, Credit and Operational Risk Analytics subgroups were responsible for
the development, maintenance and operation of the [firms] risk quantification
methodologies.29 The Model Valuation Group was responsible for independently
reviewingandapprovingthepricingmodelsusedacrosstheFirm.30

Id.
Id.atp.7.
25ExaminersInterviewofPaulShotton,June5,2009,atp.25.
26ExaminersInterviewofVincentDiMassimo,Sept.15,2009.
27Lehman,QuantitativeRiskManagementPolicyManual(Sept.2007),atp.3[LBEXDOCID384020].
28Id.
29Id.
30Id.
23
24


III.

RISKMETRICS
GRMGs Three Core Functions were: (1) Understanding and identifying all

risks; (2) Ensuring that appropriate limits [were] in place for all transactions and
products;and(3)ProtectingtheFirmagainstcatastrophicloss.31Eachofthesecore
functionsrequiredGRMGtodevelopsystemstomeasuretheriskforallproducts.32
Because [n]o single measure [could] capture[] all dimensions of risk, GRMG
measure[d]riskfrommultipleperspectives,usingvaryingmethodologies.33
Lehmansriskmanagementsystemincludedseveralcentralriskrelatedcontrols.
Some of these controls were merely monitored or measured, while others included
limitsthatwereintendedtobeenforced.
These key riskrelated controls were: (1) risk limits (ValueatRisk (VaR) and
risk appetite); (2) stress or scenario tests; (3) equity adequacy or liquidity controls (of
which Lehman had several); (4) single transaction limits; and (5) balance sheet limits.
Although each riskrelated control was different, they reinforced one another,
providing multiple layers of controls and multiple signals as to whether Lehman was
potentiallytakingtoomuchrisk.

Lehman,RiskUpdatePresentationtoLehmanBoardofDirectors,(July18,2006),atp.15[LBEXWGM
986315].
32Id.
33Lehman,RiskManagementUpdatePresentationtoLehmanBoardofDirectors(Apr.15,2008)atp.4
[LBHI_SEC07940_027909].
31

A. RiskLimits
1.

VaR

VaRis ameasureofmarketrisk, whichis expressedas the maximumamount


that can be expected to be lost with a certain degree of certainty over a given time
horizon.34 More generally, VaR reflects the maximum amount that a firms liquid
trading positions could decline in value due to normal market movements over a
fixed period of time, calculated to a particular degree of certainty.35 Lehman
maintained two distinct VaR calculations to measure its market risk exposure for
internalandexternalreportingpurposes.
LehmandefineditsinternalVaRmetricasanestimateofthepotentialdeclinein
valueoftheFirmstradingpositionsduetonormalmarketmovementsoveraoneday
holdinghorizon[calculated]ata95%confidencelevel.36Thus,LehmansinternalVaR
wasanexpressionofthefirmsmaximumpotentialonedaylossonitstradingpositions
under normal market conditions in any one of 19 trading days over a 20 trading day
period.
a) RegulatoryReportingRequirements
UnderItem305ofRegulationSKoftheFederalSecuritiesLaws,Lehmanandits
banking industry competitors were required to make certain quantitative and

SEC Division of Market Regulation, Lehman Brothers Consolidated Supervised Entity Market and
CreditRiskReview(2005),atpp.1011[LBEXDOCID2125011],attachedtoemailfromMichelleDavis,
SEC,toDavidOman,Lehman,etal.(Apr.21,2006)[LBEXDOCID2068428].
35JaredPedowitz,E&Y,BMRMMarketRiskManagementWalkthroughTemplate(Nov.30,2007),atp.6
[EYLELBHIKEYPERS1015089].
36 Lehman,GlobalRiskManagementSecondQuarter2008Report(July21,2008),atp.26[LBEXDOCID
738522].
34

37
qualitativedisclosuresregardingmarketrisk. Specifically,financialinstitutionswere
required to make disclosures regarding their exposure to market risk in one of three
ways, one of which was publicly reporting VaR.38 Like many of its competitors,
Lehmanchosetodiscloseinformationregardingitsexposuretomarketriskbypublicly
reportingVaR.39
For regulatory purposes, Lehman calculated VaR at a 99% confidence level.40
Thus, whereas Lehmans internal VaR was an expression of the firms maximum
potential onedaylossonitstradingpositionsundernormalmarketconditionsinany
oneof19tradingdaysovera20tradingdayperiod,itsregulatoryVaRcalculationwas
an expression of the firms maximum potential one day loss on its trading positions
undernormalmarketconditionsinanyoneof99tradingdaysovera100tradingday
period.
b) Limits
Lehman maintained VaR limits. Under Lehmans MRM VaR limit policy, the
firm set VaR limits for the business at the firmwide, divisional, business line, and
regional levels.41 These limits represented the maximum amount that Lehman was
willingtoloseundernormalmarketconditionsinanyoneof19tradingdaysovera20

3717C.F.R.229.305(a)(2007).
17C.F.R.229.305(a)(1).
See,e.g.,LehmanBrothersHoldingsInc.,QuarterlyReportasofAug.31,2007(Form10Q)(filedonOct.
10,2007),atp.78(LBHI10Q(filedOct.10,2007)).
40 Lehman, Market Risk Management: VaR BackTesting Procedures (Mar. 2008), at p. 2 [LBEXDOCID
382975].
41Lehman,GlobalRiskManagement,SecondQuarter2008Report(July21,2008),atp.29[LBEXDOCID
738522].
38
39

tradingdayperiod,calculatedatboththefirmwidelevelandeachdivisional,business
line, and regional level within the firm. In large part, Lehmans VaR limit policy
mirrored the firms risk appetite limit policy. Because one element of Lehmans risk
appetiteusagecalculationwasessentiallyanannualizedcomputationofthefirmsVaR,
and because Lehman placed more emphasis on risk appetite than VaR, the Examiner
focused on risk appetite more heavily than VaR in his investigation of Lehmans risk
managementpractices.
2.

RiskAppetite

Inbothitsinternalandexternalcommunications,Lehmanconsistentlydescribed
its risk appetite framework as the firms primary expression of its overall risk
tolerance.42 Whereas VaR measured the firms exposure to market risks only, risk
appetitewasanintegratedmeasurementofthefirmsmarket,counterpartycredit,and
eventrisk.43
Lehmansriskappetitelimitwasdesignedtodescribethemaximumamountof
risk that Lehman could take, and still return an acceptable profit, even if the firm
sufferedalossinthe95thpercentileofseverity.Lehmandefinedriskappetiteasthe
amount of money that theFirm [was]preparedto lose over one year dueto market,

See,e.g.,Lehman,GlobalRiskManagementSecondQuarter2008Report(July21,2008),atp.22[LBEX
DOCID738522];seealsoMadelynAntoncic,RiskManagementPresentationtoStandard&Poors[Draft]
(Aug. 17, 2007), at p. 21 [LBEXDOCID 342851], attached to email from Lisa Rathgeber, Lehman, to
JeffreyGoodman,Lehman,etal.(Aug.15,2007)[LBEXDOCID305205].
43 Lehman, Risk Update Presentation to Lehman Board of Directors (July 18, 2006), at pp. 1619 [LBEX
WGM986315];Lehman,RiskManagementUpdatePresentationtotheLehmanBoardofDirectors(Apr.
15,2008)atpp.57[LBHI_SEC07940_027909].
42

44
event and counterparty credit risk. The metric was designed to maintain a
minimally acceptable [return to its investors] and compensation adequacy including
maintaining sufficient headcount to protect the franchise for the longterm.45 Thus,
risk appetite was a numerical expression of the largest reduction in revenue [that]
Lehman [could] tolerate without suffering larger adverse consequences . . . such as
compensationinadequacy,ratingsdowngrades,orlossofconfidenceintheFirm.46
In both internal communications and statements to its external constituents,
Lehmanconsistentlyidentifiedriskappetiteasthecenterofthefirmsapproachto
risk.47 Between 2006 and 2008, Lehmans management discussed the firms risk
appetite figures with members of the Board at every meeting of the Finance and Risk
Committee48andrevieweditsriskappetitecalculationswithmembersoftheSecurities

Lehman,ICAAPSupportingDocument:MarketRiskManagementOverview[Draft](May2008),atp.4
[LBEXDOCID383057],attachedtoemailfromPaulShotton,Lehman,toLisaRathgeber,Lehman,etal.
(July31,2008)[LBEXDOCID258308].
45 Lehman,ICAAPSupportingDocument:OperationalRiskManagementOverview[Draft](May2008),at
p.10[LBEXDOCID384019],attachedtoemailfromPaulShotton,Lehman,toLisaRathgeber,Lehman,
etal.(July31,2008)[LBEXDOCID258308].
46JaredPedowitz,E&Y,BMRMMarketRiskManagementWalkthroughTemplate(Nov.30,2007),atp.9
[EYLELBHIKEYPERS 1015089]; see also Lehman, Risk Update Presentation to Lehman Board of
Directors(July18,2006),atp.16[LBEXDOCID1362012].
47 See, e.g., Jared Pedowitz, E&Y, BMRMMarket Risk Management Walkthrough Template (Nov. 30,
2007), at p. 9 [EYLELBHIKEYPERS 1015089]; Madelyn Antoncic, Risk Management Presentation to
Standard&Poors [Draft](Aug.17,2007),at p.23 [LBEXDOCID342851],attached to email fromLisa
Rathgeber,Lehman,toJeffreyGoodman,Lehman,etal.(Aug.15,2007)[LBEXDOCID305205].
48See,e.g.,LehmanBrothersHoldingsInc.,MinutesofMeetingofFinanceandRiskCommitteeofLehman
BoardofDirectors(Jan.30,2007),atpp.13[LBEXAM067014];LehmanBrothersHoldingInc.,Minutes
of the Finance and Risk Committee of Lehman Board of Directors (Jan. 29, 2008), at p. 3 [LBEXAM
067022]; Lehman Brothers Holdings Inc., Minutes of Finance and Risk Committee of Lehman Board of
Directors(Mar.25,2008)atp.3[LBEXAM003592].
44

10

49
and Exchange Commission (SEC) on a monthly basis. Risk appetite was the first
itemlistedonnumerousinternalperiodicreports,manyofwhichwerecirculatedtothe
firmsseniormanagement.50
Inpresentationsto regulators, rating agencies, and clients, Lehmanrepresented
risk appetite as a fundamental aspect of its risk management function.51 Moodys
believed risk appetite was a critical constrain[t on the firms] risktaking at the
portfolio level52 and stated that the firmwide risk appetite limit determin[ed] the
mostappropriateoveralllevelofrisktheFirmshouldbetaking.53TheSECbelieved
Lehmansriskmanagementfunctiontobeuniquelycomprehensivebecauseunlike...
its peer firms, [Lehman was able to manage its] market and credit risk . . . in an

See Lehman, Risk Update Presentation to Lehman Board of Directors (July 18, 2006), at p. 12 [LBEX
DOCID1362012](RepresentativesofFinanceandRiskmeetmonthlywiththeSEC(divisionofMarket
Regulation)todiscusstheFirmsriskmetrics...).
50 See,e.g.,Lehman,FirmWideRiskDriversReport(Apr.30,2007)[LBEXDOCID149714].attachedtoe
mail from Rui Li, Lehman, to David Goldfarb, Lehman, et al. (May 1, 2007) [LBEXDOCID 152003];
Lehman,FirmWideRiskDriversReport(Oct.22,2007),atp.1[LBEXDOCID163741],attachedtoemail
from Beate Geness, Lehman, to Herbert H. McDade, III, Lehman, et al. (Oct. 22, 2007) [LBEXDOCID
177381].
51 See, e.g., Madelyn Antoncic, Risk Management Presentation to Standard & Poors [Draft] (Aug. 17,
2007), at p. 23 [LBEXDOCID 342851], attached to email from Lisa Rathgeber, Lehman, to Jeffrey
Goodman,Lehman,etal.(Aug.15,2007)[LBEXDOCID305205](referringtoriskappetiteasthecenter
of [the firms] approach to risk in presentation to rating agency); Lehman, Risk Management: An
Integrated Framework [Draft], at p. 9 [LBEXDOCID 264161] (describing risk appetite as the center of
[thefirms]approachtorisk),attachedtoemailfromPaulShotton,Lehman,toLisaRathgeber,Lehman
(May 19, 2008) [LBEXDOCID 383304] (indicating that this presentation was intended to be a starting
point in making presentations to clients); SEC, Lehman Monthly Risk Review Meeting Notes (Oct. 19,
2007),atpp.56[LBEXSEC007438](indicatingthatriskappetitewasextensivelydiscussedatmeeting);
SEC Division of Market Regulation, Lehman Brothers Consolidated Supervised Entity Market and
Credit Risk Review (2005), at pp. 46 [LBEXDOCID 2125011] (illustrating the importance of the risk
appetite limit to the SEC, derived from Lehmans representations about the metric) attached to email
fromMichelleDavis,SEC,toDavidOman,Lehman,etal.(Apr.21,2006)[LBEXDOCID2068428].
52Moodys,RiskManagementAssessmentofLehmanBrothersHoldings,Inc.[Draft](Apr.4,2006),atp.4
[LBEXDOCID1362015].
53Lehman,DevelopmentoftheFranchisePresentationtoMoodys[Draft](May31,2006),atp.44[LBEX
DOCID1342436].
49

11

integrated fashion, through their aggregation into a single measure called risk
appetite.54 Similarly, Moodys believed that Lehmans risk appetite metric was a
more formalized and more holistic [risk measuring framework] than [those of] most
others in the industry.55 The rating agencies relied on Lehmans representations
regarding its risk appetite metric to support the positive ratings that they assigned to
theLehmanfranchise.56
a) LimitPolicy
AccordingtoLehmansMarketRiskManagementLimitPolicy(LimitPolicy),
theestablishmentandmaintenanceofasoundsystemofintegratedmarketrisklimits
was fundamental to Lehmans risk management function.57 Lehmans Limit Policy
defined limits as the level at which intervention [was] required from more Senior
Management.58 One of GRMGs primary responsibilities was [e]nsuring that
appropriatelimits[were]inplaceforthebusiness.59GRMGwaschargedwithsetting
various risk limits for the business, tracking the firms actual risk against those limits
and[a]dministeringlimitsandmanagementactiontriggersforthebusiness.60

SEC Division of Market Regulation, Lehman Brothers Consolidated Supervised Entity Market and
CreditRiskReview(2005),atp.1[LBEXDOCID2125011].
55 Moodys,RiskManagementAssessmentofLehmanBrothersHoldings,Inc.[Draft](Apr.4,2006),atp.
4[LBEXDOCID1362015].
56 See, e.g., Moodys, Risk Management Assessment of Lehman Brothers Holdings, Inc. [Draft] (Apr. 4,
2006),atpp.1,4[LBEXDOCID1362015].
57Lehman,MarketRiskManagementLimitPolicyManual(Oct.2006),atp.1[LBHI_SEC07940_767665].
58Id.
59Lehman,RiskUpdatePresentationtoLehmanBoardofDirectors(July18,2006),atp.15[LBEXDOCID
1362012].
60Lehman,GlobalRiskManagementSecondQuarter2008Report(July21,2008),atp.14[LBEXDOCID
738522].
54

12

LehmansriskappetitelimitsweresetataFirmwidelevel,andcascadeddown

to the Divisions and Lines of Business within each Division on a global and regional
basis.61 The Limit Policy contained several discrete sets of policies and procedures,
whichwerespecifictoeachtieroflimits(e.g.,firmwide,divisional,andbusinessline).
Lehmans Limit Policy expressed Lehmans zero tolerance approach to the
intentional breaching of limits.62 Under the Limit Policy, individuals who were
responsible for intentionally and flagrantly breaching limits were subject to
reprimandandfacedpossibletermination,dependingonthecircumstances.63
(1) BusinessLineandRegionalLimits
Lehmanslowestlevelofriskappetitelimitswereitsbusinesslineandregional
limits. Because these were relatively lowlevel limits, Lehmans officers had more
flexibilitytoadjustorexceedtheselimitsthanthehigherlevellimitsdiscussedbelow.
UndertheLimitPolicy,LehmansriskappetitelimitssetwithinaDivision,both
regionallyandbyLineofBusiness,weresetbyMRMinconjunctionwiththeDivision
Heads.64MRMallocatedthefirmwidelimitacrossthefirmsbusinesslinesandregions
based on: (1) the performance expectations of each business and their risk/return
profiles; (2) considerations regarding the amount of risktaking capacity needed to

Lehman,MarketRiskManagementLimitPolicyManual(Oct.2006),atp.1[LBHI_SEC07940_767665].
CompareLehman,MarketRiskManagementLimitPolicyManual(Mar.31,2005),atp.1[LBEXDOCID
363433], and Lehman, Market Risk Management Limit Policy Manual (Oct. 2006), at p. 1
[LBHI_SEC07940_767665],andLehman,GlobalRiskManagement,SecondQuarter2008Report(July21,
2008),atp.28[LBEXDOCID738522],withLehman,MarketRiskManagementPolicy[Draft](Mar.2008),
atpp.12[LBHI_SEC07940_767662](removingzerotolerancelanguage).
63Lehman,MarketRiskManagementLimitPolicyManual(Mar.31,2005),atp.1[LBEXDOCID363433].
64Lehman,MarketRiskManagementLimitPolicyManual(Oct.2006),atp.1[LBHI_SEC07940_767665].
61
62

13

supporttheoverallproductsuitethatthefirmsclientsdesiredandexpected;and(3)
thefirmsbusinessmodelandanyadjustmentsthatwereplannedregardingchangesin
thefirmsbusinessmix.65
According to the Limit Policy, when a business lines or regions risk appetite
limitwasapproachedorexceeded,thedivisionheadwastodeterminetheappropriate
course of action, taking into account the advice of [Market Risk Management].66
Provided that the limit for the Division h[ad] not been breached, the division head
could reallocate [the] intraDivisional limits, subject to the advice of MRM so as to
bring the business line or geographic usage back under the applicable limit.67
Alternatively, the CRO [was] empowered to grant a temporary waiver of an intra
Divisional limit excess at the end of which the limit [would] revert to the previous
level.68
In cases in which intradivisional excesses occurred frequently, GRMG and the
business were required to either: (1) take action to lower the risk within the business
line or geographic region; (2) convene a meeting to review the cause of the limit
excesses; (3) review the applicable risk measuring methodology; and/or (4) adjust the
allocatedrisklimitofthebusinesslineorgeographicregion.69Whenabusinesslines
riskappetitelimitexcesscausedadivisionallimittobeexceeded,thefirmwasrequired

Lehman,GlobalRiskManagementSecondQuarter2008Report(July21,2008),atp.22[LBEXDOCID
738522].
66Lehman,MarketRiskManagementLimitPolicyManual(Mar.31,2005),atp.2[LBEXDOCID363433].
67Lehman,MarketRiskManagementLimitPolicyManual(Oct.2006),atp.2[LBHI_SEC07940_767665].
68Id.
69Id.
65

14

to resolve the issue in accordance with the Limit Policys applicable divisional excess
policiesandprocedures.
(2) DivisionalLimits
Divisional limits were considered somewhat harder than the business line and
regionallimitsdiscussedabove.Whenadivisionallimitwasapproachedorseemed
likelytobeexceeded,theLimitPolicyrequiredtheissuetobeescalatedbothwithin
[MarketRiskManagement]andtheDivision...asappropriate.70Insuchsituations,
thedivisionheadandGHRMhadtotakeoneofthreecoursesofactiontoresolvethe
issue.71 These three options included: (1) [A]llow the excess to remain for an agreed
periodoftime;(2)[A]gree,insomecircumstances,torevisethelimitsif,forexample,
thereh[ad]beenachangeinthebusinesswhich[would]warrant[]suchachange;or(3)
decidetoreducetheriskprofile[ofthedivision]backwithinthelimit.TheExecutive
Committee, however, was required to approve MRMs allocation of the divisional
limits.72
(3) OverallFirmWideLimit
ThefirmwideriskappetitelimitwasatthetopofLehmansrisklimitstructure.
Insomerespects,thislimitwasthehardestofLehmansriskappetitelimits.
Finance set the firmwide risk appetite limit,73 and the Executive Committee
(priorto2008)ortheRiskCommittee(2008)approvedthelimitandanychangestothe

Lehman,MarketRiskManagementLimitPolicy(Mar.2008),atp.2[LBEXDOCID363560].
Id.
72Lehman,MarketRiskManagementLimitPolicyManual(Oct.2006),atp.1[LBHI_SEC07940_767665].
73ExaminersInterviewofRobertAzerad,Sept.23,2009,atp.3.
70
71

15

74
limit. WhereassomewitnessessaidthattheExecutiveCommitteeneededtheBoards
approvaltochangethefirmwideriskappetitelimit,75othersstatedthattheExecutive
CommitteeneededonlytoinformtheBoardofanydecisionitmaderegardingchanges
to the firmwide limit.76 Although various communications to external constituents
reflectthattheBoard was requiredto approveLehmansfirmwide risk appetite limit
on an annual basis,77 nothing on the face of the Limit Policy required the Executive
CommitteetoobtaintheBoardsapprovalbeforeamendingthefirmwideriskappetite
limit.78
The Limit Policy stated that any . . . breaches of, [the firmwide] limit require
approval of the Executive Committee.79 The Limit Policy, however, was silent with
respecttothecourseofactionthattheExecutiveCommitteeshouldtakeinresponseto
afirmwideriskappetitelimitexcess.80
TheSECs2005reviewofLehmansMRMandCRMfunctions,whichwassentto
Lehmanforitsreviewand approval, saysthat the SECunderstood the firmwide risk
appetitelimittobeabindingconstraintonrisktaking,whichwasnotmeanttobe

CompareLehman,MarketRiskManagementLimitPolicy(Oct.2006),atp.1[LBHI_SEC07940_767665]
with Lehman, Market Risk Management Limit Policy [Draft] (Mar. 2008), at p. 1
[LBHI_SEC07940_767662].
75ExaminersInterviewofDavidGoldfarb,Sept.21,2009,atpp.78.
76ExaminersInterviewofHenryKaufman,May19,2009,atp.7.
77Lehman,Moodys:DevelopmentoftheFranchise(May31,2006),atp.44[LBEXDOCID1342436].
78SeeLehman,MarketRiskManagementLimitPolicyManual(Oct.2006)[LBHI_SEC07940_767665].
79Id.atp.1.
80Seeid.
74

16

81
exceeded under any conditions. Several witnesses agreed that the firmwide risk
appetitelimitwasabindingconstraintonthebusinessthatwasnottobeexceededfor
anysignificantperiodoftime,foranyreason.82Additionally,Lehmansexecutivestold
the firms external constituents repeatedly that the firmwide risk appetite limit
representedastringentcontrol.83
Ontheotherhand,severalwitnessesstatedthatthefirmwideriskappetitelimit
wassetbelowthefirmstruerisktakingcapacity.84Stillotherswereoftheviewthat
thereasonforthelimitexcessneededtobeconsideredinevaluatingwhethertheexcess
needed to be cured immediately.85 Others said that the risk appetite limit was a
guideline, which was not intended to constrain the business risktaking activities at

SEC Division of Market Regulation, Lehman Brothers Consolidated Supervised Entity Market and
CreditRiskReview(2005),atp.5[LBEXDOCID2125011].
82 Forexample,LehmansformerHeadofFixedIncomeStrategy,KentaroUmezaki,saidthatthebusiness
hadnodiscretiontodoanythinginresponsetobreachesofthefirmwideriskappetitelimit,otherthan
bringitsriskexposuredownimmediately.ExaminersInterviewofKentaroUmezaki,June25,2009,atp.
5. Similarly, Paul Shotton said that the firmwide risk appetite limit was obviously a hard limit,
meaning that breaches needed to be cured immediately. Examiners Interviewof Paul Shotton, June 5,
2009,atp.10.InJuly2007,bothJeffreyGoodman,SeniorRiskManagerfortheFixedIncomeDivision,
andAntoncictoldmembersoftheSECthatriskappetiterepresentedahardlimitonthebusinessrisk
takingactivities.SEC,LehmanMonthlyRiskReviewMeetingNotes(July19,2007),atp.5[LBEXSEC
00736370](Jeff[Goodman]toldusthat...VaRisjustonemeasurethatLehmanuses,andismoreofa
speed bump/warning sign that a true, hard limit that role falls to[risk appetite].... He said that
Madelyn[Antoncic],Dave[Goldfarb],andtheexecutivecommitteetendtolookmoreat[riskappetite].
Asanaside,MadelyncameinafterJeffsexplanationandgavevirtuallythesamespeech.).
83See,e.g.,MadelynAntoncic,RiskManagementPresentationtoStandard&Poors[Draft](Aug.17,2007),
atp.21[LBEXDOCID342851](TheoverallphilosophyofourFirmisthatwehaveazerotolerancelevel
forignoringlimitsandinternalprocesses.),attachedtoemailfromLisaRathgeber,Lehman,toJeffrey
Goodman, Lehman, et al. (Aug. 15, 2007) [LBEXDOCID 305205]; see also SEC Division of Market
Regulation,LehmanBrothersConsolidatedSupervisedEntityMarketandCreditRiskReview(2005),at
p.5[LBEXDOCID2125011](reflectingSECsunderstandingthattheriskappetitelimitwasahardlimit
nottobeexceededunderanycircumstances).
84 Examiners Interview of Jeffrey Goodman, Aug. 28, 2009; Examiners Interview of Christopher M.
OMeara,Aug.14,2009,atpp.1011.
85ExaminersInterviewofMadelynAntoncic,Oct.6,2009,atp.7.
81

17

86
all. AlthoughAntoncicstatedthattheriskappetitelimitdefinedtheboundariesofthe
firmsacceptableriskprofile,shealsosaidthatthelimitwasnotwritteninstoneand
thatexcessescausedbyincreasesinvolatilitywereallowable.87
In interviews with the Examiner, representatives of the SEC said that after
LehmansofficersinformedthemthatLehmanwasinexcessofitsrisklimits,theSECs
primary concern was ensuring that the limit excesses were properly escalated and
resolvedwithinLehmanaccordingtoLehmansprocedures.88TheSECdidnotbelieve
that its role was to substitute its judgment for the business judgment of Lehmans
management.89
(4) CalculationandAllocationofLimits
The LimitPolicy was silent as to the methodology by which the firmwide risk
appetite limit was to be calculated. In practice, Lehmans Finance Department
calculatedthefirmwideriskappetitelimitwithsomeinputfromGRMG.90Tocalculate
the firmwide risk appetite limit, the Finance Department began with base revenue
projectionsandthendeduct[ed]anestimateofthepotentiallossofrevenuesfromnon
risktaking activities due to a downturn in customer flow and origination.91 The

Forexample,JoeLiandThomasCruikshankdescribedthefirmwideriskappetitelimitasaguideline
or guidepost for management. Examiners Interview with Thomas Cruikshank, Oct. 8, 2009, at p. 3;
ExaminersInterviewwithJoeLi,Oct.5,2009.
87ExaminersInterviewofMadelynAntoncic,Oct.6,2009,atp.7.
88ExaminersInterviewoftheSecuritiesandExchangeCommission,Aug.24,2009,atpp.2,8.
89Id.atp.5.
90 ExaminersInterviewofChristopherM.OMeara,Aug.14,2009,atpp.1213;ExaminersInterviewof
RobertAzerad,Sept.23,2009,atp.3;ExaminersInterviewofMadelynAntoncic,Oct.6,2009,atpp.47.
91 JaredPedowitz,E&Y,BMRMMarketRiskManagementWalkthroughTemplate(Nov.30,2007),atp.9
[EYLELBHIKEYPERS 1015089]; see also SEC Division of Market Regulation, Lehman Brothers
86

18

FinanceDepartmentthencalculatedtheadditionalamountthatthefirmcouldaffordto
losewithoutcompromisingthefirmscompensationadequacyorjeopardizingwhatthe
firm considered a minimally acceptable return to investors.92 The difference between
thoseamountsequaledthefirmwideriskappetitelimit.93
The calculation process require[d] significant amounts of judgment. For
instance, in coming up with the firmwide [risk appetite] limit, subjective
determinations [had to] be made regarding revenues in a down year, compensation
adequacy,andminimallyacceptable[returntoinvestors].94
b) ReportingRequirementsandPractices
(1) InternalReporting
UnderLehmansinternalpoliciesandprocedures,thefirmdisclosedinformation
regardingriskappetitetopersonnelwithinGRMGandtoseniormanagement.GRMG
created a weekly Firm Wide Risk Snapshot report, which contained Risk Appetite
limits and usage by business unit and summarized VaR by business unit and Top
Market Risk positions.95 In addition, Lehman circulated a Daily Risk Appetite and
VaR Report to GRMG personnel, business heads, and upper management, which

Consolidated Supervised Entity Market and Credit Risk Review (2005), at pp. 45 [LBEXDOCID
2125011].
92 JaredPedowitz,E&Y,BMRMMarketRiskManagementWalkthroughTemplate(Nov.30,2007),atp.9
[EYLELBHIKEYPERS 1015089]; SEC Division of Market Regulation, Lehman Brothers Consolidated
SupervisedEntityMarketandCreditRiskReview(2005),atpp.45[LBEXDOCID2125011].
93 SEC Division of Market Regulation, Lehman Brothers Consolidated Supervised Entity Market and
CreditRiskReview(2005),atp.5[LBEXDOCID2125011].
94Id.atp.61.
95Lehman,CreditRiskReportingManualVersion1.0(Nov.13,2007),atp.9[LBEXDOCID688141].

19

96
included a cover email with various spreadsheets attached. The cover email
includedthefirmsoveralldailyriskappetiteandVaRusagefiguresandthedayover
daychangeinthosefiguresversusthelimit.97Thereportalsoincludeddivisionalrisk
usage and limits..98 The spreadsheets attached to the report included detailed global
anddivisionalriskappetiteandVaRinformation.99
Another report that was circulated to the Risk Committee and/or Executive
Committee was the Firmwide Risk Drivers report.100 This onepage summary
contained detailed information regarding the firms aggregated risks, which reflected
firmwide risk appetite and VaR usage data, and explanations regarding weekover
week changes in the data.101 The Firmwide Risk Drivers report did not include
informationregardingthefirmsriskappetitelimits.102

See, e.g., Lehman, Daily Risk Appetite Report spreadsheet (Oct. 12, 2007) [LBEXDOCID 150128] ,
attached to email from Jenny Peng, Lehman, to David Goldfarb, Lehman, et al. (Oct. 12, 2007) [LBEX
DOCID152049].
97 See, e.g., email from Jenny Peng, Lehman, to David Goldfarb, Lehman, et al. (Oct. 12, 2007) [LBEX
DOCID152049].
98Id.
99 See, e.g., Lehman, Daily Risk Appetite Report spreadsheet (Oct. 12, 2007) [LBEXDOCID 150128]
attached to email from Jenny Peng, Lehman, to David Goldfarb, Lehman, et al. (Oct. 12, 2007) [LBEX
DOCID152049].
100 See, e.g., Lehman, FirmWide Risk Drivers: October 22, 2007 (Oct. 22, 2007) [LBEXDOCID 163741],
attachedtoemailfromBeateGeness,Lehman,toHerbertH.McDade,III,Lehman,etal.(Oct.22,2007)
[LBEXDOCID177381].
101Id.
102Id.
96

20

(2) BoardofDirectors
Lehman delivered regular presentations to the Board and its committees
103

regarding risk appetite. At each regularly scheduled Board meeting, Lehman


provided the Board with an update regarding the firms financial results for the
previous month or quarter, which included a discussion of the firms risk appetite
usage and limits.104 In addition, from 2006 to 2008, both the Board and the Boards
FinanceandRiskCommitteemetanddiscussedthefirmsannualfinancialplan,which
includedadiscussionofthefirmspastriskappetiteusagefiguresandapropose[d]
limitfortheupcomingyear.105
c)

RegulatoryAgenciesandEntities

In2003and2004,theSECbegandevelopingasetofrulestogoverntheoversight
of U.S. securities firms and their affiliates on a consolidated basis.106 The effort was a
response to the European Unions (EU) Financial Conglomerates Directive, which
required financial conglomerates that operated within the EU to be supervised under

See Lehman, Counterparty Risk Management Policy Group, Containing Systemic Risk: The Road to
Reform,atp.1[LBEXWGM969713](DiscussionandreviewoftheRiskAppetitelimitanditsusageis
conductedquarterlywiththeBoardofDirectors....).
104 See, e.g., Lehman, Second Quarter 2007 Financial Information Presentation to Lehman Board of
Directors(June19,2007),atp.6[LBHI_SEC07940_026226];Lehman,October2007FinancialInformation
Presentation to Lehman Board of Directors with Weliksons handwritten notes (Nov. 8, 2007), at p.6
[WGM_LBEX_00664]; Lehman, December 2007 Financial Information Presentation to Lehman Board of
Directors (Jan. 29, 2008), at p. 6 [LBHI_SEC07940_027331]; Lehman, Estimated April 2008 Financial
InformationPresentationtoLehmanBoardofDirectors(May7,2008),atp.6[LBHI_SEC07940_028014].
105SeeLehman,2007FinancialPlanPresentationtotheFinanceandRiskCommitteeofLehmanBoardof
Directors (Jan. 30, 2007) at pp. 2124 [LBEXAM 067099]; Lehman, 2007 Financial Plan Summary
Presentation to Lehman Board of Directors (Jan. 31, 2007) at p. 11 [LBHI_SEC07940_025712]; Lehman,
2008 Financial Plan Presentation to Finance and Risk Committee of Lehman Board of Director (Jan. 29,
2008),atp.17[LBHI_SEC07940_068559];Lehman,2008FinancialPlanSummaryPresentationtoLehman
BoardofDirectors(Jan.29,2008),atp.11[LBHI_SEC07940_027374].
106ExaminersInterviewofSecuritiesandExchangeCommission,Aug.24,2009,atpp.34.
103

21

theEUsfinancialregulationsor,internationally,underasetofsubstantiallyequivalent
rules.107 With comments from the investment banks, the SEC constructed guidelines
that met the Financial Conglomerates Directive and formed the basis of the SECs
ConsolidatedSupervisedEntities(CSE)Program.108
FirmsthatdidnotwishtobesupervisedundertheFinancialServicesAuthority
(FSA)protocolscouldchoosetovoluntarilyparticipateintheCSEprograminstead.109
Fiveregisteredbrokerdealers,includingGoldmanSachs,MorganStanley,BearStearns,
Merrill Lynch, and Lehman, opted into the CSE program.110 By opting into the CSE
program, Lehman voluntarily subjected itself to a host of regulatory reporting
requirements.
The SEC had broad authority to access information from the CSEs about their
operations and businesses. Under the Code of Federal Regulations, the CSEs were
requiredto[m]akeavailabletothe[SecuritiesandExchange]Commissioninformation
about the ultimate holding company or any of its material affiliates that the
Commissionfindsisnecessarytoevaluatethefinancialandoperationalriskwithinthe
ultimateholdingcompanyanditsmaterialaffiliates.111TheCSEswerealsorequiredto
provideadditionalinformationaboutthefinancialconditionoftheirholdingcompanies

Id.atp.3&n.2.
Id.atp.3.
109Id.
110Id.atpp.34.
11117C.F.R.240.15c31E(a)(1)(viii)(G)(2007).
107
108

22

and affiliates, including all relevant capital requirement computations and any other
agreeduponfinancialinformation.112
The SECs authority entitled it to monitor, evaluate, and assess Lehmans risk
reporting policies and procedures, risk appetite and equity framework, and limit
monitoringandescalationprocesses.113Thus,LehmanprovidedinformationtotheSEC
regardingitsriskappetiteusage,limits,andlimitexcesses.114Inaccordancewithsuch
requests, Lehman submitted intermittent daily, weekly, and monthly risk appetite
reportstotheSEC,whichshowedthefirmsriskappetiteusageagainstitslimits.115
The SEC relied on Lehman to provide the SEC with the information it used to
assesstheefficacyandaccuracyofLehmansriskmeasurementsandriskmanagement
function.116 Under the CSE program, Lehman was required to implement and
maintain a consolidated internal risk management control system and procedures to
monitor and manage groupwide risk, including market, credit, funding, operational,

Summary for SEC 17 C.F.R. Parts 200 and 240 [Release No. 3449830; File No. S72103] (RIN 3235
A196).
113 See Lehman, Corporate Audit Report: Consolidated Supervised Entity (2006), at pp. 13 [LBEXAM
066214].
114See17C.F.R.240.15c31E(a)(2)(xii)(2007).
115 See Lehman, Monthly SEC Finance and Risk Review Agenda (Aug. 11, 2008) [LBEXWGM 000294];
Lehman,RiskUpdatePresentationtoLehmanBoardofDirectors(July18,2006),atp.12[LBEXDOCID
1362012] (Representatives of Finance and Risk meet monthly with the SEC (division of Market
Regulation) to discuss the Firms risk metrics....); Examiners Interview of Securities and Exchange
Commission, Aug. 24, 2009, at p. 7; Examiners Interview of Paul Shotton, June 5, 2009, at pp. 2021
(Shotton believed that Lehman reported only VaR to the SEC, and not risk appetite, but he is the only
witnesswhoexpressedthispositiontotheExaminer.).
116ExaminersInterviewoftheSecuritiesandExchangeCommission,Aug.24,2009,atp.6.
112

23

117
and legal risks, and make and maintain certain books and records. The SECs
monitoringteamdidnotperformindependentauditsofLehmansriskcalculations,or
performindependentauditsofLehmansriskmetrics.118However,theSECdidrequire
Lehmantoperformcertaininternalauditsandreliedoninformationfromthoseaudits
to assess the efficacy and accuracy of Lehmans risk measurements and risk
managementfunction.119
TheSEChadtheauthoritytoregulateLehmansbusinessincertainsubstantive
ways. For example, the SEC could strip certain capital relief entitlements from CSEs
thatfailedtoprovideinformationaboutthefinancialconditionoftheultimateholding
company.120
The SEC believed that its role was to oversee Lehmans risk management
controls, make certain that those risk controls functioned effectively, and ensure that
certain riskrelated issues were communicated to Lehmans senior management.121
Although the SEC did escalate particularly concerning riskrelated issues to Matthew
Eichner,theheadoftheCSEriskmanagementmonitoringteam,itdidnotbelievethat
its role was to question Lehmans managements business judgments or decisions
regardingthefirmsrisktakingactivities.122

Summary for SEC 17 C.F.R. Parts 200 and 240 [Release No. 3449830; File No. S72103] (RIN 3235
A196).
118ExaminersInterviewofSecuritiesandExchangeCommission,Aug.24,2009,atp.6.
119Id.
12017C.F.R.240.15c31E(a)(1)(viii)G),(I)(2007).
121ExaminersInterviewofSecuritiesandExchangeCommission,Aug.24,2009,atp.6.
122Id.
117

24

(1) PublicFilings
Although Lehman was required under federal law to publicly report certain
information regarding its market risk exposures (see Sections III.A.1.a and III.A.2.c),
Lehman was not required to disclose information regarding risk appetite in its public
filings.RiskappetiteisnotreferencedinRegulationSKoftheFederalSecuritiesLaws
andnootherfederallawrequiredLehmantocomprehensivelydisclosetheentiretyof
its riskrelated information, metrics, or calculations.123 Until August 2007, however,
Lehmanpubliclydisclosedthefactthatitmonitoreditsriskappetiteinasectionofits
publicfilingstitled,OtherMeasureofRisk.124AlthoughLehmandidnotdisclosethe
existence of its internal risk appetite limits or any information concerning the
enforcement of those limits in its public filings, Lehman did voluntarily disclose
informationregardingitsriskappetite.125
Starting with Lehmans 2007 10K and continuing with Lehmans First and
Second Quarter 2008 10Qs, Lehman removed the Other Measures of Risk section,
whichdescribedLehmansriskappetitemetric,fromitsfilings;noothersectionofthose

See,e.g.,17C.F.R.229.305(Item305ofRegulationSK)(withnoreferencetoriskappetite).
CompareLehmanBrothersHoldingsInc.,AnnualReportfor2006asofNov.30,2006(Form10K)(filed
onFeb.13,2007),atp.60(LBHI200610K)andLehmanBrothersHoldingsInc.,QuarterlyReportasof
Feb.28,2007(Form10Q)(filedonApr.9,2007),atp.71(LBHI10Q(filedApr.9,2007))andLehman
BrothersHoldingsInc.,QuarterlyReportasofMay31,2007(Form10Q)(filedonJuly7,2007),atp.75
(LBHI10Q(filedJuly7,2007))andLehmanBrothersHoldingsInc.,QuarterlyReportasofAug.31,
2007 (Form 10Q) (filed on Oct. 10, 2007) at p. 78 (LBHI 10Q (filed Oct. 10, 2007)) with Lehman
BrothersHoldingsInc.,AnnualReportfor2006asofNov.30,2006(filedonFeb.13,2007)(Form10K)at
pp.6976(LBHI200610K).
125See,e.g.,LBHI200610Katpp.6061;LBHI10Q(filedonFeb.28,2007),atp.82.
123
124

25

126
reportsdisclosedinformationonLehmansriskappetite. Nodocumentaryevidence
hasidentifiedwhomadethedecisiontoomittheOtherMeasuresofRisksectionfrom
those filings, nor is it clear when or why that decision was made.127 Neither Mark
Weber,ariskmanageratLehmanfromJuly2006toSeptember2008,whowasinvolved
withdraftingtheRiskManagementportionofLehmans2007firstquarter10Q,nor
Goodman, Antoncic, or Christopher M. OMeara, Lehmans Chief Financial Officer
(CFO)from2004to2007andthenLehmansCRO,recalledwhomadethedecisionto
removetheriskappetitelanguagefromLehmansfilingsorwhenorwhythatdecision
was made.128 Shotton told the Examiner that Ryan Traversari, Lehmans Senior Vice
President of External Reporting, was responsible for the removal, and that he did so
becausehebelievedLehmanspublicfilingsweredisjointed.129Inhisinterviewwith

SeeLBHI200710K,atpp.135149(evidencingthattheRiskManagementsectionnolongercontains
an Other Measures of Risk portion); Lehman Brothers Holdings Inc., Quarterly Report as of Feb. 29,
2008 (Form 10Q) (filed on Apr. 4, 2008), at pp. 15873 (LBHI 10Q (filed on Apr. 4, 2008)); Lehman
BrothersHoldingsInc.,QuarterlyReportasofMay31,2008(Form10Q)(filedonJuly10,2008),atpp.
15974(LBHI10Q(filedonJuly10,2008)).
127 See Lehman, Form 10K Draft A (Dec. 21, 2007) [LBEXDOCID 1410826], attached to email from
JonathanCohen,Lehman,toKennyLin,Lehman,etal.(Dec.21,2007)[LBEXDOCID1437379];Lehman,
Form 10K Draft B (Dec. 28, 2007) [LBEXDOCID 1410829], attached to email from Jonathan Cohen,
Lehman,toNancyHuie,Lehman(Jan.2,2008)[LBEXDOCID1486755];Lehman,Form10KDraftC(Jan.
4,2007)[LBEXDOCID98327],attachedtoemailfromRyanTraversari,Lehman,toEricR.Addington,
Lehman, et al. (Jan. 4, 2007) [LBEXDOCID 112558]; Lehman, Form 10K Draft D (Jan. 11, 2007) [LBEX
DOCID98325]attachedtoemailfromRyanTraversari,Lehman,toErinCallan,Lehman,etal.(Jan.11,
2008)[LBEXDOCID112557].
128ExaminersInterviewofMarkWeber,Aug.11,2009,atp.11;ExaminersInterviewofChristopherM.
OMeara,Aug.14,2009,atpp.1920;ExaminersInterviewofJeffreyGoodman,Aug.28,2009;Examiners
InterviewofMadelynAntoncic,Oct.6,2009,atp.13.
129 ExaminersInterviewofPaulShotton,June6,2009,atp.22;ExaminersInterviewofRyanTraversari,
Sept.24,2009,atp.3.
126

26

theExaminer,Traversarisaidthathedidnotrecalleverhavingdiscussedtheremoval,
whodidit,orwhy.130
Because Lehman had not previously disclosed that it had specific risk appetite
limits,orthatthoselimitswereenforced(letalonehowstrictlytheywereenforced),the
Examiner did not find a colorable claim that the removal of the Other Measures of
Risksectionfromthe200710Krenderedthatfilingfalseormisleading.
(2) RatingAgencies
The rating agencies viewed Lehmans risk appetite metric as the center of
Lehmans approach to risk management and a critical constrain[t on the firms] risk
takingattheportfoliolevel.131Innumerouspresentationstoratingagencies,Lehman
describeditsfirmwideriskappetitelimitasakeyindicatorthatdetermin[ed]themost
appropriateoveralllevelofrisktheFirmshouldbetaking.132Inaddition,Lehmantold
the rating agencies that the Board and Executive Committee were responsible for
approving the overall risk appetite limit annually.133 The rating agencies relied on

ExaminersInterviewofRyanTraversari,Sept.24,2009,atpp.34.
Moodys,RiskManagementAssessmentofLehmanBrothersHoldings,Inc.[Draft](Apr.4,2006),atp.
4 [LBEXDOCID 1362015]; see also Lehman, Lehman Brothers Risk Management: An Integrated
Framework[Draft],atp.9[LBEXDOCID264161](statingthattheriskappetitemetricwasattheCenter
of [Lehmans] Approach to Risk), attached to email from Paul Shotton, Lehman, to Lisa Rathgeber,
Lehman(May28,2008)[LBEXDOCID375356].
132 Lehman, Moodys: Development of the Franchise (May 31, 2006), at p. 44 [LBEXDOCID 1342436];
accordLehman,RiskManagementPresentationtoFitch(Apr.7,2006),atp.20[LBEXDOCID691768].
133Id.
130

131

27

Lehmans representations regarding its risk appetite metric to support their positive
ratingsoftheLehmanfranchise.134
B. StressTests
Lehmans risk appetite and VaR limit structure was supplemented by a second
riskcontrol,itsstresstesting.Stresstestingisaprocedureforevaluatingthepotential
loss of a portfolio due to shocks to its underlying risk factors over a wide range of
scenarios,howeverunlikelytheprobabilityofoccurrencemaybe.135WhereasLehman
usedVaRandriskappetitetoaddressthequestionofhowmuch...aportfolio[could]
loseoveragiventimehorizonandwithagivendegreeofconfidence,136thefirmused
stressteststoaddressthequestionofhowmuch...thefirm[could]loseinaplausible,
if unlikely, worst case scenario.137 Stress testing [was] used to capture tail and
outliereventsinthemarketthatwerenotcapturedbyVaRandriskappetite.138
Under the CSE Program, Lehman was required to develop and maintain a
marketbased stress testing program,139 under which the firms portfolio would be

See, e.g., Moodys, Risk Management Assessment of Lehman Brothers Holdings, Inc. [Draft] (Apr. 4,
2006),atpp.1,4[LBEXDOCID1362015];seealsoLehman,CreditRatingsStrategyPresentation(Mar.1,
2007), at p. 11 [LBEXDOCID 249324] (For Lehman, high profitability, strong risk management and
liquidityarethecommonstrengthscitedbytheRatingAgencies.).
135 JaredPedowitz,E&Y,MarketRiskManagementWalkthroughTemplate(Nov.30,2007),atp.6(EYLE
LBHIKEYPERS1015089].
136Lehman,MarketRiskManagement:StressTestingPolicyandProceduresManual(Apr.21,2005),atp.1
[LBEXDOCID 385132],attached to email from Melda Elagoz, Lehman, to Paul Shotton, Lehman, et al.
(July18,2007)[LBEXDOCID385135].
137Id.
138 JaredPedowitz,E&Y,MarketRiskManagementWalkthroughTemplate(Nov.30,2007),atp.6[EYLE
LBHIKEYPERS1015089].
139ExaminersInterviewoftheSecuritiesandExchangeCommission,Aug.24,2009,atp.12.
134

28

140
tested against both hypothetical and historical stress scenarios. The SEC required
Lehman to report the results of the marketbased stress tests on a monthly basis.141
Additionally,Lehmanwasrequiredtoperformbothfundingandliquiditystresstestsat
leastonceperquarter.142
[A]lthough the nature, form and frequency of the analysis [was] not
prescribed, Lehman was also required to perform stress testing as a supplement to
VaR under Basel Accord and Basel II.143 In addition, the FSA required Lehman to
performtwospecificstressscenarios.First,theFSArequiredLehmantostresstestsits
capitalrequirementsduringarecessionaryperiodsuchasmightbeexperiencedonce
in 25 years; during which time [one] might expect to see counterparty ratings
downgrades and weakening of real estate, private equity and loan portfolios.144
Second,theFSArequiredthatfirmsrunascenario,designedtosimulatetheeffectsofa
defaultbyamajormarketcounterparty.145

SEC,LehmanBrothersConsolidatedSupervisedEntityMarketandCreditRiskReview(2005),atp.63
[LBEXDOCID 2125011], attached to email from Michelle Danis, SEC, to David Oman, Lehman, et al.
(Apr.21,2006)[LBEXDOCID2068428].
141ExaminersInterviewoftheSecuritiesandExchangeCommission,Aug.24,2009,atp.12.
14217C.F.R.240.15c31g(c)(1)(2007).
143 Lehman, Stress Testing: Policy and Procedures Manual (Oct. 2006), at p. 2 [LBEXDOCID 2909526],
attached to email from Stephen Hancock, Lehman, to Stuart Tarling, Lehman, et al. (May 24, 2007)
[LBEXDOCID 2909525]; see also Lehman, Stress Scenario Analysis (Sept. 2007) [LBEXDOCID 687914],
attachedtoemailfromPaulShotton,Lehman,toMynorGonzalez,Lehman,etal.(May16,2008)[LBEX
DOCID725042].
144 Lehman,StressScenarioAnalysis(Sept.2007),atp.5[LBEXDOCID687914],attachedtoemailfrom
PaulShotton,Lehman,toMynorGonzalez,Lehman,etal.(May16,2008)[LBEXDOCID725042].
145Id.atpp.78.
140

29

146
Lehmans stress testing did not include the application of limits. Thus, the

stress loss amounts that Lehman generated were not measured against any
predeterminedstandard.147
Lehmanemployedavarietyofmarketstressteststomeasurerisk.148Lehmans
stresstestsweredesignedtomeasurethefirmsvulnerabilitytomacroeconomicevents
which could affect the firms entire portfolio as well as localized stress scenarios that
were designed to explore the specific vulnerabilities of each line of business and
region.149 For example, Lehman conducted stress tests based on historical market
eventssuchastheOctober1987marketcrashandthe1998Russianfinancialcrisis.150In
addition,Lehmansriskmanagersdevelopedandconductedotherstressteststhatwere
based on hypothetical market scenarios such as the impact of a potential [l]iquidity
[c]runch due to central banks globally raising rates, jumps in oil prices caused by
supplydisruptionsand[m]ajorshiftsinyieldandspreadcurvessuchassteepeningor
flattening,orparallelshiftsupordown.151Lehmanranstresstestsbasedon13or14
differentscenarios.152

ExaminersInterviewofJeffreyGoodman,Aug.28,2009.
Id.
148 See Lehman, Stress Testing: Policy and Procedures Manual (Apr. 21, 2005), at pp. 35 [LBEXDOCID
385132], attached to email from Melda Elagoz, Lehman, to Paul Shotton, Lehman, et al. (July 18, 2007)
[LBEXDOCID385135].
149Id.atpp.34.
150 Lehman, Risk Management Presentation to Fitch (Apr. 7, 2006), at p. 47 [LBEXDOCID 691768],
attached toemailfromJeffrey Goodman,Lehman,to Donald E.Petrow, Lehman (July 2,2007) [LBEX
DOCID671711].
151 Lehman, Risk, Liquidity, Capital and Balance Sheet Update Presentation to Finance and Risk
Committee of Lehman Board of Directors (Sept. 11, 2007), at p. 28 [LBEXAM 067167]; Lehman, Risk
146
147

30

Thefirmsmacroeconomicstresstestsweredesignedtotesttheeffectsofastress

eventthatcouldnotbemitigated[for]twoweeks.153Thefirmslocalizedstresstests
assumed horizons or time periods, which were deemed appropriate, given the
liquidityoftheinstrumentsoraffectedpositions.154
C. Equity,Liquidity,andFundingAdequacyControls
Lehman defined equity sufficiency as the cushion that it needed to absorb
potential economic losses, stemming from specific counterparties, illiquid positions,
andgeneraloperatingbusinessandlegalrisks.155Thefirmemployedvariousmetricsto
gaugeitsequity sufficiency,including:(1)theCSE Total Capital Ratio;(2)riskequity;
and (3) the Equity Adequacy Framework (EAF).156 The CSE Framework was a
regulatory requirement imposed by the SEC. Risk equity and EAF were internal

ManagementPresentationtoFitch(Apr.7,2006),atp.47[LBEXDOCID691768],attachedtoemailfrom
JeffreyGoodman,Lehman,toDonaldE.Petrow,Lehman(July2,2007)[LBEXDOCID671711].
152 See, e.g., Lehman, Stress Test Report for March 31, 2006 (Apr. 23, 2006) [LBEXDOCID 2078161],
attached to email from Sandeep Garg, Lehman, to Paul Shotton, Lehman, et al. (Apr. 24, 2006) [LBEX
DOCID2118206];StressTestReportforFebruary28,2007[LBEXDOCID632363],attachedtoemailfrom
Melda Elagoz, Lehman, to Paul Shotton, Lehman, et al. (Mar. 9, 2007) [LBEXDOCID 630356]; Lehman,
Stress Test Report for October 31, 2007 (Dec. 19, 2007) [LBEXDOCID 632432], attached to email from
Jeffrey Goodman, Lehman, to Cherie Gooley, Lehman (Dec. 19, 2007) [LBEXDOCID 665513]; Lehman,
Stress Test Report for April 30, 2008 (May 28, 2008) [LBEXDOCID 3296803], attached to email from
MarkWeber,Lehman,toCherieGooley,Lehman,etal.(May28,2008)[LBEXDOCID3302270].
153 Lehman,StressTesting:PolicyandProceduresManual(Apr.21,2005),atp.5[LBEXDOCID385132],
attached to email from Melda Elagoz, Lehman, to Paul Shotton, Lehman, et al. (July 18, 2007) [LBEX
DOCID385135].
154Lehman,StressTesting:PolicyandProceduresManual(Apr.21,2005),atp.5[LBEXDOCID385132],
attached to email from Melda Elagoz, Lehman, to Paul Shotton, Lehman, et al. (July 18, 2007) [LBEX
DOCID385135].
155 Lehman,Risk Management: Risk Equity and RiskAppetite Models (May17, 2005),at pp. 34 [LBEX
SEC009046].
156Lehman,RiskManagementUpdatePresentationtoLehmanBoardofDirectors(Apr.15,2008),atp.8
[LBHI_SEC027909].

31

157
measuresthatthefirmemployedtodetermineitsequityneeds. Inaddition,thefirm
used the Cash Capital Model to measure its liquidity and longterm ability to fund
illiquidpositions.158
Under the CSE Program, Lehman was required to maintain minimum capital.
Specifically, the SEC required Lehman to maintain a total capital ratio of 10%.159 The
Tier1capitalratiowasameasurethatwassimilartothetotalcapitalratio,exceptthat
certaintypesofdebtandhybridsecuritieswereexcludedfromthecalculation.160
Inaddition,LehmanusedtheRiskEquityModeltodeterminetheequitytobe
allocatedtoeachof[its]businesses.161RiskEquitywasanumericalexpressionofeach
businessmarketrisk,eventrisk,counterpartycreditrisk,operatingrisk,andlegalrisk,
plus certain other equity that the firm needed to allocate to the businesses, such as
buildingsandothertangibleoperatingassets.162

Id.
Email from Enrico Corsalini, Lehman, to Paolo Tonucci, Lehman, et al. (June 26, 2008)
[LBHI_SEC07940_522785].
159AnnaYuandEricSpahr,Lehman,CSEOverviewPresentationtoLehmanTokyoTownHall(Aug.8,
2007),atp.6[LBEXDOCID382979],attachedtoemailfromPaulShotton,Lehman,toYingLin,Lehman
(Apr.3,2008)[LBEXDOCID375347].The10%TotalCapitalRatiorequirementworkedintandemwitha
Tier1Capitalminimumof6%.
160Id.at13.
161Lehman,RiskEquityFrameworkPresentationtoLehmanBoardofDirectors[Draft](Apr.7,2008),atp.
4 [LBEXDOCID 687943], attached to email from Ying Lin, Lehman, to Paul Shotton, Lehman (Apr. 8,
2008)[LBEXDOCID725313].
162Id.at4.
157

158

32

In mid2007, Lehman developed EAF as a shadow risk equity tool and

supplement to Risk Equity.163 EAF calculate[d] the equity required to enable


restructuringinacrisisoutsideofbankruptcywithoutaccesstounsecureddebt.164The
metricwasdesignedtoensurethatLehmanhadsufficienttime...toarrangeforthe
disposition of assets or restructuring of liabilities165 and assess[] [the firms] equity
adequacy in a potential Lehmanspecific crisis to ensure that the Firm would have
sufficientequitycapitaltoabsorbanypotentiallossesandfundingimpairmentscaused
bythe...crisis.166LehmanviewedtheEAFasthebestmeasureofequitysufficiency
because, unlike Lehmans other models, it fully [met] the needs of effective capital
management, e.g., transparency, practicality, and timeliness.167 According to various

Lehman, Equity Adequacy Framework Presentation to Standard & Poors (Aug. 17, 2007), at p. 2
[LBEXDOCID 505934], attached to email from Albert Pulido, Lehman, to Christopher M. OMeara,
Lehman,etal.(Aug.16,2007)[LBEXDOCID552499].
164Lehman,Q22008UpdatePresentation(June4,2008),atp.11[LBHI_SEC07940_514735],attachedtoe
mail from Paolo Tonucci, Lehman, to Piers Murray, JP Morgan, et al. (June 5, 2008)
[LBHI_SEC07940_514732]; see also Lehman, Risk, Liquidity, Capital and Balance Sheet Update
PresentationtoFinanceandRiskCommitteeofLehmanBoardofDirectors(Sept.11,2007),atpp.5152
[LBEXAM067167].
165 Lehman, Equity Adequacy Framework Presentation to Standard & Poors (Aug. 17, 2007), at p. 3
[LBEXDOCID 505934], attached to email from Albert Pulido, Lehman, to Christopher M. OMeara,
Lehman,etal.(Aug.16,2007)[LBEXDOCID552499].
166Lehman,RiskEquityFrameworkPresentationtoLehmanBoardofDirectors[Draft](Apr.7,2008),atp.
9 [LBEXDOCID 687943], attached to email from Ying Lin, Lehman, to Paul Shotton, Lehman (Apr. 8,
2008)[LBEXDOCID725313].
167Lehman,SP&AEquityAdequacyandEquityAllocationPresentation[Draft](Sept.12,2007),atp.1
[LBEXDOCID1695588],attachedtoemailfromAriAxelrod,Lehman,toKristinPepper,Lehman,etal.
(Sept.13,2007)[LBEXDOCID1645820].
163

33

presentation materials that Lehman distributed to its external constituents, EAF was
oneoftheFirmsprimaryeconomiccapitalmodel[s].168
In addition, Lehman employed the Cash Capital Model (Cash Capital) to
measure itsliquidity and longterm ability to fund illiquid positions.169 In a liquidity
event,thefirmassumedthatitwouldnotbeabletoaccesstheunsecureddebtmarket
andsecuredfundingwouldbelimited.170Thus,allilliquidassetshadtobefundedwith
cash capital.171 Sources of cash capital included equity, longterm debt and evergreen
facilitieswithatermoftwelvemonthsorlonger.172
D. SingleTransactionLimits
In 2000, Lehman began developing a single transaction limit framework,173
which was designed to curtail the firms headline risk.174 Headline risk refers to the
riskassociatedwithlargeexposurestoindividualissuers,whichcarrypotentiallosses
that are significant enough to receive [s]crutiny from rating agencies, investors and

See, e.g., Lehman, Equity Adequacy Framework Presentation (May 19, 2008), at p. 2 [LBEXDOCID
12353],attachedtoemailfromPaoloTonucci,Lehman,toChristopherM.OMeara,Lehman,etal.(May
21,2008)[LBEXDOCID66852].
169 Paolo Tonucci, Lehman, Liquidity Funding Overview Presentation to Standard and Poors (Aug. 17,
2007),atp.48[LBEXDOCID2031705],attachedtoemailfromShaunK.Butler,Lehman,toElizabethR.
Besen,Lehman,etal.(Aug.28,2007)[LBEXDOCID2374876].
170 Lehman,untitled Funding FrameworkPresentation(Aug.6,2007),at pp. 35 [LBEXDOCID 601791],
attached to email from Angelo Bello, Lehman, to Kentaro Umezaki, Lehman (Aug. 6, 2007) [LBEX
DOCID720559].
171Id.
172Id.at23.
173ExaminersInterviewofMadelynAntoncic,Oct.6,2009,atp.12.
174EmailfromJoeLi,Lehman,toJeffreyL.Weiss,Lehman,etal.(Feb.2,2007)[LBEXDOCID383248].
168

34

175
creditors of the Firm. Thus, Lehmans single transaction limits were intended to
limit the firms large positions, which its aggregate risk limits might not otherwise
constrain.176Toitsoutsideconstituents,Lehmanrepresenteditssingletransactionlimit
frameworktobepartofarigoroussystemofchecksandbalances,whichensured
thatalltransactionswereaccommodatedwithinthelimits.177
Lehmans single transaction limits applied only to the firms leveraged loan
originations.178 Although GRMG urged the Global Real Estate Group (GREG) to

Lehman,SingleTransactionLimitFrameworkReport[Draft](Jan.2005),atp.1[LBEXDOCID245375],
attachedtoemailfromJoeLi,Lehman,toJeffreyL.Weiss,Lehman,etal.(Feb.2,2007)[LBEXDOCID
383248].
176 Lehman, SEC Risk Appetite, Risk Equity Review for CSE (May 24, 2005), at p. 60 [LBEXDOCID
271652], attached to email from Laura M. Vecchio, Lehman, to Mark Weber, Lehman (Oct. 29, 2007)
[LBEXDOCID408046].
177 See Madelyn Antoncic, Lehman, Lehman Brothers Risk Management: An Integrated Framework
(Feb.20, 2008), at p. 20 [LBEXDOCID 194031], attached to email from Paul Shotton, Lehman, to
Christopher M. OMeara, Lehman (Feb. 20, 2008) [LBEXDOCID 214223]; Lehman, Current Market
BackgroundInformationTalkingPoints[Draft](Aug.16,2007),atp.3[LBEXDOCID506009],attachedto
emailfromChristopherM.OMeara,Lehman,toIanT.Lowitt,Lehman(Aug.19,2007)[LBEXDOCID
572320]; Examiners Interviews of Steven Berkenfeld, Oct. 5 and 7, 2009, at p. 11; see also SEC, Lehman
BrothersConsolidatedSupervisedEntityMarketandCreditRiskReview(June2005),atpp.67[LBEX
DOCID2125011],attachedtoemailfromMichelleDanis,SEC,toDavidOman,Lehman,etal.(Apr.21,
2006)[LBEXDOCID2068428];Lehman,SECRiskAppetite,RiskEquityReviewforCSE(May24,2005),
atpp.6061[LBEXDOCID271652],attachedtoemailfromLauraM.Vecchio,Lehman,toMarkWeber,
Lehman (Oct. 29, 2007) [LBEXDOCID 408046]; Madelyn Antoncic, 2006 Bondholder Meeting: Risk
Management Presentation (Oct. 17, 2006), at p. 25 [LBEXDOCID 541394], attached to email from
ElizabethR.Besen,Lehman,toChristopherM.OMeara,Lehman(Aug.2,2007)[LBEXDOCID559489].
178ExaminersInterviewofMadelynAntoncic,Oct.6,2009,atp.12;ExaminersInterviewofJoeLi,Oct.5,
2009; see email from Nachiketa Das, Lehman, to Steven Simonte, Lehman, et al. (Feb. 9, 2007) [LBEX
DOCID 388631]; Lehman, Single Transaction Limit Framework [Draft] (Oct. 2005), at pp. 23 [LBEX
DOCID 2072632],attached to emailfrom JoeLi, Lehman, to David Oman, Lehman,et al.(July 7,2006)
[LBEXDOCID2170674].
175

35

179
considerthefirmssingletransactionlimitswhenenteringintonewdeals, thesingle
transactionlimitsdidnotapplyinthecommercialrealestatespace.180
Lehmans single transaction limit was originally set at a loss threshold of $150
million,measuredbyanalyzingthepotentiallossfromthetransactioninquestionata
99.5% confidence level.181 In February 2007, because the firms capital base and
revenueshadgrown,GRMGrevisedthelossthresholdto $250millionand adopted a
tandem, but separate, notional limit of $1.8 billion per unsecured and $3 billion per
securedtransaction.182
Although Lehman was not a regulated commercialbank and therefore was not
required to institute notional transaction limits, Lehman entered into an informal
agreementwiththeratingagenciestoabidebyessentiallythesamenotionallimitsthat
applied to commercial banks; while commercial banks maintained a notional limit of
15% of tangible equity, Lehman maintained a notional limit of 15% of Tier 1 and 2

Email from Jeffrey Goodman, Lehman, to Zev Klasewitz, Lehman (Jan. 17, 2007) [LBEXDOCID
794864];emailfromJeffreyGoodman,Lehman,toZevKlasewitz,Lehman(Feb.12,2007)[LBEXDOCID
794879].
180ExaminersInterviewofMadelynAntoncic,Oct.6,2009,atp.12.
181 Lehman,Ambac:DueDiligenceRequest[Draft](Feb.2007),atp.32[LBEXDOCID719123],attachedto
emailfromBlairSieff,Lehman,toRaymondKahn,Lehman,etal.(Feb.5,2007)[LBEXDOCID739860];
Lehman, Single Transaction Limit Framework Report [Draft] (Jan. 2005), at pp. 23 [LBEXDOCID
245375], attached to email from Paul Shotton, Lehman, to Ping Feng, Lehman (Feb. 2, 2007) [LBEX
DOCID383248](Shottonsemailnotesthechangetoa$250millionthreshold.).
182 Lehman,Ambac:DraftDueDiligenceRequest(Feb.2007),atp.32[LBEXDOCID719123],attachedto
emailfromBlairSieff,Lehman,toRaymondKahn,Lehman,etal.(Feb.5,2007)[LBEXDOCID739860];
Lehman, Single Transaction Limit Framework Report [Draft] (Jan. 2005), at pp. 23 [LBEXDOCID
245375], attached to email from Paul Shotton, Lehman, to Ping Feng, Lehman (Feb. 2, 2007) [LBEX
DOCID383248](Shottonsemailnotesthechangetoa$250millionthreshold.).
179

36

183
capital. TheagreementwasashiftfromLehmanspriorpolicy,underwhichLehman
maintainedanotionallimitof15%oftangiblecommonequity,pluspreferredshares.184
In contrast to tangible equity, Tier 1 capital yielded a higher notional limit because it
didnotincludetaxdeferredassets.185
The rating agencies provided external control, as the agencies would
immediatelycontactLehmanwhenadealviolatedthesingletransactionlimit.186Lowitt
andOMearawouldcalltheratingagenciesandalleviatetheirconcernswhenLehman
expectedalargedealtobreachthelimit.187
ExecutiveCommitteeapprovalwasrequiredwhenapotentialdealexceededthe
single transaction limit.188 In other words, a deal could not get done without the
blessing of the Executive Committee.189 Such deals came before the Executive
Committee because the sheer size of the transactions required the Committees

Lehman, Risk Limits Presentation (Sept. 2006), at pp. 12 [LBEXDOCID 1343779], attached to email
fromPaoloTonucci,Lehman,toChristopherM.OMeara,Lehman,etal.(Sept.28,2006)[LBEXDOCID
1354049]. David Goldfarb and Steve Berkenfeld both opined that no more than 15% of tangible equity
shouldeverhavebeenoutstandingonanyonedeal.ExaminersInterviewofDavidGoldfarb,Sept.21,
2009,atp.12;ExaminersInterviewsofStevenBerkenfeld,Oct.5ands7,2009,atp.11.
184Id.
185 Lehman,RiskLimitsPresentation(Sept.2006),atpp.12&nn.12[LBEXDOCID1343779],attachedto
email from Paolo Tonucci, Lehman, to Christopher M. OMeara,Lehman, et al. (Sept. 28,2006) [LBEX
DOCID1354049].
186 Examiners Interview of David Goldfarb, Sept. 21, 2009, at p. 12; Examiners Interviews of Steven
Berkenfeld,Oct.5and7,2009,atp.11.
187ExaminersInterviewsofStevenBerkenfeld,Oct.5and7,2009,atp.11.
188 Lehman, SEC Risk Appetite, Risk Equity Review for CSE (May 24, 2005), at p. 60 [LBEXDOCID
271652], attached to email from Laura M. Vecchio, Lehman, to Mark Weber, Lehman (Oct. 29, 2007)
[LBEXDOCID408046].
189 Examiners Interview of Fred S. Orlan, Sept. 21, 2007, at p. 8; Examiners Interviews of Steven
Berkenfeld,Oct.5and7,2009,atp.7;ExaminersInterviewofJeremyIsaacs,Oct.1,2009,atp.6.
183

37

190
approval separate and apart from the approval of any lowerlevel committees.
Lehmans standard risk management presentation clarifies that Executive Committee
approvalwouldallowLehmantocommittoalargedealinrarecircumstances,rather
thanasamatterofroutinepractice.191
Inthethirdquarterof2006andthefourthquarterof2007,Lehmanadjustedits
notional single transaction limit from $2.1 billion to $3.6 billion and then from $3.6
billionto$4.5billion,respectively.192Inthesecondquarterof2007,Lehmansquarterly
lossthresholdstoodat$250million,whichitintendedtoraiseto$400millionatyears
end.193
Lehman applied the loss thresholds and notional limits only to the leveraged
loanamountsthatLehmanexpectedtoretainforitself,nottotheoftenlargeramounts
thatthefirmcommittedtofundinpreliminarypapersbeforesyndicationorsale.194

ExaminersInterviewofJeremyIsaacs,Oct.1,2009,atp.6.
Madelyn Antoncic, Lehman, Standard Risk Management Presentation, at p. 21 [LBEXDOCID
194031], attached to email from Paul Shotton, Lehman, to Christopher M. OMeara, Lehman (Feb. 20,
2008)[LBEXDOCID214223].
192 Lehman,RiskLimitsPresentation(Sept.2006),atpp.12&nn.12[LBEXDOCID1343779],attachedto
email from Paolo Tonucci, Lehman, to Christopher M. OMeara,Lehman, et al. (Sept. 28,2006) [LBEX
DOCID 1354049] (noting $3.6 billion limit); Lehman, Leveraged Finance Risk Presentation to Executive
Committee(Oct.16,2007),atp.32[LBEXDOCID506095],attachedtoemailfromBlairSieff,Lehman,to
StevenBerkenfeld,Lehman,etal.(Oct.4,2007)[LBEXDOCID569902](notingincreaseto$4.5billion).
193 See email from Paul Shotton, Lehman, to Ping Feng, Lehman (Feb. 2, 2007) [LBEXDOCID 383248]
(notingthresholdbeingthenat$250million);Lehman,LeveragedFinanceRiskPresentationtoExecutive
Committee(Oct.16,2007),atp.11[LBEXDOCID506095],attachedtoemailfromBlairSieff,Lehman,to
Steven Berkenfeld, Lehman, et al. (Oct. 4, 2007) [LBEXDOCID 569902] (proposing increase to $400
million).
194Lehman,LeveragedFinanceRiskPresentationtoExecutiveCommittee(Oct.16,2007),atp.11[LBEX
DOCID506095],attachedtoemailfromBlairSieff,Lehman,toStevenBerkenfeld,Lehman,etal.(Oct.4,
2007) [LBEXDOCID 569902] (Notional value subject to STL is expected commitment, not amount for
whichthefirmoriginallysigns.).
190

191

38

Someleveragedloanscontainedamaterialadversechangeclauseandaflexible

interest rate provision, which made it easier for Lehman to syndicate the exposure to
other financial institutions.195 On these deals, the single transaction limits loss
thresholds and notional limits could be doubled, because those protections were
thoughttomitigateroughly50%oftheassociatedrisk.196
E. BalanceSheetLimits
Lehmans balance sheet limit was another riskrelated control that Lehman
employed to allocate its resources efficiently, ensure that the business was adequately
capitalized, and guarantee adequate returns on assets.197 The balance sheet limit is
intended torestrict theamountofassetsthatadivisionora specificbusinessline can
originateinanygivenquarter.198Aspecificbusinessorregionwouldbeabletoobtaina
higher balance sheet limit if the additional balance sheet capacity was supported by
higherreturnsonassets.199Thefirmsetaminimumrateofreturnat3%andincrements

Lehman,SingleTransactionLimitFrameworkReport[Draft](Jan.2005),atp.3[LBEXDOCID245375],
attached to email from Paul Shotton, Lehman, to Ping Feng, Lehman (Feb. 2, 2007) [LBEXDOCID
383248].
196Id.
197ExaminersInterviewofKentaroUmezaki,June25,2009,atp.8.
198 See generally Lehman, FID Balance Sheet Management Policy Presentation (Sept. 20, 2007) [LBEX
DOCID253145],attachedtoemailfromKentaroUmezaki,Lehman,toAndrewJ.Morton,Lehman,etal.
(Oct. 17, 2007) [LBEXDOCID 301274]; see also Lehman, FID Balance Sheet Management Presentation
(Apr.2007)atp.3[LBEXDOCID787297],attachedtoemailfromKieronKeating,Lehman,toDavidN.
Sherr,Lehman,etal.(June6,2007)[LBEXDOCID808850].
199 Lehman, FID Balance Sheet Management Presentation (Apr. 2007), at p. 3 [LBEXDOCID 787297],
attachedtoemailfromKieronKeating,Lehman,toDavidN.Sherr,Lehman,etal.(June6,2007)[LBEX
DOCID808850].
195

39

in the balance sheet would not be granted when a division fell below the minimum
threshold.200Thebalancesheetlimitsrolledupintoafirmwidebalancesheettarget.201
Balancesheet limitbreachesbecameanissueat Lehmanasearlyas 2005.202 By
February 2007, the firm had a serious balance sheet issue.203 FID businesses
consistently exceeded their limits even though returns on assets and earnings were
decreasing.204FIDbreacheditsbalancesheetlimitineveryquarterof2007andinthe
first quarter of 2008.205 Balance sheet limit breaches were heavily concentrated in
securitizedproductsandrealestate.206Thedivisionbreachedthebalancesheetlimitfor
the third quarter of 2007 by a substantial margin and ended the fourth quarter of the
yearwithusageexceedingthelimitbyapproximately$13billiondollars.207Attheend
ofthefirstquarterof2008,Lehmanhadexceededitsbalancesheetlimitby$18billion.208

Id.
ExaminersInterviewofKentaroUmezaki,June25,2009,atpp.89.
202Id.
203 EmailfromJosephGentile,Lehman,toMichaelGelband,Lehman,etal.(Feb.21,2007)[LBEXDOCID
810934).
204 Lehman, FID Balance Sheet Management Presentation (Apr. 2007), at p. 2 [LBEXDOCID 787297],
attachedtoemailfromKieronKeating,Lehman,toDavidN.Sherr,Lehman,etal.(June6,2007)[LBEX
DOCID808850].
205SeeLehman,BalanceSheetTrendPresentation(Apr.2007),atpp.46[LBEXDOCID251418],attached
to email from Kentaro Umezaki, Lehman, to Rebecca Miller, Lehman (May 3, 2007) [LBEXDOCID
346520]; Lehman, 2007 Balance Sheet Targets and Usage Global Spreadsheet (Oct. 17, 2007) [LBEX
DOCID278229],attachedtoemailfromKentaroUmezaki,Lehman,toAndrewJ.Morton,Lehman,etal.
(Oct.17,2007)[LBEXDOCID301274];emailfromClementBernard,Lehman,toRogerNagioff,Lehman,
et al. (Nov. 20, 2007) [LBEXDOCID 272199]; Andrew J. Morton, Lehman, Notes: First 60 Days
Presentation (Apr. 7, 2008), at p. 4 [LBEXDOCID 1734462], attached to email from Gary Mandelblatt,
Lehman, to Andrew J. Morton, Lehman, et al. (Apr. 7, 2008) [LBEXDOCID 1834937] (showing first
quarter2008limitbreaches).
206Lehman,BalanceSheetTrendPresentation(Apr.2007),atpp.46[LBEXDOCID251418],attachedtoe
mailfromKentaroUmezaki,Lehman,toRebeccaMiller,Lehman(May3,2007)[LBEXDOCID346520].
207 Lehman, 2007 Balance Sheet Targets and Usage Global Spreadsheet (Oct. 17, 2007) [LBEXDOCID
278229],attachedtoemailfromKentaroUmezaki,Lehman,toAndrewJ.Morton,Lehman,etal.(Oct.17,
200
201

40

SeniormanagersinFIDreactedtothelimitbreachesbylobbyingthefirmtoraise

thelimitorgiveadditionalbalancesheetcapacitytobusinessesthatweresubstantially
over the limit.209 Illustratively, Lehman was over the balance sheet limit for the third
quarter of 2007 by $3 billion dollars at the end of June.210 At that time, Lehmans
managers expected FIDs demand for balance sheet capacity to be $18 billion dollars
higherthanthelimit.211UmezakiandNagioffmetwithOMearatolobbyformore.212
Umezakisucceededinprocuringan$8billiondollarraisefromthefirm.213Inthesame
vein, Umezaki told Reilly that FID needed additional balance sheet capacity for the
fourthquarterof2007becauseofthehighyieldfundingpipelineandtheslowdownin
real estate syndications.214 As a result, the FIDs balance sheet limit for the fourth
quarterof2007was$10billiondollarshigherthanthepreviousquarter.215

2007) [LBEXDOCID 301274]; email from Clement Bernard, Lehman, to Roger Nagioff, Lehman, et al.
(Nov.20,2007)[LBEXDOCID272199].
208 Andrew J. Morton, Lehman, Notes: First 60 Days Presentation (Apr. 7, 2008), at p. 5 [LBEXDOCID
1734462], attached to email from Gary Mandelblatt, Lehman, to Andrew J. Morton, Lehman, et al.
(Apr.7,2008)[LBEXDOCID1834937].
209EmailfromKentaroUmezaki,Lehman,toGerardReilly,Lehman,etal.(July23,2007)[LBEXDOCID
375604];emailfromGerardReilly,Lehman,toChristopherM.OMeara,Lehman(Sept.7,2007)[LBEX
DOCID 1357177]; email from Ian T. Lowitt, Lehman, to Gerard Reilly, Lehman, et al. (Sept. 7, 2007)
[LBEXDOCID1357178];emailfromGerardReilly,Lehman,toKentaroUmezaki,Lehman,etal.(Sept.7,
2007)[LBEXDOCID1357179];emailfromKentaroUmezaki,Lehman,toAlexKirk,Lehman,etal.(Sept.
17,2007)[LBEXDOCID375610].
210 Email fromKentaro Umezaki, Lehman, to AndrewJ. Morton, Lehman (June28,2007)[LBEXDOCID
250701].
211Id.
212Id.
213 Email from Kentaro Umezaki, Lehman, to Alex Kirk, Lehman, et al. (Sep. 17, 2007) [LBEXDOCID
375610].
214 Email from Kentaro Umezaki, Lehman, to Gerard Reilly, Lehman, et al. (Sep. 7, 2007) [LBEXDOCID
1357177].
215 Email from Satu Parik, Lehman, to Kentaro Umezaki, Lehman, et al. (Oct. 10, 2007) [LBEXDOCID
251253].

41

In theory, businesses that exceeded their balance sheet limits faced penalties,

whichcouldincludethediminutionoftheircompensationpool.216WithinFID,balance
sheetlimitswereconsideredtobeharderthanVaRlimitsbecause,unlikebusinesses
thatexceededtheirVaRlimits,businessesthatexceededtheirbalancesheetlimitsfaced
real penalties and consequences.217 Penalties for overages were set at $5 million for
everybillion dollars thata business was overthebalancesheetlimit.218Attheend of
2007, the penalties were revised to $2.5 million and incentives were reset at $1.25
million.219 Charges were assessed in $500 million dollar increments.220 The business
heads were unhappy with the penalties and some of them thought that the charges
wouldmakeitharderforthebusinessestofunctionglobally.221However,penaltiesfor
balancesheetoverageshadneverbeenimposedbeforeRogerNagioffbecamethehead
of FID.222 Nagioff said that the limits were ultimately imposed in either the third
quarterorthefourthquarterof2007.223

Examiners Interview of Kentaro Umezaki, June 25, 2009, at pp. 89; Lehman, Global Consolidated
BalanceSheet(May31,2007)[LBEXDOCID276740],attachedtoemailfromKentaroUmezaki,Lehman,
to Lesley OrmasScala, Lehman (Aug. 23, 2007) [LBEXDOCID 375605]; email from Kentaro Umezaki,
Lehman,toKaushikAmin,Lehman,etal.(July10,2007)[LBEXDOCID252873].
217ExaminersInterviewofKentaroUmezaki,June25,2009,atp.8.
218 Lehman, FID Balance Sheet Management Presentation (Apr. 2007), at p. 3 [LBEXDOCID 787297],
attachedtoemailfromKieronKeating,Lehman,toDavidN.Sherr,Lehman,etal.(June6,2007)[LBEX
DOCID808850].
219 EmailfromKentaroUmezaki,Lehman,toKaushikAmin,Lehman,etal.(July10,2007)[LBEXDOCID
252873].
220 Lehman, FID Balance Sheet Management Policy Presentation (Sept. 2007), at p. 2 [LBEXDOCID
253145],attachedtoemailfromKentaroUmezaki,Lehman,toAndrewJ.Morton,Lehman,etal.(Oct.17,
2007)[LBEXDOCID301274].
221ExaminersInterviewofRogerNagioff,Sept.30,2009,atp.18;emailfromKentaroUmezaki,Lehman,
toGregoryEikenbush,Lehman(July12,2007)[LBEXDOCID253135].
222ExaminersInterviewofRogerNagioff,Sept.30,2009,atp.18.
223ExaminersInterviewofRogerNagioff,Sept.30,2009,atp.18.
216

42


IV.

RISKCOMMITTEE
Another feature of Lehmans risk management was the firms Risk Committee.

LehmandescribedtheRiskCommitteeasaweeklyforumfortheseniormanagement
oftheFirmtoreviewallmaterialriskexposures.224Accordingtoitsmandate,theRisk
Committees responsibilities included the discussion and analysis of the Firms
significant credit, market and other risks, including operational risk.225 The key
focuses of the Risk Committee included the firms: (1) risk appetite;226 (2) VaR;
(3)counterpartycreditrisk;(4)largeexposures;(5)commitments;and(6)othertopics
ofinterestasidentifiedbytheChiefRiskOfficer.227
Until 2008, the Risk Committee was nominally comprised of the Executive
Committee, the CRO and the CFO.228 In 2008, Lehman expanded the nominal
membership of the Risk Committee to include the heads of various business lines as
well.229Asdescribedmorefullybelow,itappearsthatLehmansfullyconstitutedRisk
Committeemetirregularlyifatallafterearly2007.

Lehman, ICAAP Supporting Document: Operational Risk Management Overview [Draft] (July 30,
2008), at p.6 [LBEXDOCID 384019],attached to email from PaulShotton, Lehman, to LisaRathgeber,
Lehman,etal.(July31,2008)[LBEXDOCID258308].
225Id.
226 SeeSectionsIII.A.1.bandIII.A.1.cofthisReportwhichdiscusstheimportanceriskappetiteingreater
detail.
227 Lehman, ICAAP Supporting Document: Operational Risk Management Overview [Draft] (July 30,
2008), at p.6 [LBEXDOCID 384019],attached to email from PaulShotton, Lehman, to LisaRathgeber,
Lehman,etal.(July31,2008)[LBEXDOCID258308].
228 Lehman,RiskCommitteeCharter(Jan.5,2007),atp.1[LBEXDOCID719070],attachedtoemailfrom
RobertBing,Lehman,toLauraM.Vecchio,Lehman,etal.(June11,2007)[LBEXDOCID719765];butsee
Lehman,RiskCommitteeCharter(Dec.20,2007),atp.1[LBEXAM065737](statingthatthemembersof
theRiskCommitteeweretheExecutiveCommittee,theCROandtheCoChiefAdministrativeOfficer).
229 Examiners Interview of Satu Parikh, Aug. 26, 2009, at p. 6; Examiners Interview of Kaushik Amin,
Apr.14,2009,atp.7;contraExaminersInterviewofDavidN.Sherr,May6,2009,atp.10(recallingthat
224

43

Recollections of the form and substance of Lehmans Risk Committee meetings

varied. Several members did not recall having served on the committee, or even that
such a committee existed.230 Others had varying memories of what occurred at the
meetings.231AntoncicstatedthattheRiskCommitteemetonWednesdays,butsaidthat
these meetings were often cancelled and that she could not attend all of them.232 She
alsostatedthatthepackagegiventoRiskCommitteemembersfortheirmeetingswas
substantial until 2007, when Gregory changed the structure so that only the one page
Firm Wide Risk Drivers sheet was provided and made it clear that the businesses
wouldmakeriskdecisionsgoingforward.233
V.

CHIEFRISKOFFICERCHANGE
From2004toSeptember2007,MadelynAntoncic,awidelyrespectedtechnician

who had a PhD in economics, served as the firms CRO. In her capacity as CRO,

the Risk Committee was expanded to include the heads of various business lines as early as 2006);
Lehman,ICAAPSupportingDocument:OperationalRiskManagementOverview[Draft](July30,2008),
at p. 6 [LBEXDOCID 384019] (stating that the Risk Committee members included members of the
Executive Committee, the CRO, at the CFO), attached to email from Paul Shotton, Lehman, to Lisa
Rathgeber,Lehman,etal.(July31,2008)[LBEXDOCID25308].
230 Examiners Interview of George H. Walker IV, Nov.20, 2009, at pp. 2, 5; Examiners Interview of
HughE.McGeeIII,Aug.12,2009,atpp.1415;ExaminersInterviewofAndrewJ.Morton,Sept.21,2009,
atp.13.
231ExaminersInterviewofDavidGoldfarb,Sept.21,2009,atpp.45(Goldfarbstatedthateveryoneonthe
ExecutiveCommitteewasveryinvolvedintheRiskCommitteebutnominuteswerekeptbecauseitwas
anactivedialogueratherthanadecisionmakingmeeting);ExaminersInterviewofSatuParikh,Aug.26,
2009,atp.6(ParikhrecalledtheRiskCommitteeasa40to50membercommitteein2008combiningtop
managementandbusinessheads,butwithoutFuldatthehelm);ExaminersInterviewofKaushikAmin,
April14,2009,atp.7(AminrememberedtheRiskCommitteeasaMondaymorningmeetingwithoutany
formal documents that discussed various risks based on businesses presentations); Examiners
Interviews of Steven Berkenfeld, Oct.5 and 7, 2009, at p. 11 (Berkenfeld viewed Risk Committee
discussions of deals as broad sound bites that had no bearing on whether a particular deal could be
approved);ExaminersInterviewofChristopherM.OMeara,Sept.23,2009atpp.10,1314(OMeara,the
ChiefRiskOfficerin2008,statedthattheRiskCommitteemetonMondayswithformalagendas).
232ExaminersInterviewofMadelynAntoncic,Feb.25,2009,atp.4.
233ExaminersInterviewofMadelynAntoncic,Oct.6,2009,atpp.3,12.

44

Antoncic reported directly to the Head of Strategic Partnerships, Principal Investing


and Risk, David Goldfarb, who reported directly to the Chairman and CEO, Richard
Fuld.234 In September 2007, Lehman announced that effective December 1, 2007,
ChristopherOMeara,whowasthentheCFOwouldreplaceAntoncicasLehmanstop
riskmanager.235
In his capacity as Global Head of Risk Management (GHRM), OMeara was
responsible for all aspects of [Lehmans] risk profile, including oversight of risk
management policies, procedures, analytics and metrics; and, in conjunction with
[Lehmans]ExecutiveCommittee,monitoringFirmwideriskappetite....236OMeara
reporteddirectlytoFuldaswellasthefirmsCoCAO,IanLowitt,anditsPresident,Joe
Gregory(andthenMcDade).237
Prior to this transition, OMeara had served as Lehmans CFO from 2004 until
2007,andfrom1994to2004,hehadfilledanumberofotherrolesatLehmanthatwere
unrelatedtoriskmonitoring.238AntoncicmovedtothenewlycreatedpositionofGlobal

Madelyn Antoncic, Risk Management Presentation to Standard & Poors (Aug. 17, 2007), at p. 11
[LBEXDOCID3285232],attachedtoemailfromManhuaLeng,Lehman,toMarkWeber,Lehman,etal.
(Sept.5,2007)[LBEXDOCID3320640].
235LehmanBrothersnamesnewCFO,Marketwatch,Sept.21,2007.
236 LehmanBrothersHoldingsInc.,PressRelease:LehmanBrothersAnnouncesNewAppointments(Sept.
20,2007),atp.1[LBEXDOCID533362],attachedtoemailfromBrianFinnegan,Lehman,toChristopher
M.OMeara,Lehman,etal.(Sept.20,2007)[LBEXDOCID575413].
237 Lehman,RiskManagementUpdatePresentationtoLehmanBoardofDirectors(Apr.15,2008)atp.3
[LBHI_SEC07940_027909].
238 LehmanBrothersHoldingsInc.,PressRelease:LehmanBrothersAnnouncesNewAppointments(Sept.
20,2007),atp.1[LBEXDOCID533362],attachedtoemailfromBrianFinnegan,Lehman,toChristopher
M.OMeara,Lehman,etal.(Sept.20,2007)[LBEXDOCID575413].
234

45

239
Head of Financial Market Policy Relations. Although OMeara did not officially
become CRO until December 2007, he began the transition from CFO to CRO shortly
aftertheSeptember2007pressrelease.240
Several witnesses believed that OMeara did not have the risk management
experience that they would have expected in a CRO.241 OMeara did not have a
backgrounddirectlyinriskmanagement,andhedidnothavetechnicalproficiencyin
riskconcepts.242
Notwithstanding OMearas atypical background, Lehmans Board and
regulators were confident that OMeara could assume the top risk management role.
Theybelievedthathehadgoodmanagerialskillsandwouldbeabletoworkwiththe
risk managers below him.243 Additionally, the majority of Lehman employees

Id.
ExaminersInterviewofChristopherM.OMeara,Aug.14,2009,atpp.79.
241 ExaminersInterviewofMadelynAntoncic,Feb.25,2009atp.7(AntoncicsaidthatbecauseOMearas
background was heavily in accounting, neither she nor the members of her risk management team
believed that OMeara was capable of challenging management in the way that Antoncic did, and
speculatedthatperhapsthatwaswhyOMearawaschosen.);ExaminersInterviewofKentaroUmezaki,
June25,2009,atp.8(UmezakisaidthatOMearahadbetterorganizationalskillsthanAntoncic,butthat
hislackofriskmanagementexperiencewasasignificantdrawback.);ExaminersInterviewofAndrewJ.
Morton,Sept.21,2009,atpp.1314(MortonsaidthatOMearadidnothavetimetoputaqualifiedrisk
managementteaminplacebeforeLehmansbankruptcy.);ExaminersInterviewofRogerNagioff,Sept.
30, 2009, at p. 17 (Nagioff was against the OMeara risk appointment, saying that while OMeara was
capable,hewasnotwellcastforriskmanagement,asthesubjectmatterwasnewforhimandhehadno
instinct for it.); see also email from Jeffrey Goodman, Lehman, to Mark Weber, Lehman, et al. (Oct. 22,
2007)[LBEXDOCID318367](sayingthatOMearawantedtotalktotheexecaboutgettingriskdown,
butthatheneededtheemailrecipientstodecidewherespecificriskcutsneededtobemade).
242ExaminersInterviewofChristopherM.OMeara,Aug.14,2009,atp.8.
243 Examiners Interview of John F. Akers, Apr. 22, 2009, at p. 8 (Akers said that he had a great deal of
confidenceinOMeara.);ExaminersInterviewofRogerBerlind,May8,2009,atp.8(Berlindexplained
thathefeltpositiveaboutOMearasmovetoCRObecausehewasimpressedwithOMeara.);Examiners
Interview of Henry Kaufman, May 19, 2009, at p. 19 (Kaufman believed that OMeara had a more
comprehensiveknowledgeofLehmansoperationthanAntoncicinamanagementandanalyticalsense,
239
240

46

interviewed felt that at the very least OMeara was qualified, and Fuld defended the
appointmentbystatingthatOMearawasabetterriskmanagerandmorepracticalthan
Antoncic.244
Inherinterview,Antoncicsaidthatinearly2007,longbeforeOMearareplaced
her, she believedshewas beingmarginalizedand didnot fully participate in some of
the risk decisions made from that point forward (particularly Archstone).245 These
eventsoccurredafterAntoncicexpressedheroppositiontothelargeincreaseinthe2007
risk appetite limit and to the firms bridge equity and leveraged loan business.246

andthatthereplacementofAntoncicstrengthenedLehmanbecauseOMearahadrealworldexperience
thatAntonciclacked.);ExaminersInterviewoftheSecuritiesExchangeCommission,Aug.24,2009,atp.
7 (The SEC told the Examiner that it received more information from OMeara than it had under
Antoncic,anditsopinionwasthatduetoOMearasbettermanagementskillsandthefactthatAntoncic
remained with the firm in another capacity, the firm lost little with respect to its Risk Management
functioneventhoughhedidnotpossessariskmanagementbackground.);ExaminersInterviewofJerry
A. Grundhofer, Sept. 16, 2009, at p. 10 (Grundhofer described OMeara as a first rate manager.);
ExaminersInterviewofMichaelL.Ainslie,Sept.22,2007,atp.5(AinsliesaidthatLehmansBoardfelt
OMeara was smart and knowledgeable about Lehmans business, and had been told that OMearas
knowledgeofLehmanwouldallowhimtointegrateintotheriskbusinesseasily.);ExaminersInterview
of Thomas Cruikshank, Oct. 8, 2009, at pp. 56 (Cruikshank explained that he had no doubts about
OMearasabilitytoleadRiskManagement.).
244 Examiners Interview of Kaushik Amin, Apr. 14, 2009, at p. 10 (According to Amin, OMeara was
qualified for the top Risk Management Group post because as CFO he had been responsible for
computingprofitandlossdata,andthatOMearawasfamiliarwiththerisksassociatedwiththevarious
businesses because his groundlevel experience had taught him which types of investments were
susceptible to failure.); Examiners Interview of Mark Weber, Aug. 11, 2009, at p. 13 (Weber said that
OMeara was generally able to understand the function of being CRO.); Examiners Interview of
RichardS.Fuld,Jr.,Sept.25,2009,atp.20(FuldthoughtthatOMearawasabetterriskmangerandmore
practical than Antoncic.); Examiners Interview of Roger Nagioff, Sept. 30, 2009, at p. 17 (Nagioff was
againsttheOMearaappointment,butthoughtOMearawascapableanddeclinedtocriticizeOMearas
performanceintherole.);ExaminersInterviewofIanT.Lowitt,Oct.28,2009,atpp.89(Lowittsaidthat
OMearaandCallanwerequalifiedfortheirnewpositions.);ExaminersInterviewofGeorgeH.Walker
IV,Nov.20,2009,atp.6(WalkerdescribedOMearaasanengagedriskmanager.).
245 Examiners Interview of Madelyn Antoncic, Oct. 6, 2009, at pp. 89, 1112; Examiners Interview of
MadelynAntoncic,Mar.27,2009,atpp.1314;ExaminersInterviewofMadelynAntoncic,Feb.25,2009,
atpp.46.
246ExaminersInterviewofMadelynAntoncic,Oct.6,2009,atpp.812;ExaminersInterviewofMadelyn
Antoncic,Mar.27,2009,atpp.814;ExaminersInterviewofMadelynAntoncic,Feb.25,2009,atpp.27.

47

Antoncics personnel file indicates that she was on good standing with the business
headswhowereaskedtoreviewheruntil2007,atwhichpointsomeLehmanmanagers
startedtoevaluateherperformancemorecritically,partiallybecauseshewasmorerisk
aversethansomeofherreviewers.247IntheirinterviewswiththeExaminer,Fuldand
GregorydeniedthattheyhadmarginalizedAntoncic.248
When OMeara became Lehmans CRO, Callan replaced him as acting CFO.249
As with OMeara, some former Lehman managers believed that Callan was not
qualifiedfortheCFOposition.250BecauseCallandidnothavethetypicalbackground
ofaCFO,OMearasattentionwassplitbetweenadjustingtohisnewroleasCROand
helping Callan become CFO.251 As OMeara himself put it, from September to
December2007,hewaswearingtwohats.252
Shotton also said that because of OMearas divided attention, Lehman
effectively had no chief risk manager during the crucial period in 2007 that coincided

Antoncicspersonnelfile(theExaminerwaspermittedtoreviewbutnotcopythefile).
ExaminersInterviewofRichardS.FuldJr.,Sept.25,2009,atpp.2021;ExaminersInterviewofJoseph
Gregory,Nov.5,2009.
249 LehmanBrothersHoldingsInc.,PressRelease:LehmanBrothersAnnouncesNewAppointments(Sept.
20,2007),atp.1[LBEXDOCID533362],attachedtoemailfromBrianFinnegan,Lehman,toChristopher
M.OMeara,Lehman,etal.(Sept.20,2007)[LBEXDOCID575413].
250 Examiners Interview of Madelyn Antoncic, Oct. 6, 2009, at p. 9; Examiners Interview of David
Goldfarb, Sept. 21, 2009, at p. 10 (declining to comment on her expertise, but saying that she had a
differentskillsetthenmostCFOs);ExaminersInterviewofPaulShotton,June5,2009,atp.3.
251ExaminersInterviewofErinCallan,Oct.23,2009,atpp.21,24;ExaminersInterviewofChristopher
M.OMeara,Aug.14,2009,atp.8;ExaminersInterviewofPaulShotton,June6,2009,atpp.2425;email
fromChristopherM.OMeara,Lehman,toErinCallan,Lehman(June4,2008)[LBEXDOCID215709];e
mailfromChristopherM.OMeara,Lehman,toRichardS.Fuld,Jr.,Lehman,etal.(Feb.29,2008)[LBEX
DOCID186993];emailfromStuartM.Blount,Lehman,toChristopherM.OMeara,Lehman,etal.(Oct.
18,2007)[LBEXDOCID1356258].
252ExaminersInterviewofChristopherOMeara,Aug.14,2009,atp.8;seealsoemailfromChristopherM.
OMeara, Lehman, to Erin M. Callan, Lehman (June 4, 2008) [LBEXDOCID 215709] (giving Callan
suggestedtalkingpointsforapresentationtopotentialinvestors).
247
248

48

253
with OMearas transition. Although the SEC was comfortable with OMeara
assumingAntoncicsrole,itsimilarlynotedinwrittenmaterialsthatitwasconcerned
withthefactthatLehmanwasexceedingitsriskappetitelimitsduringaperiodthatthe
CROpositionwasintransition.254

253

ExaminersInterviewofPaulShotton,June6,2009,atpp.3,2325.
SEC,NotesfromLehmansMonthlyRiskReviewmeeting(Oct.11,2007),atp.6[LBEXSEC007438].

254

49

APPENDIX9:RISKAPPETITEANDVAR
USAGEVERSUSLIMITSCHARTS

This Appendix compiles data gathered by the Examiners financial advisors regarding
Lehmans internal risk limits excesses. The first chart in this appendix is a compilation of data,
showing Lehmans firmwide risk appetite and VaR usage versus its limits during the period from
December2006throughSeptember15,2008.Thefollowingchartsillustratesimilardatawithrespect
toLehmansFixedIncomeDivision,HighYieldbusiness,andGlobalRealEstateGroup.

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

APPENDIX10:CALCULATIONOFCERTAININCREASESIN
RISKAPPETITELIMITS
To: LehmanExaminer
From: Duff&Phelps
Subject:IncreaseinRiskAppetiteLimitsfrom2006to2007andfrom2007to2008
Date:February1,2010

This Appendix describes the ways in which Lehmans methodology for


calculatingtheRiskAppetite(RA)limitschangedfrom2006to2007andfrom2007
to 2008. It analyzes the quantitative impact of those changes on the final limit
amounts.

I.

Settingthe2007RAlimit
a) Lehman performed numerous calculations of potential RA limits for 2007.
Despite using various methodologies, it recommended approximately the
same$3.3billionlimiteachtime.

A November 20, 2006 proposal considered four potential 2007 RA limits,


recommendinga$3.3billionlimit,Theriskappetitelimitfor2007couldbeset
as highas$3.9 billion.However,inviewof historically low volatility levels
we recommend setting the limit 15% lower i.e., at $3.3 billion. (i p.5) Two
dayslater,aNovember22,2006proposalconsideredadifferentmethodologyfor
calculating the RA limit and concluded, We recommend setting the Risk
Appetitelimitat$3.2billionfor2007.(iip.2)

On January 11, 2007 another round of revisions in the 2007 RA limit


calculationmethodologywasperformedbyRobertAzeradatAntoncicsrequest.
He prepared two calculations using different methodologies, one reaching a
$3.793 billion limit, and another reaching a $2.973 billion limit. (iii p.3; iv p. 3)
The $2.973 billion limit was actually the same calculation as used for the final
limitof$3.273billion,howeveritcontainedaproposed$300millionhaircutfor
market conditions and principal investments, which was not used for the final
limit.


Ultimately, a final limit was presented to the board of directors: the
January 30, 2007 Financial Plan stated, We propose to establish a 2007 risk
appetitelimitof$3.3billiontheminimumperformancehurdleissetata10.0%
ROE.Thelimitisbasedonacalculationthatdifferedfromallthecomputations
seeninpriordraftsofthe2007limitcalculation.(vp.21;vip.25)

b) Reviewoftheimpactofvariousmethodologiesandassumptionsconsideredin
calculationofthe2007RALimit:

Applyingamaximumcapof10%onthehaircutsontheunderwritingandclient
revenuesinastressscenario.Bylimitingthehaircutstoonly10%,ahigherRA
limitisachieved.(ip.2)ThefinalRAlimitcalculationonJanuary30,2007does
notusethis10%caponhaircuts.(vip.5)

Revisions of haircuts on revenues in a stress scenario. The haircuts applied to


budgeted divisional revenues in a stress scenario varied across presentations.
TheNovember20,2006,November22,2006andthefinalRAlimitcalculationof
January30,2007allassumeddifferenthaircutsinastressscenario.(ip.4;iip.6;v
p.21) These different haircuts are analyzed, despite an October 10, 2007 email
fromAzeradthatincludeswordingthatimpliesthathaircutsinastressscenario
aredeterminedusinghistoricalmodeling,i.e.,theyshouldhavebeenconsistent
acrossanalysesperformedonthesameornearbydates.(viip.1)

ApplyingahaircuttothePrincipalandProprietaryrevenuesinastressscenario.
Both the November 20, 2006 and November 22, 2006 presentations discuss the
exclusionofPrincipalandProprietaryrevenuesfromthestressscenario.(ip.1;ii
p.1) The removal of the haircuts on Principal and Proprietary revenues would
resultinhigherprojectedtotalrevenuesinastressscenario,whichwouldleadto
a higher RA limit. The final RA limit calculation on January 30, 2007 does not
apply haircuts to the Principal and Proprietary revenues, with the justification
that the budgeted revenues would be achievable even in a downturn scenario.
(vip.5)

UsingROE as a performancemetricversusaC&B ratio.Two differentmetrics


are discussed to determine the minimum level of revenues that would be
required in a downturn scenario. The C&B ratio (an abbreviation for
Compensation and Bonus, or Compensation and Benefits) is the total
compensationexpenseasapercentageofrevenues,inastressscenario.TheC&B
ratio target methodology was considered to determine the minimum revenues
requiredtobeabletocompensateandretainpersonnel,evenduringadownturn
2


in the market. The alternative methodology initially used a predetermined
desired ROTE (return on tangible equity) as the target, and calculated the
minimumamountofrevenuesthatwouldberequiredtoachievethisreturnina
downturn. The targets considered for the 2007 methodology were a 55% C&B
ratio, or a 10% ROTE. Of the two, the 55% C&B ratio yielded a substantially
lower RA limit. The 55% C&B ratio was not used, and the resulting limit
calculationsarestampedunacceptableresult.(ip.2,8,10)Further,theROTE
target ultimately was not used. Instead the final January 30, 2007 RA limit
calculation used a 10% ROE target, the impact of which was a lower RA limit
thana10%ROTEtarget,andahigherRAlimitthana55%C&Btarget.(vip.4)

Applying a 15% buffer to the RA limit. Both the November 20, 2006 and
November 22, 2006 presentations suggested adding a 15% reduction to the
calculated RA limit as an extra precaution, in view of historically low volatility
levels observed in capital markets in 2006. (i p.5; ii p.2) The final RA limit
calculation of January 30, 2007 did not include this 15% buffer, resulting in a
higherlimit.(vp.22)

Applying a $300 million buffer to the RA limit. Similar to the 15% buffer
discussedabove,twodifferentreductionstothetotallimitweresuggestedinthe
January 11, 2007 RA limit calculation. One was a $150 million Market
EnvironmentHaircut,andtheotherwasa$150millionhaircutEarmarkedfor
Additional Principal/Strategic Investments. (iv p.3) The final RA limit
calculationonJanuary30,2007doesnotincludeeitherofthesehaircuts.(vp.22)

c) TheFinal2007RAlimitwashigherthanthe2006RALimit,partlyasaresult
of applying a more aggressive methodology than that which was used to
calculatetheRAlimitfor2006.Twomajordifferenceswerethemovetoa10%
ROEperformancetargetfor2007andtheapparenteliminationofanyhaircuts
tothePrincipalandProprietaryrevenuesfor2007.

II.
Settingthe2008RAlimit

a) The final 2008 Risk Appetite limit used methodologies and assumptions
different from those used in calculating the 2007 limit, which in aggregate
resultedinahigherRAlimitthanfor2007.

The 2008 RA limit used 10% ROTE as the performance standard (viii p.17) as
opposed to the 10% ROE performance standard used for the 2007 RA limit
calculation.Achievinga10%ofROTEinsteadof10%ROErequiresalowernet
3


income, as tangible equity is a subset of total equity. To achieve a lower net
income, less revenue is required. This allows for a lower minimum revenue
level to achieve target performance, which leads to a higher RA limit. (ix p.3,4
pleasenotethatthisisanexcelfilepreparedbyLehmantocalculatethe2008RA
limit.)If10%ROEhadbeenusedastheperformancestandard,the2008RAlimit
mighthavebeen~$649millionlower(x,p.2,4pleasenotethattheimpactofthis
change is dependent on the impact of other changes, and may be calculated
differentlydependingontheorderofotheradjustments.)

The2008RAlimitused,overall,lowerhaircutsonbudgetedrevenuesinastress
scenario than the 2007 RA limit. (vi p.5; ix p.5 column J) The most significant
reduction was from a 20% to a 15% haircut on the client revenues, which
accounted for $12.8 billion of the $21.0 billion in the 2008 budget. If the 2007
haircutshadbeenused,the2008RAlimitwouldhavebeen~$676millionlower.
(xi,p.2,5)

The2008RAlimitusedamodifiedcalculationtocalculatethefixedandvariable
compensation expense in a downturn scenario. The 2007 RA calculation
assumed that the fixed compensation expense in a stress scenario would be
reduced by 6% versus budgeted fixed compensation expense, and that the
variablecompensationexpensewouldbediscountedby40%.(vip.4)The2008
RA calculation assumed instead that the fixed expense would be the same in a
stressscenario,butthebudgetedvariablecompensationexpensewasdiscounted
by58.33%(35%dividedby.6).(ixp.4cellH8)Ifthe2007compensationexpense
calculation had been used, the 2008 RA limit would have been ~$603 million
lower.(xiip.2,4)

The 2008 RA limit used a modified calculation to calculate the fixed non
personnel expense in a downturn scenario. Fixed nonpersonnel expense, in a
stressed scenario, was reduced by 17% from the budgeted amount in the 2007
limit calculation. (vi p.4) The 2008 RA calculation discounted fixed non
personnel expense by 10%. (ix p.4 cell H11) If the 2007 fixed nonpersonnel
discounthadbeenused,theRAlimitwouldhavebeen~$236millionhigher.(xiii
p.2,4)

The2008RAlimitusedveryhighrevenueprojectionsforthecomingyear.

Lehmans 2008 revenue budget of $21 billion contrasted with analyst


estimates. Reuters consensus revenue report shows a median 2008
revenueestimate(for13analysts)of$19.1billionforLehmaninDecember
4


2008.(xvp.1)WhilenumerousanalystreportscitedLehmanearningscalls,
tworeportsspecificallycitedmeetingswithLehmansthenCFOErinCallan
asa basisfortheirestimates of 2008 revenues,ranging from $19.0 to $19.2
billion (xvi p.5; xvii p.1 the two analyst reports that cite meetings with
Callan).Also,seeSectionIIIofthisreport,AnalystEarningsEstimates.

b) Noapparentcompensatingmeasuresweretaken

Despite the changes to a more aggressive calculation described above,


more conservative compensating methodologies which had been discussed in
2007, but not applied in the final 2007 RA calculation, were also not applied in
2008:

The 55% C&B ratio was not used as a performance standard. Instead the C&B
ratioforthefinalRAcalculationwas58.2%.(ixp.4cellH24)Ifa55%C&Bratio
had been used, instead of the 10% ROTE target, the 2008 RA limit would have
been~$818millionlower.(xviiip.2,4)

ThebudgetedPrincipalandProprietaryrevenueswerenothaircutinthestress
scenario.IfthePrincipalandProprietaryrevenueshadbeendiscountedby100%,
aswasapparently thecasein2006,the2008RAlimit wouldhavebeen~$1,955
millionlower.Alternatively,anyhaircutassumedwouldhaveadollarfordollar
impactontheRAlimit.Forexample,ifa10%haircuthadbeenused(thelowest
ofallhaircutssuggestedintheinthe2008RAcalculationspreadsheet,seeixp.5),
theRAlimitwouldhavebeen~$196millionlower.

Neitherthe15%buffer,northe$300milliondollarhaircutswereused.(ixp.2)If
the15%volatilitybufferhadbeenapplied,the2008RAlimitwouldhavebeen
~$600 million lower ($4 billion x 15%). If the $300 million dollar haircut ($150
millionforMarketEnvironmentHaircutand$150millionforEarmarkedfor
Additional Principal/Strategic Investments) had been applied, the limit would
havebeenthatmuchlower.

c) Recalculation of the 2008 RA limit using the 2007 methodology results in a


lowerRAlimit.

We recalculated the 2008 RA limit, using the exact methodology used for
thecalculationin2007,andarrivedatalimitof$2.457billion.Thisisincontrast
to the $4 billion limit actually used in 2008. The methodological changes that
contributed to the ~$1.5 billion reduction in the limit as we have recalculated,
5


were (as described above): a change from ROTE (2008) back to ROE (2007),
increasesinstresshaircutsinadownturnscenario(higherhaircutswereusedin
2007), and adjustments to the compensation and non personnel expense
calculations in a downturn scenario (2007 used more conservative assumptions
inaggregate).Pleasenotethatmanyofthecalculationsworkintandem,andthe
impactsofeachchangeinisolationarenotsimplyadditive.(xxp.2,4,5)

d) Whatchangedbetween2007and2008thatimpactedtheRAlimit,outsidethe
methodologychanges?

As stated above, if Lehman had maintained a consistent methodology


between2007and2008,theRAlimitfor2008wouldhaveactuallybeenlowered
to $2.457 billion. This number would have been lower than the limit of $3.3
billionwhichwasin placethroughout2007.Thisdecreasewastheresultofthe
followingfactors.

Budgeted revenue increased. The increase in budgeted revenue, from $19.65


billionin2007to$21billionin2008,inisolation,wouldhaveallowedforahigher
RAlimitby$1.35billion.

Revenuelossinadownturnscenarioincreased.Becausebudgetedrevenuewas
increased, and revenue loss in a stress scenario is calculated as a percentage of
budgetedrevenuebrokenoutbytype,therevenuelossinthedownturnscenario
(using 2007 haircuts) also increased. The higher the expected revenue loss, the
lowerthelimit.

Expected average common equity increased. The 2007 calculation assumed


common equity of $17.413 billion, while the 2008 calculation assumed $20.795
billion. As the RA limit was based off of 10% return on equity, the increased
equityledtohigherrequiredrevenues,andlowerlimits.

Increase in budgeted compensation expense. Budgeted compensation expense


increasedfrom$9.6billionin2007to$10.9billionin2008.Theincreasedexpense
required higher revenues to achieve the performance target (i.e. 10% ROE),
which resulted in a lower limit. The distribution of fixed vs.variable
compensation expense also changed from 56% fixed in 2007 to 54% fixed in
2008.Thevariableexpenseisdiscountedatahigherrateforthestressscenario,
whichleadstoahigherRAlimit.

Increase in budgeted non personnel expense. Budgeted non personnel expense


increasedfrom$3.4billionin2007to$4.2billionin2008,leadingtoadecreasein
theRAlimit.

Decreaseintaxratesassumedinastressscenario.Thetaxratesusedinastress
scenariodecreasedfrom30%in2007to26%in2008.Alowertaxexpenseledto
ahigherRAlimit.

Decrease in dividends. Dividends in stress scenario were lowered from $66


millionin2007to$49millionin2008,leadingtoahigherRAlimit.

Overall, the reason why the $2.457 billion 2008 limit we have projected
(using2008financial projectionsand the actual 2007 methodology) would have
beenlowerthanthe2007limitof$3.3billionisthatprojectionsforoverheadand
equitygrewbetween2007and2008,overridingthegrowthinprojectedrevenues.

III.

AnalystEarningsEstimates
Analyst Report Summary - 2008 Earnings Estimates

Analyst

Date

2008
Projected
Reason for issuing Equity Report
Revenue
($mm)

Source

CIBC

12/13/2007 $ 18,953.0 following an earnings call and "Outlook 2008: Crunch


Time"

Meredith Whitney; Kaimon Chung, CFA "4Q07 Results Highlight


Difficult Credit Market Conditions" CIBC World Markets (December
13, 2007)
following earnings call
Susan Katzke; Ross Seiden "Lehman Brothers Earnings First
Impressions" Credit Suisse (December 13, 2007)
following earnings call
Douglas Sipkin, CFA; Warren Gardiner "LEH: Survive..And Thrive
Later, Solid All Things Considered" Wachovia Capital Markets, LLC
(December 13, 2007)
following earnings call
Kenneth Worthington, CFA; Funda Akarsu "Lehman Delivers, but
Earnings Quality Remains Key Concern" JPMorgan (December 13,
2007)
following earnings call
James Mitchell; John Grassano "Solid Results in Tough Environment;
Undervalued Franchise" The Bunkingham Research Group
(December 14, 2007)
Based on sharper than assumed economic slow-down
Matthew Czepliewicz "A relative winnerin subdued credit markets"
HSBC Global Research (January 3, 2008)
Based on achievement of this forecast relies on healthy Susan Katzke; Ross Seiden "Lehman Brothers Company Update
global GDP growth and a recovery in the capital markets Establishig 2009E" Credit Suisse (January 11, 2008)

Credit Suisse

12/13/2007

18,972.0

Wachovia

12/13/2007

19,159.0

JPM

12/13/2008

18,186.0

Buckingham Research 12/14/2007

21,850.0

HSBC

1/3/2008

19,757.0

Credit Suisse

1/11/2008

18,980.0

Wachovia

1/15/2008

19,159.0 Based on recently held client meeting with Erin Callan, Douglas Sipkin, CFA; Herman Chan; Warren Gardiner "LEH: Tough
overall tone was cautious given the challenging operating Year Ahead--Sowing Seeds For Share Gains" Wachovia Capital
environment. Still believe LEH is well positioned
Markets, LLC (January 15, 2008)

Oppenheimer

1/28/2008

18,953.0 Based on first meeting with Erin Callan, leaving estimates Meredith Whitney; Kaimon Chung, CFA "Take-aways From Meeting
as is
With LEH's New CFO Erin Callan" Oppenheimer (January 28, 2008)


Sources:

i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
xiii.
xiv.
xv.
xvi.
xvii.
xviii.
xix.
xx.

2007 Risk Appetite Limit Revised Proposal, November 20, 2006. LBEX
DOCID2125724
2007RiskAppetiteLimit,November22,2006.LBEXDOCID2125734
2007$3.8billionRALimitCalculation.LBEXDOCID145687
2007$3.0billionRALimitCalculation.LBEXDOCID145663
2007FinancialPlan,January30,2007.LBH_SEC07940_752429
2007RiskAppetiteLimit,January7,2007.LBEXDOCID159838
FW:RevisedRiskAppetiteLimit,January4,2008.LBEXWGM1056629
2008FinancialPlan,January29,2008.LBHI_SEC07940_068559
2008$4billionRALimitCalculation.LBEXDOCID1305768
Impact on RA limit of change from ROTE to ROE analysis performed by
D&P.
ImpactonRAlimitofchangeinStressHaircutsanalysisperformedbyD&P.
ImpactonRAlimitofchangeinCompensationExpenseanalysisperformed
byD&P.
ImpactonRAlimitofchangeinNPEanalysisperformedbyD&P.
2008BudgetOctober4,2007.EC000042
ReutersEstimates:CustomConsensusReportforLehmanBrothersInc.
OppenheimerRating,January28,2008.
WachoviaRating,January15,2008.
ImpactonRAlimitofchangefrom55%C&BRatioanalysisperformedby
D&P.
2008FinancialPlan,DraftJanuary29,2008.LBHI_SEC07940_045973
2008$2.4billionRALimitCalculationanalysisperformedbyD&P.

APPENDIX11:COMPENSATION
To determine, as the Examiner was directed to do, whether the officers
and directors of Lehman breached their fiduciary duties, the Examiner
investigated whether Lehmans compensation practices may have improperly
motivatedconduct,asdiscussedmorefullyinSectionIII.A.1ofthisReport.
I.

EXECUTIVESUMMARY
Specifically, the Examiner reviewed: (1) how Lehman determined the

amount of overall compensation and divided that compensation pool among


divisions, business lines and employees; (2) the extent to which risk was
consideredinLehmansassessmentofperformanceforcompensationpurposes;
and(3)Lehmanspoliciesandpracticesincomparisontothoseofpeerfirms.
Lehman allocated compensation based primarily on net revenue.
Revenue not yet recognized but recorded based on marktomarket valuations
was included in net revenue and, therefore, impacted compensation decisions.
This inclusion naturally created incentives to value investments highly, avoid
writedownsandotherwiseseektomaximizeshorttermprofitssoastogenerate
highernetrevenueleadingtohighercompensation.TheExaminerhasnotfound
evidencethatLehmanpersonneldeliberatelyengagedinmisconductdesignedto
exploittheseincentives.


Although riskbased metrics and similar criteria did play some role in
compensation decisions, it was a minor, not central, role. Compensation
decisionsweredrivenlargelybynetrevenue,marketcomparisonsandemployee
attritionconcerns.
Lehmanscompensation practices were similar to those of its Wall Street
peers. While Lehmans vesting and delivery periods for its stock awards were
notablylongerthanitspeerfirms,Lehmanscompensationpracticesweresimilar
tothoseusedbytheothermajorinvestmentbanks.1
II.

THECOMPENSATIONANDBENEFITSCOMMITTEEOFTHE
BOARD
The first step of Lehmans annual compensation process began with

meetings of the Compensation and Benefits Committee (Compensation


Committee)oftheBoardofDirectors,whichin2007and2008consistedofJohn
F. Akers, Marsha Marty Johnson Evans, Sir Christopher Gent and John D.
Macomber. Tracy Binkley, Lehmans Head of Human Resources, served as
Secretary for meetings, while Richard S. Fuld, Jr., Lehmans Chief Executive
Officer and Chairman of the Board, and others (Joseph M. Gregory, President
and Chief Operating Officer (COO), Anthony J. Collerton, COO of Human

The Examiner did not examine or reach a conclusion regarding whether the compensation
practicesoftheindustryasawholeduringtheperiodleadinguptoLehmanscollapsewerein
hindsight reasonable; that issue has been the subject of much public debate, and is beyond the
scopeofthisexamination.
1


Relations, and Thomas A. Russo, Chief Legal Officer, among others) regularly
attended Compensation Committee meetings by invitation.2 These meetings
generallytookplaceonamonthlyornearmonthlybasis.3
The Compensation Committees primary role was to set the firms
compensation ratio (defined below) and to supervise the allocation of available
compensationderivedfromtheratiointocompensationpoolsforeachdivision.4
In addition, the Compensation Committee determined the mix of cash
compensation and equity compensation (awarded as restricted stock units

Lehman Brothers Holdings Inc., Minutes of the Compensation and Benefits Committee of
Lehman Board of Directors (Jan. 30, 2007), at p. 1 [LBHI_SEC07940_025526]; Lehman Brothers
Holdings Inc., Minutes of the Compensation and Benefits Committee of Lehman Board of
Directors (Apr. 11, 2007), at p. 1 [LBHI_SEC07940_025940]; Lehman Brothers Holdings Inc.,
Minutes of the Compensation and Benefits Committee of Lehman Board of Directors (Oct. 15,
2007), at p. 1 [LBHI_SEC07940_026503]; Lehman Brothers Holdings Inc., Minutes of the
Compensation and Benefits Committee of Lehman Board of Directors (Dec. 7, 2007), at p. 1
[LBHI_SEC07940_027100]; Lehman Brothers Holdings Inc., Minutes of the Compensation and
Benefits Committee of Lehman Board of Directors (Jan. 28, 2008), at p. 1
[LBHI_SEC07940_027212]; Lehman Brothers Holdings Inc., Minutes of the Compensation and
Benefits Committee of Lehman Board of Directors (Mar. 4, 2008), at p. 1 [LBEXAM 003552];
LehmanBrothersHoldingsInc,MinutesoftheCompensationandBenefitsCommitteeofLehman
Board of Directors (Mar. 12, 2008), at p. 1 [LBEXAM 003580]; Lehman Brothers Holdings Inc.,
Minutes of the Compensation and Benefits Committee of Lehman Board of Directors (Apr. 14,
2008),atp.1[LBEXAM003646];LehmanBrothersHoldingsInc.,MinutesoftheCompensation
andBenefitsCommitteeofLehmanBoardofDirectors(June19,2008),atp.1[LBEXAM003769];
Lehman Brothers Holdings Inc., Minutes of the Compensation and Benefits Committee of
LehmanBoardofDirectors(July1,2008),atp.1[LBEXAM003812];LehmanBrothersHoldings
Inc.,MinutesoftheCompensationandBenefitsCommitteeofLehmanBoardofDirectors(Sep.3,
2008),atp.1[LBEXAM003902];LehmanBrothersHoldingsInc.,MinutesoftheCompensation
andBenefitsCommitteeofLehmanBoardofDirectors(Sep.12,2008),atp.1[LBEXAM003922].
3Id.
4ExaminersInterviewofAnthonyJ.Collerton,May14,2009atpp.23;ExaminersInterviewof
MaryPatArcher,Aug.20,2009,atp.2;ExaminersInterviewofMarshaJohnsonEvans,May22,
2009,atp.6.
2


(RSUs) or options), as well as set the deferred component of total
compensation.5
A. DeterminingLehmansCompensationRatio
Eachyear,theCompensationCommitteedeterminedLehmansaggregate
compensation expense (consisting of both fixed compensation expenses and
discretionary,performancebasedbonusexpenses)bycalculatingaratiooftotal
compensation and benefits expense to net revenue (the compensation ratio).6
Inadditiontonetrevenue,theCompensationCommitteeconsideredfactorssuch
as: the need to maximize returns to shareholders; investments of the firm in

Lehman Brothers Holdings Inc., Minutes of the Compensation and Benefits Committee of
Lehman Board of Directors (Jan. 30, 2007), at p. 1 [LBHI_SEC07940_025526]; Lehman Brothers
Holdings Inc., Minutes of the Compensation and Benefits Committee of Lehman Board of
Directors(Apr.11,2007),atpp.111[LBHI_SEC07940_025940];LehmanBrothersHoldingsInc.,
Minutes of the Compensation and Benefits Committee of Lehman Board of Directors (Oct. 15,
2007), at pp. 14 [LBHI_SEC07940_026503]; Lehman Brothers Holdings Inc., Minutes of the
CompensationandBenefitsCommitteeofLehmanBoardofDirectors(Dec.7,2007),atpp.110
[LBHI_SEC07940_027100]; Lehman Brothers Holdings Inc., Minutes of the Compensation and
Benefits Committee of Lehman Board of Directors (Jan. 28, 2008), at pp. 17
[LBHI_SEC07940_027212]; Lehman Brothers Holdings Inc., Minutes of the Compensation and
Benefits Committee of Lehman Board of Directors (Mar. 4, 2008), at p. 15 [LBEXAM 003552];
LehmanBrothersHoldingsInc,MinutesoftheCompensationandBenefitsCommitteeofLehman
Board of Directors (Mar. 12, 2008), at p. 1 [LBEXAM 003580]; Lehman Brothers Holdings Inc.,
Minutes of the Compensation and Benefits Committee of Lehman Board of Directors (Apr. 14,
2008), at pp. 15 [LBEXAM 003646]; Lehman Brothers Holdings Inc., Minutes of the
Compensation and Benefits Committee of Lehman Board of Directors (June 19, 2008), at p. 1
[LBEXAM003769];LehmanBrothersHoldingsInc.,MinutesoftheCompensationandBenefits
Committee of Lehman Board of Directors (July 1, 2008), at p. 1 [LBEXAM 003812]; Lehman
BrothersHoldingsInc.,MinutesoftheCompensationandBenefitsCommitteeofLehmanBoard
ofDirectors(Sep.3,2008),atpp.16[LBEXAM003902];LehmanBrothersHoldingsInc.,Minutes
oftheCompensationandBenefitsCommitteeofLehmanBoardofDirectors(Sep.12,2008),atpp.
13[LBEXAM003922].
6 Examiners Interview of Anthony J. Collerton, May 14, 2009 at p. 2; Examiners Interview of
MarshaJohnsonEvans,May22,2009,atp.6;Lehman,CompensationOverview(July30,2008),at
p.3[LBEXWGM727244].
5


strategichiring;andrewardingperformanceinacompetitivemannerinlightof
currentmarketconditions.7Throughouttheyear,theCompensationCommittee
consulted quarterly revenue projections and realtime results provided by the
FinanceDepartmenttoestimateandforecastthefirmscompensationratio.8
The quarterly revenue projections included analysis of the impact of
slightly different compensation ratio levels on pretax margin, return on equity
(ROE), earnings per share (EPS), discretionary bonuses and total
compensationfornonguaranteednonnewhire(NGNNH)employees.9
The compensation pool was finalized in the fourth quarter of each
Lehman fiscal year (September through November), when Lehman was able to
accuratelypredictitsannualnetrevenuesbasedonFinanceDepartmentaccruals
andto compareitscompensationestimates to theestimates ofitscompetitors.10
As Lehmans fiscal yearend approached, the compensation ratio fluctuated
based on what Lehman learned from outside consultants regarding the

Lehman, Compensation Overview (July 30, 2008), at p. 3 [LBEXWGM 727244]; Examiners


InterviewofMarshaJohnsonEvans,May22,2009,atp.6.
8 Examiners Interview of Anthony J. Collerton, May 14, 2009, at pp. 23; Lehman Brothers
Holdings Inc., Minutes of the Compensation and Benefits Committee of Lehman Board of
Directors(March12,2008),atp.1[LBEXAM003580].
9 Lehman Brothers Holdings Inc., Minutes of the Compensation and Benefits Committee of
LehmanBoardofDirectors(March12,2008),atp.1[LBEXAM003580].
10ExaminersInterviewofAnthonyJ.Collerton,May14,2009,atp.3.
7


compensationratios usedbycompetitors such as GoldmanSachs, BearStearns,
MorganStanleyandMerrillLynch.11
Lehmans compensation ratio typically ranged between 48% and 50% of
netrevenue,andwas49.3%ofnetrevenueineachoffiscalyears2005,2006and
2007.12ThechartbelowdemonstratesLehmanscompensationratioascompared
tofourcompetitorsbetween2003and2007:13

Lehman,PresentationtotheCompensationCommitteeoftheBoardofDirectors(Jan.23,2008),
atp.2[LBHI_SEC07940_027204].
12 Examiners Interview ofAnthony J. Collerton,May 14,2009,at p. 2;Lehman, Presentation to
Compensation and Benefits Committee of Lehman Board of Directors (Jan. 23, 2008), at p. 5
[LBHI_SEC07940_027204].
13 LehmanBrothersHoldingsInc.,AnnualReportfor2005asofNov.30,2005(Form10K)(filed
onFeb.13,2006),atp.26(LBHI200510K);LehmanBrothersHoldingsInc.,AnnualReportfor
2006asofNov.30,2006(Form10K)(filedonFeb.13,2007),atp.28(LBHI200610K);Lehman
BrothersHoldingsInc.,AnnualReportfor2007asofNov.30,2007(Form10K)(filedonJan.29,
2008),atp.29(LBHI200710K);TheBearStearnsCompaniesInc.,AnnualReportfor2005asof
Nov.30,2005(Form10K)(filedonFeb.13,2006),atp.49(BearsStearns200510K);TheBear
StearnsCompaniesInc.,AnnualReportfor2006asofNov.30,2006(Form10K)(filedonFeb.13,
2007),atp.50(BearsStearns200610K);TheBearStearnsCompaniesInc.,AnnualReportfor
2007asofNov.30,2007(Form10K)(filedonJan.29,2008),atp.81(BearsStearns200710K);
TheGoldmanSachsGroupInc.,AnnualReportfor2005asofNov.25,2005(Form10K)(filedon
Feb. 7, 2006), at p. 152 (Goldman Sachs 2005 10K); The Goldman Sachs Group Inc., Annual
Reportfor2006asofNov.24,2006(Form10K)(filedonFeb.5,2007),atp.166(GoldmanSachs
200610K);TheGoldmanSachsGroupInc.,AnnualReportfor2007asofNov.30,2007(Form
10K) (filed on Jan. 28, 2008), at p. 174 (Goldman Sachs 2007 10K); Morgan Stanley, Annual
Reportfor2007asofNov.30,2007(Form10K)(filedonJan.29,2008),atp.28(MorganStanley
2007 10K); Merrill Lynch & Co., Inc., Annual Report for 2007 as of Dec. 28, 2007 (Form 10K)
(filedonFeb.25,2008),atp.32(MerrillLynch200710K).
11

($000,000)

2007

2006

LehmanBrothers
NetRevenue
Compensation&BenefitsExpense

CompensationRatio

2005

2004

2003

$19,257

$17,583

$14,630

$11,576

$8,647

9,494

8,669

7,213

5,730

4,318

49.3%

49.3%

49.3%

49.5%

49.9%

BearStearns

NetRevenue

5,945

9,227

7,411

6,813

5,994

Compensation&BenefitsExpense

3,425

4,343

3,553

3,254

2,881

57.6%

47.1%

47.9%

47.8%

48.1%

CompensationRatio

GoldmanSachs

NetRevenue

45,987

37,665

25,238

20,951

16,012

Compensation&BenefitsExpense

20,190

16,457

11,758

9,681

7,515

43.9%

43.7%

46.6%

46.2%

46.9%

CompensationRatio

MorganStanley

NetRevenue

28,026

29,839

23,525

20,319

17,621

Compensation&BenefitsExpense

16,552

13,986

10,749

9,320

7,892

59.1%

46.9%

45.7%

45.9%

44.8%

CompensationRatio

MerrillLynch

NetRevenue

11,250

33,781

25,277

22,059

19,900

Compensation&BenefitsExpense

15,903

16,867

12,314

10,663

9,886

141.4%14

49.9%

48.7%

48.3%

49.7%

CompensationRatio

Excluding Merrill Lynch, the 2007 average of competitors compensation


ratios was 53.5%;15 the 2006 average of competitors compensation ratios was
46.9%.16 Lehman attempted to maintain or reduce its compensation ratio on a
yeartoyearbasisasasignaltothemarketthatitwascommittedtocontrolling

In 2007, Merrill reported a net loss from continuing operations of $8.6 billion, resulting in
compensation expenses exceeding net revenue, and a compensation ratio of 141.4%. Merrill
Lynch200710K,atpp.10,69.
15IfMerrillwasincluded,theratiowouldbe70.35.
16 LBHI200510Katp.26;LBHI200610Katp.28;LBHI200710Katp.29;BearStearns200510
Katp.49;BearStearns200610Katp.50;BearStearns200710Katp.81;GoldmanSachs2005
14


compensationexpenseswhilesalariesofindividualemployeesandexecutives
might increase, Lehman was maintaining and/or decreasing its compensation
expensesasanoverallpercentageoffirmexpenses.17
Early in 2008, Lehman projected declining revenue due to market
conditions.18Tomaintaintotalcompensationatadollarlevelcomparabletopast
levelsdespitedecliningrevenues,andthusavoidpotentialemployeeexodusto
competitors, Lehman projected an increase in the firms compensation ratio
duringthefirstquarterof2008.19Thechartbelowdemonstratesthattrend:

2007
Q2
Q3
5,512
4,308
2,718
2,124
49.31% 49.30%

2008
Q1
3,507
1,841
52.50%

($000,000)
Q1
Q4
NetRevenue
5,047
4,390
Compensation
2,488
2,164
%ofRevenue
49.30%
49.29%

At a March 12, 2008 Compensation Committee meeting, Fuld


recommended,andtheBoardadopted,anincreasedcompensationratioof52.5%
for the first quarter of 2008.20 First quarter 2008 net revenue decreased by

10Katp.152;GoldmanSachs200610Katp.166;GoldmanSachs200710Katp.174;Morgan
Stanley200710Katp.28;MerrillLynch200710Katp.32.
17ExaminersInterviewofSirChristopherGent,Oct.21,2009,atpp.2,811;ExaminersInterview
ofJamesEmmert,Oct.9,2009,atp.2.
18Lehman,PresentationtoCompensationandBenefitsCommitteeofLehmanBoardofDirectors
(Jan.23,2008),atp.1[LBHI_SEC07940_027204].
19Id.atp.2.
20 Lehman Brothers Holdings Inc., Compensation and Benefits Committee Meeting Minutes of
LehmanBoardofDirectors(Mar.12,2008),atp.1[LBEXAM003580].


approximately 30.5% from first quarter 2007 net revenue and approximately
20.1%fromfourthquarter2007netrevenue.21
Beginning second quarter 2008, the compensation ratio method of
determiningtotalcompensationwasnolongerviable,asfirmwidenetrevenue
wasnegative$668million.22Despitehavingfirmwidenegativenetrevenuefor
secondquarter2008,certainLehmandivisions,i.e.,InvestmentManagementand
Investment Banking, had performed well during that period.23 Consequently,
Lehman management determined that employees in those better performing
divisions should be paid compensation commensurate with compensation paid
toemployeesinsimilardivisionsatLehmanspeerfirms,inordertoprotectthe
Lehman franchise.24 Preliminary market indications following second quarter
2008 suggested that pay for the lead investment banks was likely to be down
approximately25%to30%overallfrom2007.25Consistentwiththeseindications,
theCompensationCommitteealsoplannedtotargeta30%reductioninpayfor

LehmanBrothersHoldingsInc.,QuarterlyReportasofFeb.28,2007(Form10Q)(filedonApr.
9, 2007), at p. 3 (LBHI 10Q (filed Apr. 9, 2007)); Lehman Brothers Holdings Inc., Quarterly
ReportasofMay31,2007(Form10Q)(filedonJuly10,2007),atp.3(LBHI10Q(filedJuly10,
2007));LehmanBrothersHoldingsInc.,QuarterlyReportasofAug.31,2007(Form10Q),atp.3
(filed on Oct. 10, 2007) (LBHI 10Q (filed Oct. 10, 2007)); LBHI 2007 10K at p. 29; Lehman
BrothersHoldingsInc.,QuarterlyReportasofFeb.29,2008(Form10Q)(filedonApr.9,2008),at
p. 4 (LBHI 10Q (filed Apr. 9, 2008)); Lehman Brothers Holdings Inc., Quarterly Report as of
May31,2008(Form10Q)(filedonJuly10,2008),atp.4(LBHI10Q(filedJuly10,2008)).
22LBHI10Q(filedJuly10,2008).
23 Lehman, Second Quarter 2008 Compensation Expense Presentation to Compensation and
Benefits Committee of Lehman Board of Directors (July 11, 2008), at p. 1
[LBHI_SEC07940_851433].
24Id.
21


NGNNH employees for 2008; the Compensation Committee determined it
wouldbedifficulttobothmaintainthefranchiseandinitiateanypaycutsofover
30%.26 In addition, beginning in January 2008, the Compensation Committee
beganexploring alternativelongtermcompensation models,includingchanges
toitsequityawardplan,whichwouldloweroverallcompensationcosts.27
B. CashEquityMixofCompensationandVesting
In addition to setting the firms compensation ratio, the Compensation
Committeealsodeterminedthecashequitymix(thepercentageofcompensation
paidincashversusthatportion paidinequity)andthedeferredcomponentof
total compensation for all Lehman employees.28 As an individuals total
compensation increased, the deferred component increased correspondingly.29
In Lehmans view, individuals with significant portions of their total
compensationintheformofdeferredcompensationhadanincentivetopromote
thefirmslongtermsuccess.30

Id.atp.3.
Id.
27Lehman,PresentationtoCompensationandBenefitsCommitteeofLehmanBoardofDirectors
(Jan. 23, 2008), at p. 2 [LBHI_SEC07940_027204]; Lehman, Compensation Overview (July 30,
2008),atpp.132[LBEXWGM727244].
28Lehman,CompensationOverview(July30,2008),atpp.1519[LBEXWGM727244].
29Id.
30Id.
25
26

10


The chart below shows the amount of total compensation comprised of
equitybasedawardsin2008:31
2008 Total Compensation Range

Amount of Total Compensation in Equity-Based Awards

$0 - $74,999
75,000 - 99,999
100,000 - 299,999
300,000 - 499,999
500,000 - 749,999
750,000 - 999,999
1,000,000 - 1,499,999
1,500,000 - 1,999,999
2,000,000 - 2,499,999

1% of 2008 TC
2% of 2008 TC
$2,000 plus 14% of 2008 TC above $100,000
$30,000 plus 35% of 2008 TC above $300,000
$100,000 plus 35% of 2008 TC above $500,000
$187,500 plus 65% of 2008 TC above $750,000
$350,000 plus 65% of 2008 TC above $1,000,000
$675,000 plus 85% of 2008 TC above $1,500,000
$1,100,000 plus 80% of 2008 TC above $2,000,000
$1,500,000 plus 90% of 2008 TC above $2,500,000
up to a maximum of 65% of 2008 TC

2,500,000 and above

Thus, employees receiving compensation greater than $750,000 received a


significantportionoftheirtotalcompensation(65%)inequity.
Thefirmscashequitymixofcompensationin2007was32%cashto68%
equity.32Lehmansmixwasconsistentwiththatofitspeergroup,whichranged
from alowof 11%cashcompensation atGoldman Sachsto a highof 39% cash
compensationatBearStearns,asdetailedinthefollowingchart:33

Lehman Brothers
Bear Stearns
Goldman Sachs
JP Morgan Chase

Compensation Mix
Equity
vs.
Cash
68.00%
32.00%
61.00%
39.00%
89.00%
11.00%
69.00%
31.00%

Id.atp.26.
Lehman,AnnualCompensationReviewPresentationtoCompensationandBenefitsCommittee
ofLehmanBoardofDirectors(Apr.14,2008),atp.5[LBHI_SEC07940_027870].
33Id.
31
32

11


Merrill Lynch
Morgan Stanley
2007 Average

71.00%
72.00%
73.00%

29.00%
28.00%
27.00%

Since 2005, Lehmans equity compensation component consisted


exclusively of RSUs, and each RSU grant entitled an employee to one share of
Lehman stock after a period of years.34 The following chart depicts Lehmans
equity vesting and delivery schedule.35 The vesting schedule refers to the time
period before an employee received his or her RSUs. The delivery schedule
referstothetimeperiodbeforetheRSUsconvertedintounrestrictedstock.

Lehman,CompensationOverview(July30,2008),atp.14[LBEXWGM727244].
Id.atp.27.

34
35

12

Vesting Schedule
Discount at grant year 1 year 2 year 3 year 4 year 5

Firm
1

25.00%

Suisse
ISUs (in
lieu of
discount)
Deutsche
Bank
Goldman
Sachs

n/a

Citigroup
Credit
2

2007 SVP
and below

25.00% 25.00% 25.00% 25.00%

25.00% 25.00%

25.00% 25.00%

33.00% 33.00% 33.00%

33.00% 33.00%

33.00%

100.00%
9.00%
0.00%

JP Morgan
Merrill
Lynch
Morgan
Stanley
UBS
Lehman
Brothers
2007 MD

Delivery Schedule
at grant year 1 year 2 year 3 year 4 year 5

Principal
Discount
Principal
Discount

2008 Proposed

100.00%

50.00% 25.00% 25.00%


40.00%

50.00%

60.00%

25.00% 25.00%
100.00%

0.00%

50.00% 50.00%

0.00%

25.00% 25.00% 25.00% 25.00%

25.00% 25.00%

25.00% 25.00%

0.00%
0.00%

50.00% 50.00%
33.00% 33.00% 33.00%

50.00%
33.00% 33.00%

50.00%
33.00%

50.00%
30.00%

50.00%

50.00%

50.00%
100.00%

100.00%
100.00%

100.00%

100.00%
100.00%

100.00%
25.00%
0.00%

33.00% 33.00% 33.00%

100.00%

Discount provided on deferral levels up to $500k in bonus only. Discretionary supplemental awards in 2007.
Equity discounts replaced in 2006 by a new performance-based Incentive Stock Unit ("ISU") program; ISUs were communicated as equivalent to RSUs
with a 20% discount. Deferral % of 100% above $4 million in bonus.

In2007,asinallprioryears,RSUswereissuedtoemployeesatadiscount
to market price.36 Therefore, the total value of the RSUs an employee received
consistedoftwocomponents:aportionofthevaluewasattributabletohisorher
actual RSU award (principal portion), and a portion was attributable to the

Id.

36

13


discounttomarketprice(discountportion).37ManagingdirectorsreceivedRSUs
atadiscountof30%tomarketprice,andSeniorVicePresidentsandotherlower
rankingemployeesreceivedRSUsatadiscountof25%tomarketprice.38In2007,
50% of a Managing directors principal portion RSUs vested after three years,
and the remaining 50% vested after five years. The discount portion of RSUs
granted to a Managing director also vested after five years.39 Similarly, the
principal portion of the RSUs granted to Senior Vice Presidents and lower
rankingemployeesvestedaftertwoyears,andthediscountportionoftheRSUs
vestedafterfiveyears.40
LehmansRSUvestingand deliveryscheduleswere longerthan thoseof
its peer firms. Lehman Managing directors experienced equity vesting after as
long as five years (50% of the principal portion, and 100% of the discount
portion),andLehmanpostponedsharedeliveryuntilafterfiveyears,41whereas
thevestinganddeliveryperiodsofLehmanspeerfirmsconcludedafterthreeor
fouryears.42
Annual limits were imposed on Executive Committee members, limiting
theamountofequitytheywerepermittedtoliquidatebasedonthemarketvalue

Id.
Id.atp.15.
39Id.atp.27.
40Id.
41Id.
42Id.
37
38

14


of their equity holdings at the beginning of each year.43 For 2008, the annual
liquidationlimitwas20%,whichwascalculatedusingapretaxequityvaluethat
includedRSUs,optiongainsandthepretaxequivalentofsharesowned.44
According to Lehman witnesses, longer vesting and delivery, as well as
restrictions on the amount of equity Executive Committee members could
liquidateannually,helpedtoalignexecutiveinterestswiththelongtermgoalsof
the firm and its shareholders.45 A forthcoming article in the Yale Journal on
Regulation by Harvard Law School Professors Lucian A. Bebchuk, Alma Cohen
and Holger Spamman calls that assumption into question, noting that the top
fiveexecutivesatLehmanreceivedcashbonusesandproceedsfromstocksales
totaling $1 billion between 2000 and 2008 and that Lehman top executives had
regularshorttermincentivestoattempttoincreasethestockpriceontheshares
thatthey weresellingastheybecamevestedanddelivered.46Indeed,although
Lehmans vesting and delivery schedules were longer than peers vesting and
delivery schedules, Lehmans schedules were still focused on shortterm firm
performance(fiveyearsorless).

Id.atp.21.
Id.atp.21.
45ExaminersInterviewofSirChristopherGent,Oct.21,2009,atpp.2,811;ExaminersInterview
ofAnthonyJ.Barsanti,Oct.15,2009,atp.17.
46LucianA.Bebchuk,etal.,TheWagesofFailure:ExecutiveCompensationatBearStearnsandLehman
20002008(YaleJ.onReg.,WorkingDraft,Nov.22,2009),
http://www.law.harvard.edu/faculty/bebchuk/pdfs/BCSWagesofFailureNov09.pdf(lastvisited
Jan.27,2010),atpp.2,9.
43
44

15


Lehmans extended vesting schedule also had an impact on employee
severance. Firm policies and procedures addressed the manner in which non
vestedshareswouldbetreatedfordepartingemployeeswhohadachievedfull
careerstatusatLehman.47Fordepartingemployeeswhohadyettoachievefull
careerstatus,theCompensationCommitteeand/ortheExecutiveCommitteehad
discretiontoawardseverancepackagesandtodeterminehownonvestedshares
would be treated; Fuld would generally make recommendations, which the
CompensationCommitteewould,forthemostpart,approve.48
C. DividingCompensationBetweenLehmanDivisions
Afterdeterminingthefirmscompensationratioandthecashequitymix,
the Compensation Committee turned to the next step in the annual
compensation process dividing the compensation pool among Lehmans
divisions.49 Once the Compensation Committee finalized the total firmwide
compensation pool in the fourth quarter of each fiscal year and Lehman could
accuratelypredictannualrevenuesbasedonFinanceDepartmentestimates,and
after Lehman compared its predicted compensation to the compensation

Lehman, Summary of Select Material Terms for the 2007 Equity Award Program for Bonus
EligibleandProductionBasedEmployees(2007),atp.1[LW00896].
48Lehman,JeremyM.IsaacsSeparationPlan(Sep.8,2009)[LBEXDOCID827786],attachedtoe
mailfromHilaryMcNamara,Lehman,toTracyA.Binkley,Lehman,etal.(Sept.8,2008)[LBEX
DOCID962552].
49Lehman,CompensationOverview(July30,2008),atpp.58[LBEXWGM727244].
47

16


estimates of its Wall Street competitors, the Compensation Committee divided
thecompensationpoolamongLehmandivisions.50
A portion of the firms total compensation pool was fixed, representing
compensationorbenefitobligationsthatthefirmhadcommittedtohonor,such
as compensation agreements or contractedfor salaries for current and former
employees,healthcarecosts,retirementbenefits,contractualseverancepackages
and amortization of equity awards that had been given to employees in past
years (normally amortized over five years).51 These fixed obligations were
satisfiedfirst,withallremainingfundsinthecompensationpoolthenallocated
todivisionsforemployeebonuses.52
Rather than applying the firms compensation ratio to determine
divisional compensation allocations, the Committee employed a discretionary
process that analyzed a number of factors.53 The compensation ratio for
InvestmentBankingwasgreaterthanthefirmwidecompensationratioof49.3%,
whilethecompensationratioforCapitalMarketswaslowerthanthefirmwide
compensation ratio.54 The compensation ratio for Investment Management

ExaminersInterviewofAnthonyJ.Collerton,May14,2009atp.3.
Id.atpp.23.
52Id.atp.3.
53Lehman,CompensationOverview(July30,2008),atpp.57[LBEXWGM727244].
54Lehman,Q12008FinalGreenbookDetailedVersion(Mar.12,2008),atp.14
[LBHI_SEC07940_042145];Lehman,Q22008GreenbookFinalVersion(June12,2008),atpp.910
[LBHI_SEC07940_042474];Lehman,Q32008Greenbook(Sept.11,2008),atpp.23
[LBHI_SEC07940_042656].
50
51

17


fluctuatedaboveandbelowthefirmwidecompensationratio.55Thechartbelow
demonstratesthisvariation,showingsegmentrevenueandcompensationforthe
InvestmentBanking,CapitalMarketsandInvestmentManagementdivisionsfor
the third, second, and first quarters of 2008 and the fourth, second, and first
quartersof2007:
Investment Banking
($000,000)
Segment Revenue
Compensation
Expense
Compensation
Allocation
Segment Expense
Adjustments
Total Compensation
Compensation
Ratio

Q3
266

2008
Q2
858

Q1
867

313

352

71

384

Capital Markets

Q4
831

2007
Q2
1,150

Q1
850

217

442

529

367

819

83

97

112

105

95

64
500

228
542

(31)
523

44
679

82
543

144.4% 58.2% 62.5%

62.9% 59.0% 63.9%

2008
Q3
Q2
(4,321) (2,374)

Investment Management
2008
2007
Q2
Q1
Q4
Q2
848
968
832
768

Q1
1,672

Q4
2,727

2007
Q2
3,594

834

536

821

1,129

970

304

339

307

357

393

381

521

594

630

617

848

578

(43)

91

26

(27)

(81)

(56)

1,341

(23)
1,406

(460)
706

(173)
1,266

(340)
1,638

1
1,550

261

(35)
395

260
593

47
377

90
402

72
397

-31.0% -59.2% 42.3%

Q1
3,502

Q3
76

46.4% 45.6% 44.3%

344.4% 46.6% 61.2%

45.3% 52.3% 57.2%

The Compensation Committee apportioned draft pools of compensation


to each division based primarily on each divisions net revenue and the
prevailing practices in the market.56 This process had a stated rationale to
provide a level of transparency in the determination of compensation at the
divisional level in order to more clearly demonstrate the tie between financial
performance and compensation, providing strong incentives for divisional
performance, and to encourage revenue maximization and aggressive
managementofnonpersonnelexpenses.57

Id.
Lehman,CompensationOverview(July30,2008),atpp.57[LBEXWGM727244].
57Id.atp.5.
55
56

18

Q1
695


TheCompensationCommitteeusedperformancebasedmetricsaswellas
moresubjectivecriteriatoallocatepoolsofcompensationtoeachdivision.From
the revenue projections provided by the Finance Department, Lehman would
calculate precompensation profits before taxes (PCPBT), and then input that
figureintothecompensationmodel.58Beginningin2003,Lehmansupplemented
its PCPBTbased compensation model by also considering an Economic Value
Added (EVA) metric, which included a risk component based on a use of
equity charge.59 Lehman viewed its PCPBTbased compensation model as a
competitiveadvantagebecauseitalignedpaywithperformance,providedmore
accountabilityandallowedmanagementtotakestepstooptimizeperformance.60
The Compensation Control Group within the Finance Department
provided the Compensation Committee, Chief Financial Officer and Chief
Accounting Officer with a presentation of data on six or seven performance
statisticsforeachdivisioninanygivenyearversusthedivisionspreviousyears
performance.61 These included: net revenues, changes in headcount, PCPBT,
EVA and ROE.62 The Compensation Committee also received a presentation
during the fourth quarter detailing compensation expenses (expressed in terms

Id.atpp.58.
Id.atp.6;ExaminersInterviewofJamesEmmert,Oct.9,2009,atp.2.
60Lehman,2008CompensationUpdate(July2008),atp.4[LBHI_SEC07940_741779].
61ExaminersInterviewofJamesEmmert,Oct.9,2009,atp.2.
62Id.
58
59

19


of NGNNH compensation), and the Compensation Committee was presented
withalternativesfordistributingcompensationtodivisions.63TheCompensation
Committee used outside consultants (including Johnson & Associates, Inc. and
MGMC,Inc.),toanalyzecompetitivegapsandmarketindicators.64
The Compensation Committee used these performance results as a
baseline for allocating compensation to each Lehman division, followed by a
review of subjective criteria to determine divisional compensation allocations.
Thesecriteriaandconsiderationsincluded:

Newbusinessesthatwereinearlystagesoftheirgrowththathadnot
yet generated sufficient compensation to pay employees
competitively;

Significant market pressures in business sectors, reflecting market


premiumspaidbynewentrantsintothatsector;

Lehmans decision to grow a business sector in accordance with the


firmslongtermstrategicplan;

Franchise preservation issues driven by the market cycle, where


Lehmanpaidadivision/businessathigherlevelsinordertoprotectits
investmentinkeyemployees;and

Reward for One Firm behaviors such as cross selling or client


management activities where the revenue benefit accrued to another
businessunit.65

Noformalorwrittenguidelinesexistedastotheweightassignedtoeither
thedivisionalperformanceresultsorthesubjectivecriteria.66Thecompensation

Id.
Id.

63
64

20


poolforadivisiondidnotincreaseordecreaseinadirectlyproportionalmanner
to that divisions net revenue performance.67 Divisions that Lehman wanted to
grow,forexample,weregenerallyallocatedcompensationpoolslargerthantheir
net revenue performance might have dictated.68 Similarly, a higher share of
compensationwaspaidouttodivisionssuchasInvestmentBanking,whichdid
not pose a significant risk to Lehmans balance sheet assets, than to riskier
businesses such as Real Estate, which exposed Lehmans balance sheet to
potentiallosses.69
Infiscalyear2007,forexample,LehmansFixedIncomeDivision(FID)
generated $3.4 billion less PCPBT as compared to fiscal year 2006, but
nevertheless, FID employees received similar compensation to what they had
receivedin2006.70Specifically,whilethecompensationmodelindicatedthatfor
2007 FID compensation should be reduced by $888 million from 2006
compensation, senior management and the Compensation Committee reduced
FID compensation by only $80 million.71 Similarly, in 2007, model results
indicatedthattheEquitiesDivisionshouldhavereceiveda$477millionincrease

Lehman,CompensationOverview(July30,2008),atp.7[LBEXWGM727244].
ExaminersInterviewofMaryPatArcher,August20,2009,atp.4.
67Id.; email from Kentaro Umezaki, Lehman, to Roger Nagioff, Lehman, et al. (Nov. 8, 2007)
[LBEXDOCID175489].
68Lehman,CompensationOverview(July30,2008),atp.7[LBEXWGM727244].
69Lehman,2007YearEndCompProcessModelPreRound2NGNNHAdjustor(Nov.28,2007)
[LBEXDOCID147440];ExaminersInterviewofRogerNagioff,Sept.30,2009,atp.19.
70Lehman,CompensationOverview(July30,2008),atpp.68[LBEXWGM727244].
65
66

21


in compensation from 2006, based on an approximately $1.8 billion increase in
PCPBTandimprovedprofitability.However,followingseniormanagementand
CompensationCommitteeadjustments,thedivisionreceivedanincreaseofonly
$229million.72
The Compensation Committee applied a similar process to determine
compensation allocations to individual business lines within divisions. For
example, within FIDs Rates and Products subdivision, the Commodities
segments 2006 net revenues and compensation ratio were $27.8 million and
195%, respectively.73 The segments 2007 net revenue and compensation ratio
were $231 million and 48.9%, respectively.74 These ratios are consistent with
witness interviews stating that the segment was a startup in 2006 from which
Lehmandidnotexpecthighnetrevenues,yetdeterminedthatitwasappropriate
to compensate employees commensurate with their market peers in order to
attract and retain them to further grow the business.75 The segment saw
substantial growth by 2007, and therefore, the 2007 segment ratio was more

Id.
Id.
73Lehman,2007YearEndCompProcessModelPreRound2NGNNHAdjustor(Nov.28,2007)
[LBEXDOCID147440].
74Id.
75ExaminersInterviewofMaryPatArcher,Aug.20,2009,atp.4;ExaminersInterviewofRoger
Nagioff,Sep.30,2009,atp.20.
71
72

22


consistent with the firms overall compensation ratio.76 Finally, compensation
decisions made by Lehmans competitors in regard to their comparative
divisionsplayedaroleinLehmansallocations,asLehmanattemptedtoprevent
attrition bymatching thecompensation of its competitors.77Thereisalso some
indication that the Compensation Committee retained a holdback pool of
compensationthatcouldbepaidtocertaindivisionsforadjustmentpurposes.78
III.

DETERMININGINDIVIDUALEMPLOYEECOMPENSATION
After divisional and business line compensation was allocated, each

division head would allocate the pool of compensation to be received by its


executivesandemployees.Divisionheadshadautonomyregardingindividual
compensation decisions, and the specific performance metrics they relied upon
to apportion compensation to their executives and employees varied based on
market practices in each divisions business line.79 Compensation decisions for
individual employees depended on that specific employees functions, but all

Lehman,2007YearEndCompProcessModelPreRound2NGNNHAdjustor(Nov.28,2007)
[LBEXDOCID147440];ExaminersInterviewofMaryPatArcher,Aug.20,2009,atp.4.
77EmailfromKentaroUmezaki,Lehman,toRogerNagioff,Lehman,etal.(Nov.8,2007)[LBEX
DOCID175489];LehmanBrothersHoldingsInc.,CompensationOverview(July30,2008),atpp.
3,5,8[LBEXWGM727244].
78EmailfromRogerNagioff,Lehman,toMaryPatArcher,Lehman(Dec.4,2007)[LBEXDOCID
175004].
79Lehman, Compensation Overview (July 30, 2008), at p. 11 [LBEXWGM 727244]; Examiners
Interview of Mary Pat Archer, Aug. 20, 2009, at pp. 24; Examiners Interview of Michael
Gelband,Aug.12,2009,atpp.2224;ExaminersInterviewofAnthonyJ.Collerton,May14,2009,
atp.3.
76

23


performanceindicatorswerenetrevenuebased.80LehmansCompensationand
Control Group met monthly with each divisions Chief Administrative Officer
(CAO)toreviewthedivisionscompensationmodels.81
Whileeachdivisionandbusinessunithadautonomyanddiscretionover
its own compensation process, each division reported its compensation
allocation results (including its list of top compensated employees) to the
Executive Committee.82 An illustrative example of how FID carried out the
compensationprocessin2007wasdescribedasfollows:83
OnceFIDreceivedthebonuspoolpackagefromtheFinanceDepartment
in early November 2007,84 a round one meeting followed involving a large,
representative group of FID Managing Directors, including Mary Pat Archer,
Roger Nagioff, Thomas Humphrey, Alex Kirk, Andrew J. Morton, Kentaro
Umezaki and Ravi Mattu.85 Nagioff, with assistance from Archer, outlined for
the group the firmwide approach for that years compensation.86 Nagioff
explained the process and made recommendations on how round one would

Lehman,CompensationOverview(July30,2008),atp.11[LBEXWGM727244].
Lehman,2008CompensationUpdate(July2008),atp.6[LBHI_SEC07940_741779].
82ExaminersInterviewofMichaelGelband,Aug.12,2009,atpp.2223;ExaminersInterviewof
AnthonyJ.Collerton,May14,2009,atp.3;Lehman,CompensationOverview(July30,2008),at
p.11[LBEXWGM727244].
83ExaminersInterviewofMaryPatArcher,Aug.20,2009,atp.2.
84ArcherstatedthatAndrewJ.MortonandAlexKirkspenttimepriortothefirstcutorround
one meeting trying to create a preliminary split based on the prior years final compensation
decisions.ExaminersInterviewofMaryPatArcher,Aug.20,2009,atp.2.
85Id.
80
81

24


work in terms of dividing compensation between business units and
employees.87 Additionally, he would set targets for FID in terms of fitting the
divisions total compensation decisions within Lehmans overall annual targets
(expressedasapercentagechangefromthepreviousyearintermsofNGNNH
compensation).88 The group reviewed relative performance, historic
compensation, efficiencies with regard to headcount, headcount and
performanceofthebusinessonayearoveryearbasis.Thegroupthenmadea
preliminaryallocationofdivisionalcompensationpoolfundsamongitsbusiness
unitsfollowingabottomupreview(ensuringeveryoneinthedivisionreceived
the bonus they deserved to retain key employees) and a topdown review
(ensuringguaranteesfornewhireswerepaid).89Nagioffwasthefinaldecision
makerifconflictswithinthegroupcouldnotberesolved.90
Followingroundone,theheadsofeachbusinessunithadanotherweekto
allocatecompensationtoemployeesusinganonlinebonussystem.91Individual
employee compensation allocation was a discretionary process and decisions

EmailfromKentaroUmezaki,Lehman,toRogerNagioff,Lehman,etal.(Nov.6,2007)[LBEX
DOCID175483].
87Id.
88Id.
89ExaminersInterviewofMaryPatArcher,Aug.20,2009,atp.2;emailfromMaryPatArcher,
Lehman,toRogerNagioff,Lehman(Sept.10,2007)[LBEXDOCID175480];emailfromKentaro
Umezaki,Lehman,toRogerNagioff,Lehman,etal.(Nov.6,2007)[LBEXDOCID175483].
90EmailfromKentaroUmezaki,Lehman,toRogerNagioff,Lehman,etal.(Nov.6,2007)[LBEX
DOCID175483].
91ExaminersInterviewofMaryPatArcher,Aug.20,2009,atp.2.
86

25


appear to have been made primarily by a series of performance criteria that
variedbyclassofprofessionalratherthanbydivision.FIDbusinessunitheads
ranked their employees in quartiles, designating the top 25% of performers as
1s on down to the bottom 25% of employees (who performed below
expectations) as 4s; while the 14 ranking was not strictly determinative of
compensation, the expectation was that employees at higher levels (12) would
receive higher bonus compensation than those at lower levels (34).92 After
making preliminary allocations to employees, the business heads reported to
Nagioff,Archerandthelargergrouponhowtheyhadallocatedbonuseswithin
their business unit, and they prepared rosters listing each employees
compensationfromhightolowthatyear,aswellas,ahistoryofeachemployees
compensation from previous years.93 Some adjustments would be made at this
timetoconformcompensationwithinthedivisionamongstemployeegroups(so
that, for example, administrative assistants in one business unit were not
disproportionately compensated compared to administrative assistants in
anotherbusinessunit).94Theseadjustmentsconcludedroundone.

EmailfromKentaroUmezaki,Lehman,toRogerNagioff,Lehman,etal.(Nov.8,2007)[LBEX
DOCID175489];Lehman,RulesofEngagementBonusWorkbookQuickGuide[LBEXDOCID
282667].
93ExaminersInterviewofMaryPatArcher,Aug.20,2009,atpp.23.
94Id.atp.3.
92

26


Nagioff then met with Gregory so that compensation decisions could be
reviewed by the Compensation Committee. The Compensation Committee
reviewedthedetailsofthetop 200to 250 earnersin each division as well asof
anyemployeeswhosecompensationhaddrasticallyincreasedordecreasedfrom
thepreviousyear.95OncetheCompensationCommitteehadfinalizedthefirm
widenetrevenuesattheendofNovember,roundtwowouldbeginwherebyFID
wouldreallocatecompensationasnecessarybasedonanyincreaseordecreasein
its final compensation pool from the Compensation Committee.96 FID
occasionally would retain a small pool of compensation in a reserve for
adjustmentsortofixanymisallocationsfromthepreviousrounds.97
Once round two was over, the direct managers of each business line
would communicate the bonuses to their employees as part of the employees
performance reviews, normally finishing that part of the process by late
December.98
Final approval of all compensation decisions was vested in the
Compensation Committee.99 Indeed, on one occasion, management was
reprimanded for awarding a compensation package without prior Board

Id.
Id.;emailfromKentaroUmezaki,Lehman,toMaryPatArcher,Lehman(July10,2007)[LBEX
DOCID1677802];
97ExaminersInterviewofMaryPatArcher,Aug.20,2009,atp.3.
98Id.;emailfromKentaroUmezaki,Lehman,toMaryPatArcher,Lehman(July10,2007)[LBEX
DOCID1677802].
95
96

27


approval.100WhiletheBoardultimatelyapprovedthepackage,itinformedFuld
and management that all such decisions were required to be approved by the
Board.101
IV.

CONSIDERATIONOFRISKINLEHMANSCOMPENSATION
PRACTICES
While Lehmans compensation practices were predominately driven by

net revenuebased metrics, risk did play some role in compensation decisions.
Forexample,atthefirmwidelevel,althoughtheEVAcompensationmetricwas
net revenuebased, the metric also considered balance sheet risk necessary to
achieve net revenues.102 Additionally, Lehman divisions with feebased net
revenues(suchasInvestmentBanking)generallyreceivedhighercompensation
allocations on a percentageofnetrevenue basis than divisions that undertook
significantbalancesheetrisk,suchasrealestate.103
Risk also played a role in compensation through balance sheet limits.
Businesses that exceeded balance sheet limits theoretically faced penalties that

ExaminersInterviewofAnthonyJ.Collerton,May14,2009,atp.3.
ExaminersInterviewofJohnF.Akers,Apr.22,2009,atp.7.
101Id.
102 Examiners Interview of James Emmert, Oct. 9, 2009, at p. 2; Examiners Interview of Roger
Nagioff,Sept.30,2009,atpp.4,1920.
103ExaminersInterviewofRogerNagioff,Sept.30,2009,atpp.4,1920;ExaminersInterviewof
JamesEmmert,Oct.9,2009,atp.2;ExaminersInterviewofAndrewJ.Morton,Sept.21,2009,at
p.4.
99

100

28


couldincludethediminutionoftheircompensationpool.104AsUmezakinoted,
balance sheet usage and limit breaches triggered penalties in the netrevenue
metricsusedbyLehman,therebyaffectingdivisionalcompensationinanegative
manner.105
Asrecentlyas2004,FIDusedaCompensationScorecardthatincluded
riskweightedmetricssuchasreturnonriskequityandreturnonnetbalance
sheet to determine business unit compensation pool allocations.106 Similarly,
divisional compensation metrics, yearoveryear divisional performance data
and internal divisional performance tracking documents submitted to the
Compensation Committee by the Compensation Control Group assessed
divisional performance relative to Value at Risk (VaR), balance sheet usage
andriskappetite.107TheCompensationCommitteesreviewofthesedocuments
indicatesatleastsomeconsiderationofriskinmakingcompensationdecisions.108
Beginninginthefirstquarterof2008,Lehmanadoptedanewcompetency
measure for the Equities Sales force that addressed risk appreciation.109 This
competency measure consisted of four criteria: (1) awareness (the employees

Examiners Interview of Kentaro Umezaki, June 25, 2009, at pp. 89; Lehman, Global
Consolidated Balance Sheet (May 31, 2007) [LBEXDOCID 276740]; email from Kentaro
Umezaki,Lehman,toKaushikAmin,Lehman,etal.(July10,2007)[LBEXDOCID252873].
105ExaminersInterviewofKentaroUmezaki,June25,2009,atpp.89.
106Lehman,2004FixedIncomeDivisionCompensationScorecard[LBEXDOCID1748807].
107Lehman,COMPMETRICSExcelSpreadsheet,atpp.19[LBEXLL1054327];Lehman,2007FID
ForecastBudgetSupportExcelSpreadsheet,atpp.111[LBEXBARCMP0000001].
108Id.
104

29


understanding of the risks inherent in the market and transactions); (2)
communication (the employees ability to share and highlight key risks to
partners in trading and control areas); (3) client skills (negotiating transaction
terms for optimum riskreward profile); and (4) shareholder/manager behavior
(deploying capital efficiently and in consideration of clients historical trading
impactwithawarenessofownershipoftherisksandrewardsoftransactions).110
Witnesses offered differing opinions concerning the weight given to risk
factors in making compensation decisions. Archer, FID Chief Accounting
Officer, did not recall any discussion of VaR during FIDs 2007 bonus pool
meetings.111Archernotedthatwhilebusinessheadswereresponsiblefortherisk
component of FID, if a risky trade had been made successfully, then the trade
wouldhavebeencompletedandtheriskaspectwouldnothavebeendiscussed
aspartofthegroupsassessmentofanemployeeforcompensationpurposes.112
Umezaki, Global Head of FID Business Strategy in 2007, expressed
concern regarding the weight (or lack thereof) that risk factors were given in
regard to compensation decisionmaking. Specifically, in an April 19, 2007 e
mail,Umezakiofferedfeedbackonbalancesheetissues,andnoted:

Lehman,LBEquitiesRiskAppreciationOverview(June2,2009),atpp.14[LBEXLL605596].
Id.
111ExaminersInterviewofMaryPatArcher,Aug.20,2009,atp.4.
112Id.
109
110

30


Incentives and motivation: the majority of the trading businesses
focus is on revenues, with balance sheet, risk limit, capital or cost
implications being a secondary concern. The fact that [traders]
havent heard that those items matter [in] public forums from
senior management recently reinforces this revenue oriented
behavior implicitly. In my opinion, this group is not behaving
badly: they are just getting conflicting messages that go
unreconciled(growrevenuesfromFID;managebalancesheet
from Finance, if you will). We also dont have a strong enough
mechanism to reinforce better behavior around these non
revenuemetrics,ascompistiedtorevenuesatthedivisionallevel.
Tough problem to solve given the way we incent today. Weve
beendebatingthisforagooddecadenow.113
Gelband, former head of FID, indicated that he made an effort to adjust
compensationdecisionstoreflecttheamountofriskthatthebusinessunitorthat
theindividualhadtaken.114Nagioffsimilarlystatedthatriskbasedmetricswere
consideredindividingFIDscompensationpooltoFIDsbusinesslines,butnot
inanyspecificmathematicalway.115
According to Gregory, the focus of the Executive Committee in making
adjustmentstodivisionalcompensationwaslessontheamountofriskadivision
had taken, and more on general fairness and equity, with the Executive
Committeeconsideringthefullinterestsofthefirmwhenconsideringhowmuch
balancesheetcertaindivisionsusedascomparedtoothers.116Gregorydisagreed
with other witnesses in this regard, stating that employees in risktaking

Email from Kentaro Umezaki, Lehman, to Scott J Freidheim, Lehman, et al. (Apr. 19, 2007)
[LBEXDOCID318475].
114ExaminersInterviewofMichaelGelband,Aug.12,2009,atpp.3,2224.
113

31


businessescouldbepaidcompensationbasedonasimilarorevenlargershareof
theirrevenuesthanemployeesinfeebasedbusinesses.117Gregoryprovidedthe
example of Investment Banking, where he stated that the business and
employees received a larger share of compensation than their revenues would
otherwise indicate because Investment Banking created substantial ancillary
profitsthroughotherrevenuestreams.118
Finally, Lehman witnesses noted that product controllers compensation
wasnottiedtothedivisionortotheperformanceoftheproduct,andtherefore,
there was no compensationbased incentive for these employees to missmark
positionsoravoidwritedowns.119
V.

COMPENSATIONBASEDONUNREALIZEDMARKTOMARKET
PROFITS
In calculating net revenue, Lehman included revenue not yet recognized

but recorded based on marktomarket positions, and such revenue was


considered in determining divisional and employee net revenue contributions
for compensation purposes.120 The compensation pool would, therefore, have
increased or decreased (and a divisions and/or individuals compensation

ExaminersInterviewofRogerNagioff,Sept.30,2009,atp.20.
ExaminersInterviewofJosephM.Gregory,Nov.5&13,2009,atpp.1213.
117Id.atp.13.
118Id.
119ExaminersInterviewofHerbertH.McDade,III,Sept.16,2009,atp.5.
120ExaminersInterviewofJohnD.Macomber,Sept.25,2009,atpp.5,22;ExaminersInterviewof
JamesEmmert,Oct.9,2009,atpp.23.
115
116

32


wouldhavebeenaffected)bytheamountofunrealizedmarktomarketgainor
loss. With the exception of the compensation process for proprietary traders,121
nomechanismexistedbywhichLehmancouldclawbackcompensationpaid
to employees based on marktomarket revenues that were recorded but never
realized.122
In discussing the proper approach for paying compensation on the KSK
Energy transaction, for which the firm booked a large marktomarket profit,
HenryKlein,ChrisOMeara,andDavidGoldfarbengagedinanemailexchange
and noted that booking the transaction as an unrealized gain and paying
compensationbasedonthatmethodologyisnotdifferentfromhowLehmans
GlobalTradingStrategies(GTS)groupwascompensatedonotherdeals:
GTSispaidonthebasisofthemarketvalueofitsportfolioatyear
endasreflectedonLehmansbooks.TheFirmisalwaysatriskthat
we have a very profitable year, it pays out a lot of compensation,
and then we lose money and never make profits again. Any
compensation paid by Lehman to GTS employees is based on the
assumption that GTS continues to exist and continues to be
profitableovertime(thereisnoclawback)....KSKismarktofair
marketvaluedefinedasthevaluethatwebelievewecouldsellthe
position for. Last year, the mark was included in GTS P&L for
compensationpurposes,lastyearandthisyearitisincludedinthe
P&LoftheFirmandisalsoincludedintheP&Lfortheleveraged
partnership. Choosing to exclude the mark for compensation

Proprietarytraderscouldhaveupto25%oftheircompensationwithhelduntilthefollowing
year, thereby allowing Lehman to factor in and subtract eventual losses on investments before
remitting the remaining compensation to the trader. Examiners Interview of James Emmert,
Sept.25,2009,atp.2.
122ExaminersInterviewofJamesEmmert,Oct.9,2009,atp.2.
121

33


purposes when it is included for every other purpose seems
arbitrarytome.123
This email suggests that for Lehmans GTS group, Lehmans practice was to
include unrealized marktomarket profits in net revenue and compensation
decisionsandthattherewasconcern,giventhesizeoftheKSKtransaction,that
the policy should possibly be reconsidered with respect to the particular
transaction.124
Given that compensation was impacted by marktomarket valuations,
incentivesexistedfortradersandbusinessunitstovalueinvestmentshighlyso
as to generate higher net revenues and thus higher compensation. Similarly,
giventhatthenetrevenuebasedcompensationmodelwasemployedfirmwide,
writedowns on positions also had a negative effect on compensation, creating
incentive for employees and divisions to avoid such writedowns, and/or retain
unprofitable investments solely to avoid revenue decreasing (and thus
compensationdecreasing)writedowns.125
TheExaminer reviewedthousands ofelectronicand hardcopy materials
authored by Lehman employees which related to compensation decisions, and
alsoconducteddozensofinterviewsofpersonnelinvolvedinthecompensation

Email from Henry Klein, Lehman, to David Goldfarb, Lehman (Apr. 20, 2008)
[LBHI_SEC07940_770016].
124Lehmancommencedbankruptcyproceedingsbeforeacompensationdecisionwasmadewith
respecttothistransaction.
125ExaminersInterviewofEileenSullivan,July24,2009,atpp.23.
123

34


process. The Examiner found no evidence that Lehman personnel deliberately
engaged in misconduct designed to exploit Lehmans compensation system.
However, Lehmans net revenuedriven compensation structure a structure
usedbymostofLehmanspeers,andwhichstructureisthesubjectofanongoing
nationaldebatenaturallycreatedincentivesforthemaximizationofshortterm
profits.

35

APPENDIX12:VALUATIONARCHSTONE
This Appendix has been prepared by Duff & Phelps, the Examiners financial
advisor,inconnectionwiththeExaminersanalysisofthereasonablenessofLehmans
valuations of its Archstone positions, set forth in Section III.A.2.f of the Report. This
Appendix has three parts Illustrative Example of a DCF/IRR Analysis, Archstone
PurchasePriceAllocation,andArchstoneCostofGoingPrivate.
I.

ILLUSTRATIVEEXAMPLEOFADCF/IRRANALYSIS
ADCFvaluationusesadiscountratetoconvertfutureexpectedcashflowstoa

presentvalue.1Thisconcepthasbeensummarizedsuccinctlyas:Whenyoudiscount
[a]projectsexpectedcashflowsatitsopportunitycostofcapital,theresultingpresent
valueistheamountinvestorswouldbewillingtopayfortheproject.2
An illustrative example is instructive to demonstrate how a DCF valuation is
calculated. Assume Lehman owned an investment that was expected to receive cash
flowsof$100attheendofYear1,$100attheendofYear2,and$100attheendofYear
3.Inthisexample,Lehmanwouldexpecttoreceive$300overthecourseofthreeyears.
The fair value of this investment is not $300, however. Rather, the $300 in future
expectedcashflowsmustbeconvertedintopresentvalueinordertoarriveatthevalue
of the investment asoftoday.Adiscountrateconverts futureexpectedcash flows to
their present value, because the time value of money and risk associated with the

1ShannonPratt&RogerGrabowski,CostofCapital:ApplicationsandExamples10(3ded.2008).
2Id.;FranklinAllen,RichardBrealey,&StewartMyers,PrinciplesofCorporateFinance20(8thed.2006).


investmentmeansthatadollarthatisexpectedtobereceivedinthefutureisworthless
than a dollar as of today.3 In this example, assume the discount rate is 10%. The
applicationofa10%discountrateconvertsthe$300offutureexpectedcashflowsintoa
present value of $249 today. The table below sets forth the calculations used in this
illustrativeexample.
PresentValueFormulaUsedforDCFAnalysis
Step1

Step2

NetCashFlowinYear1 + NetCashFlowinYear2
(1+DiscountRate)
1

100

(1+10%)1

(1+DiscountRate)
+

100

(1+10%) 2

NetCashFlowinYear3
(1+DiscountRate) 3
100
(1+10%) 3

PresentValue

PresentValue

Step3

100
1.1

100
1.21

100
1.331

PresentValue

Step4

91

83

75

249

As shown in the table above, while the net cash flow is the same for each year
($100),thepresentvaluedecreasesovertime(i.e.,$91inYear1,$82inYear2,and$75in
Year3).Thepresentvalueoftheinvestmentisequaltothesumofthepresentvalueof
cashflowsinYears1through3,whichis$249.
Lehmans Archstone DCF analysis followed a similar approach as described
above with one difference Lehman solved for the discount rate instead of present
value.Thatis,LehmansDCFanalysisstipulatedapresentvalue,madedeterminations
regardingfutureexpectedcashflows,andthenusedtheformulainthetableaboveto

3ShannonPratt&RogerGrabowski,CostofCapital:ApplicationsandExamples39(3ded.2008).


solve for the discount rate.4 Lehman referred to this as an Internal Rate of Return
(IRR) analysis. 5 As shown in the table below, use of the same formulas and
determinations(i.e.,$100cashflowsinYears1through3andapresentvalueof$249)
resultsinthesamediscountrate(10%).6
PresentValueFormulaUsedforIRRAnalysis
Step1

Step2

NetCashFlowinYear1 + NetCashFlowinYear2
(1+DiscountRate)
1

100

(1+DiscountRate)
+

(1+DiscountRate)
100

Step3

(1+10%)

Step4

91

100
(1+10%)

100
(1+DiscountRate)

83

NetCashFlowinYear3
(1+DiscountRate) 3
100
(1+DiscountRate)
100
(1+10%) 3
75

PresentValue

249

249

249

Inthismanner,theDCFandIRRanalysesresultinthesamevaluationwhenthey
arebasedonthesamedeterminationsforfutureexpectedcashflowsanddiscountrate.
II.

ARCHSTONEPURCHASEPRICEALLOCATION
ThisSectionprovidesadditionalbackgroundregardingLehmansanalysisofthe

appropriateallocationoftheArchstonepurchasepricetoArchstonesindividualassets.

4Lehman,ProjectEasyLiving:TishmanSpeyerArchstoneSmithMultifamilyJV,LP(spreadsheet)(Mar.

17,2008),atTabDiscountingSens[LBEXDOCID1626080];Lehman,EasyLivingQ2ModelRisk(June
15,2008),atTabIntro[LBEXDOCID4456413].
5MemorandumfromKeithCyrus,Lehman,etal.,toDonaldE.Petrow,Lehman,etal.,ArchstoneUpdate
(May16,2008),atp.3[LBEXDOCID1416761].
6Inpractice,IRRanalysisisperformedbyassumingthepresentvalue(inthiscase$249)isacashoutflow
and the future expected cash flows are cash inflows. As shown above, the sum of the cash inflows is
greaterthancashoutflow.Thediscountrateiscomputedbyreducingthecashinflowstothevalueofthe
cashoutflow,whichresultsinacombinedvalueofzero.


ThevalueofArchstonesassetsintheaggregatebasedontheacquisitionpriceis
relativelyeasytocalculate:thevalueofassetsisequaltothevalueofconsiderationpaid
inordertoobtaintheassets.Theconsiderationpaidfortheassetsintheaggregatecan
becalculatedbyaddingthevalueofthesharesacquired(numberofsharesmultiplied
by$60.75pershare),thevalueofliabilitiesassumed(e.g.,mortgagedebt)andthevalue
ofexpensesthatwereincurredasaresultofthetransaction(e.g.,advisorfees).Whileit
is a relatively simple matter to calculate the aggregate value of the assets, it is
considerablymoredifficultto impute thevalueoftheindividualassets, asthereis no
standardized method for directly observing what is implicit in the valuation of the
assets as a whole. 7 For financial reporting purposes, the value of the assets in the
aggregatemustbeallocatedtotheunderlyingindividualtangibleandintangibleassets
in accordance with Statement of Financial Accounting Standards No. 141, Business
Combinations.8
Keith Cyrus, a vice president in the Bridge Equity unit, explained the
ramificationsofLehmansdecisionsregardingArchstonespurchasepriceallocation.In
anemailsenttomultiplecolleaguesonDecember14,2007,Cyruswrote:
Therelevanceofthisanalysiscomesintoplayasweevaluateassetsales
bids.If[TishmanSpeyer]allocates$500milliontoplatformvalue,butthe
market clearing sales price implies a $1.0 billion platform value and we
drawthe sale/ nosale lineatallocated[budgeted] value, thenassuming
pro forma allocation, we would never sell anything. The real time

7FASB,SFASNo.141,BusinessCombinations(June2001),7.
8Id.at35.


examplesareMonterreyGrove:Weareholdingoutfor$58millionthe
allocatedpurchaseprice.Thehighbidis$56million(retradedfrom$58
million) and CBREs spot value is $53.8 million. Should we be holding
out?..Fox Plaza current high bid is $103.5 million. We are holding out
for$110CBREvalueis$86million,allocatedPP[purchaseprice]is$108
million.9
CyrussanalysiscomparedtheCBREbrokerspotvaluespreparedinMaytothe
preliminarypurchasepriceallocations.10Hewrotethat[w]eallagree,thatthebroker
values are to some degree low balled to give the brokers room to execute.11 Cyrus
attachedasensitivityanalysis(whichisproducedinitsentiretyinthechartbelow)12of
the overall value variance and implied platform value given various assumptions of
thislowballfactor,rangingfrom0%tothefull11.6%.Forinstance,ifyoubelievethe
brokersunderestimatedtruevalueby5%,theplatformvalueallocationwouldneedto
be $1.76 billion for the allocated purchase price to equal market value; 10% = $810
million. Assuming the broker variance is not extrapolated to the rest of the portfolio,
thecorrespondingplatformvalueswouldbe$1.416billionand$725million.13Inthis
manner, Cyrus is explaining that based on broker values for Archstones underlying
tangible assets, either 1) Lehman and its partners overpaid for Archstones tangible

9Email from Keith Cyrus, Lehman, to Paul A. Hughson, Lehman, etal. (Dec. 13, 2007) [LBEXDOC ID

1861553].
10Id.
11Id.
12Lehman, CBRE Broker Spot Values vs. Allocated Purchase Price (spreadsheet) (Dec. 13, 2007), at Tab
Summary[LBEXDOCID1971263],attachedtoemailfromKeithCyrus,Lehman,toCoburnJ.Packard,
Lehman,etal.(Dec.14,2007)[LBEXDOCID1861543].
13EmailfromKeithCyrus,Lehman,toPaulA.Hughson,Lehman,etal.(Dec.13,2007)[LBEXDOCID
1861553].


assets or 2) Lehman and its partners acquired an intangible asset (the platform) that
wasntvaluedbythebrokers.
Assumes Variance is Extrapolated to Non-Broker Valued Assets
Allocated
Purchase Price
165 Broker Valued Assets
38 Remaining Core Assets
Development & Other Assets
Total Real Estate

$15,424
3,089
2,724
$21,238

0.0%

Assumed Broker "Lowball" Factor


2.5%
5.0%
7.5%

10.0%

11.6%

$13,817
2,768
2,441
$19,025

$14,163
2,837
2,502
$19,501

$14,508
2,906
2,563
$19,977

$14,853
2,975
2,624
$20,452

$15,199
3,044
2,685
$20,928

$15,424
3,089
2,724
$21,238

Variance to Broker Values:


165 Broker Valued Assets
38 Remaining Core Assets
Development & Other Assets
Total Real Estate

$1,607
322
284
$2,212

$1,261
253
223
$1,737

$916
183
162
$1,261

$570
114
101
$785

$225
45
40
$310

$0
$0

Current Platform Value


Total Implied Platform Value

500
$2,712

500
$2,237

500
$1,761

500
$1,285

500
$810

500
$500

10.0%

11.6%

Assumes No Variance on Non-Broker Valued Assets


Allocated
Purchase Price
165 Broker Valued Assets
38 Remaining Core Assets
Development & Other Assets
Total Real Estate

$15,424
3,089
2,724
$21,238

0.0%

Assumed Broker "Lowball" Factor


2.5%
5.0%
7.5%

$13,817
3,089
2,724
$19,631

$14,163
3,089
2,724
$19,976

$14,508
3,089
2,724
$20,322

$14,853
3,089
2,724
$20,667

$15,199
3,089
2,724
$21,013

$15,424
3,089
2,724
$21,238

Variance to Broker Values:


165 Broker Valued Assets
38 Remaining Core Assets
Development & Other Assets
Total Real Estate

$1,607
$1,607

$1,261
$1,261

$916
$916

$570
$570

$225
$225

$0
$0

Current Platform Value


Total Implied Platform Value

500
$2,107

500
$1,761

500
$1,416

500
$1,070

500
$725

500
$500

Cyrus sent an updated email on December 19, 2007: TS [Tishman Speyer]


reallocated purchase price resulting in $1.0 billion of platform value. This implies a
7.65%variance($1.06billiononassetsvalued,$1.47billionifextrapolated)totheCBRE


brokerspotvalues.14Seethechartbelowfortherevisedanalysisthatwasattachedto
Cyrusemail.15
CBRE Broker Spot Values vs. Allocated Purchase Price

Assumes Variance is Extrapolated to Non-Broker Valued Assets


Allocated
Purchase Price
165 Broker Valued Assets
38 Remaining Core Assets
Development & Other Assets
Total Real Estate

$14,874
3,082
2,782
$20,738

0.0%

Assumed Broker "Lowball" Factor


2.5%
5.0%
7.65%
10.0%

$13,817
2,863
2,584
$19,265

$14,163
2,935
2,649
$19,746

$14,508
3,007
2,713
$20,228

Variance to Broker Values:


165 Broker Valued Assets
38 Remaining Core Assets
Development & Other Assets
Total Real Estate

$1,057
219
198
$1,473

$711
147
133
$992

$366
76
68
$510

Current Platform Value


Total Implied Platform Value

1,000
$2,473

1,000
$1,992

1,000
$1,510

$14,874
3,082
2,782
$20,738

$0
$0
1,000
$1,000

$15,199
3,150
2,842
$21,191

($325)
(67)
(61)
($453)
1,000
$547

12.8%
$15,591
3,231
2,916
$21,738

($717)
(149)
(134)
($1,000)
1,000
($0)

Assumes No Variance on Non-Broker Valued Assets


Allocated
Purchase Price
165 Broker Valued Assets
38 Remaining Core Assets
Development & Other Assets
Total Real Estate

III.

$14,874
3,082
2,782
$20,738

0.0%

Assumed Broker "Lowball" Factor


2.5%
5.0%
7.65%
10.0%

$13,817
3,082
2,782
$19,681

$14,163
3,082
2,782
$20,027

$14,508
3,082
2,782
$20,372

Variance to Broker Values:


165 Broker Valued Assets
38 Remaining Core Assets
Development & Other Assets
Total Real Estate

$1,057
$1,057

$711
$711

$366
$366

Current Platform Value


Total Implied Platform Value

1,000
$2,057

1,000
$1,711

1,000
$1,366

$14,874
3,082
2,782
$20,738

$0
$0
1,000
$1,000

$15,199
3,082
2,782
$21,063

($325)
($325)
1,000
$675

14.9%
$15,874
3,082
2,782
$21,738

($1,000)
($1,000)
1,000
($0)

ARCHSTONESCOSTOFGOINGPRIVATE
Archstones acquistion price of $60.75 per share included a premium above

Archstonespubliclytradedstockprice.MorganStanley,Archstonesfinancialadvisor

14Id.
15Lehman,SpreadsheettitledCBREBrokerSpotValuesvs.AllocatedPurchasePrice(Dec.19,2007),at

Summary tab [LBEXDOCID 1971359], attached to email from Keith Cyrus, Lehman, to Paul A.
Hughson, Lehman, et al. (Dec. 19, 2007) [LBEXDOCID 1861553]. Highlighted columns were in the
original.


fortheacquisition,providedananalysisofthepremiuminpercentagetermsthatwas
disclosedinanArchstone8K.16TheArchstone8Kstatedasfollows:

Asthistablesetforththeimpliedpremiumonapercentagebasis,theExaminers
financialadvisorcomputedthedollarvalueofthepremiumbasedonMorganStanleys
analysis. The Examiners financial advisor did this by multiplying the premium per
share by the number of shares outstanding, as set forth in the table below. These
calculations demonstrate, employing the Morgan Stanley analysis, that the premium
wasover$2 billionapplyingthePreMarketRumor Price, Unaffected SharePrice and
30DayPriorTradingAverage.

16Archstone,Exhibit99.1ProxyStatementSupplement,p.17,attachedtoArchstone,CurrentReportasof

Aug.17,2007(Form8K)(filedonAug.20,2007)(Archstone8K(Aug.17,2007)).


PremiumPaidtoAcquireArchstone
PurchasePrice
perShare

Observation

Premiumper
Share
X

Share
Outstanding
(millions)

$Value(in
millions)of
Premium

ClosingPrice5/25/2007

60.75

55.23

5.52

257

1419

PreMarketRumorPrice

60.75

49.51

11.24

257

2889

UnaffectedSharePrice

60.75

52.45

8.30

257

2133

30DaysPriorTradingAverage

60.75

52.64

8.11

257

2084

TwelveMonthPriorTradingAverage

60.75

55.06

5.69

257

1462

52WeekIntraDayHigh/AllTimeIntradayHigh

60.75

64.77

(4.02)

257

(1033)

52WeekIntraDayLow

60.75

45.63

15.12

257

3886

Transaction costs for the Archstone acquisition were $1.1 billion. 17 The
Examiners financial advisors added the $1.1 billion in transaction costs to the dollar
value of the premium to compute the total costs incurred to take Archstone private.
Pursuant to this analysis, the Examiners financial advisor determined that the cost of
taking Archstone private exceeded $3 billion applying the PreMarket Rumor Price,
UnaffectedSharePriceand30DayPriorTradingAverage,assetforthinthefollowing
table:

17 Lehman,

Project Easy Living: Tishman Speyer ArchstoneSmith Multifamily JV, LP (spreadsheet)


(Mar.17,2008),atTabS&U[LBEXDOCID1626080](theQ1model).


TotalCostofGoingPrivate
$inmillions
Transaction

CostofTaking

Premium

Expenses

ClosingPrice5/25/2007

1,419

1,134

2,553

PreMarketRumorPrice

2,889

1,134

4,023

UnaffectedSharePrice

2,133

1,134

3,267

30DaysPriorTradingAverage

2,084

1,134

3,218

TwelveMonthPriorTradingAverage

1,462

1,134

2,596

(1,033)

1,134

101

3,886

1,134

5,020

52WeekIntraDayHigh/AllTimeIntradayHigh
52WeekIntraDayLow

= ArchstonePrivate

The Examiners financial advisor compared the calculated cost of taking


Archstoneprivatetothe$5.1billionequityinvestmentinconnectionwiththeArchstone
acquisition,andsuchcomparisonissetforthinthetablebelow:
CostofGoingPrivateRelativetoEquityInvestment
$inmillions
CostofTaking

%ofEquity

ArchstonePrivate / EquityInvestment =

Investment

ClosingPrice5/25/2007

2,553

5,100

50%

PreMarketRumorPrice

4,023

5,100

79%

UnaffectedSharePrice

3,267

5,100

64%

30DaysPriorTradingAverage

3,218

5,100

63%

TwelveMonthPriorTradingAverage

2,596

5,100

51%

101

5,100

2%

5,020

5,100

98%

52WeekIntraDayHigh/AllTimeIntradayHigh
52WeekIntraDayLow

10

APPENDIX13:SURVIVALSTRATEGIESSUPPLEMENT

Appendix 13 includes additional background and detail with respect to six

separatetopicsdiscussedinReportIII.A.3.EachofthesubsectionsofthisAppendix
addressesoneofthosetopics.
I. Ratingagencies...................................................................................................................... 3
A. Background ...................................................................................................................... 3
B. March2008OutlookRevisions .................................................................................... 5
C. June2008Warnings ........................................................................................................ 7
D. September2008Warnings ........................................................................................... 10
II. Bankholdingcompanyproposal..................................................................................... 12
III. June12,2008 ......................................................................................................................... 15
A. ReplacementofOfficers .............................................................................................. 15
B. LehmanClosesa$6BillionOffering ........................................................................ 18
IV. LazardsCVSproposal....................................................................................................... 21
V. ThechronologicaldevelopmentofSpinCo ................................................................... 25
A. MarchApril2008:EarlyVersionsofSpinCo .......................................................... 25
B. JuneJuly2008:SpinCoasSurvivalStrategy ........................................................... 27
C. August2008:StepstoSpinCosExecution ............................................................... 35
D. EarlySeptember2008:PreparingtoAnnounceREIGlobal ............................. 49
VI. Discussionswithpotentialstrategicpartners ............................................................... 51
A. AIG................................................................................................................................... 51
B. UBS .................................................................................................................................. 52


C. GE..................................................................................................................................... 53
D. CarlosSlim ..................................................................................................................... 54
E. MorganStanley ............................................................................................................. 55
F. CITIC ............................................................................................................................... 57
G. SumitomoMitsuiBankingCorporation .................................................................. 59
H. StandardCharteredBank ............................................................................................ 61
I. HSBC ............................................................................................................................... 62
J. BNPParibas.................................................................................................................... 62
K. RoyalBankofCanada.................................................................................................. 63
L. SocieteGenerale............................................................................................................ 63
M. Lloyds .............................................................................................................................. 64
N. MitsubishiUFJFinancialGroup................................................................................ 64
O. Nomura ........................................................................................................................... 65
P. PotentialPartnersApproachedbyLehman ............................................................. 65

I.

RATINGAGENCIES
A. Background
Ratingagencies,includingthethreemajoragencies,Moodys,FitchandStandard

& Poors, rated Lehmans debt and securities, as they did for all major investment
banks.1 Those agencies provide longterm debt ratings, which reflect each agencys
estimationoftheprobabilitythatthedebtorwilldefaultonitsdebt,andaccordinglythe
likelihood investors in that debt will receive payment when due. The three major
agenciesallratedLehmanslongtermdebtoveratimehorizonoftwotothreeyearsor
longer.2
In assessing the likelihood of default, rating agencies consider all aspects of a
companysfinancialcondition,includingitsliquidity,capital,riskassumption,diversity
of product lines, equity,creditdefaultswapprices,return on equity, return onassets,
lessliquidandilliquidcommercialrealestatepositionsandmarketshare.3Inaddition

See Lehman, Credit Ratings Strategy (Mar. 1, 2007), at pp. 15 [LBEXDOCID 618355] (summarizing
Lehmancreditratingssincethemid1990s,incomparisonwithcreditratingsofGoldmanSachs,Merrill
Lynch, JPMorgan, and Bear Stearns), attached to email from Kentaro Umezaki, Lehman, to Gary
Mandleblatt,Lehman,etal.(Mar.6,2007)[LBEXDOCID740168].
2ExaminersInterviewofEileenA.Fahey,Sept.17,2009,atp.2;ExaminersInterviewofDianeHinton,
Sept. 22, 2009, at p. 2; see also Carol Ann Frost, Credit Rating Agencies in Capital Markets: A Review of
ResearchEvidenceonSelectedCriticismsoftheAgencies,22J.ACCT.,AUDITING&FIN,469,474(Summer2007)
(explaining that ratings are an agencys assessment of the credit quality of a debt issuer based on the
relativeprobabilityofdefault);AmadouN.R.Sy,TheSystemicRegulationofCreditRatingAgenciesand
Rated Markets, Intl Monetary Fund, Working Paper (2009), at p. 9 (noting that brokerdealers often
obtainratingsasissuersoflongtermdebt),
3 Examiners Interview with Eileen A. Fahey, Sept. 17, 2009, at pp. 23; Examiners Interview of Diane
Hinton,Sept.22,2009,atp.7;seealsoRichardCantor&FrankPacker,TheCreditRatingIndustry,FRBNY
QUARTERLY REVIEW, at p. 5 (SummerFall 1994) (noting that rating agencies base their ratings on an
assessmentofthequalitativeandquantitativeaspectsofacompanysborrowingcondition);CarolAnn
1


toissuing,changingoraffirmingacompanysrating,aratingagencyalsomayrevisea
companys creditratingoutlook inanticipation of a possiblefuture ratingsupgrade
ordowngrade.4
Adowngradeinanissuerscreditratinghasasignificantnegativeimpactonthe
financialpositionofacompanylikeLehman.5Althoughacreditratingrelatesdirectly
to the issuers debt, a lower rating impacts the attractiveness of an issuers equity, or
stock,aswell.6Moreover,counterpartiesmayrespondtoadowngradebydemanding
that the issuer post additional cash collateral to secure its obligation.7 Some of
Lehmans derivative contracts had builtin triggers permitting counterparties to
require additional cash collateral in the event of a downgrade.8 Lehmans Chief

Frost, Credit Rating Agencies in Capital Markets: A Review of Research Evidence on Selected Criticisms of the
Agencies,22J.ACCT.AUDITING&FIN.,469,476(Summer2007)(explainingthattheratingprocessinvolves
analysisofbothbusinessriskandfinancialrisk).
4 See Carol Ann Frost, Credit Rating Agencies in Capital Markets: A Review of Research Evidence on Selected
CriticismsoftheAgencies,22J.ACCT.,AUDITING&FIN,469,475(Summer2007)(notingthatacreditrating
may consist of both a letter rating and commentary, which can include a credit watch or credit
outlookmodifier).
5 See, e.g., email from Ian T. Lowitt, Lehman, to Herbert H. McDade, III, Lehman (June 30, 2008)
[LBHI_SEC07940_643543] (One notch downgrade requires 1.7 bn; and 2 notch requires 3.4 bn of
additionalmarginposting.).
6 See Dror Parnes, Why Do Bond and Stock Prices and Trading Volumes Change around Credit Rating
Announcements,9J. BEHAV. FIN.224,22426(2008);LarsA.Norden,InformationEfficiencyofCreditDefault
Swaps and Stock Markets: The Impact of Credit Rating Announcements, 28 J. BANKING & FIN. 2845, 284546
(Nov.2004).
7SeeAmadouN.R.Sy,TheSystemicRegulationofCreditRatingAgenciesandRatedMarkets,IntlMonetary
Fund, Working Paper (2009) at pp. 89 (noting that brokerdealers may use credit ratings to determine
acceptablecounterparties,aswellascollaterallevelsforoutstandingcreditexposure);emailfromIanT.
Lowitt,Lehman,toEricFelder,Lehman(July5,2008)[LBEXDOCID071263](statingthatadowngrade
willaffectlinesandwillingnessofcounterpartiestofundsecured.).
8LehmanBrothersHoldingsInc.,QuarterlyReportasofMay31,2008(Form10Q)(filedonJuly10,2008)
(LBHI 10Q (July 10, 2008)); see also Lehman, Global Treasury Downgrade Effect on Cash Capital


Executive Officer (CEO), Richard S. Fuld, Jr., told the Examiner that one of the
motivationsbehindhisdesiretoreducenetleveragewastheratingagenciesfocuson
thatnumber.9ThatconcernaboutnetleveragerelateddirectlytoLehmansuseofRepo
105transactions.10LehmansBoardunderstoodthegeneralimpactaratingdowngrade
wouldhaveonLehman.11
B. MarchandApril2008OutlookRevisions
On March 17, 2008, Moodys revised its outlook on Lehmans longterm senior
debt rating from positive to stable, explaining, the firms current exposure to
commercialandresidentialrealestate,andtoalesserdegreeleveragedloans,willlikely
poseanotinsignificantburdenonprofitabilityforatleastthenextseveralquarters.12
On March 22, 2008, Standard & Poors revised its outlook on Lehmans senior debt
ratingfromstabletonegative.13
At the beginning of April 2008, Fitch also revised Lehmans outlook to
negative,statingthattheactionwasduetoincreasedearningspressureandleverage
asinventory expandedinresidential andcommercialrealestaterelated securities and

Facilities3Jun08(June2008)[LBHI_SEC07940_513314],attachedtoemailfromAmberishRatanghayra,
Lehman,toPaoloR.Tonucci,Lehman,etal.(June3,2008)[LBHI_SEC07940_513312].
9ExaminersInterviewofRichardS.Fuld,Jr.,Sept.25,2009,atp.8.
10SeeSectionIII.A.4.dandeoftheReport,whichdiscussesRepo105ingreaterdetail.
11ExaminersInterviewofJerryA.Grundhofer,Sept.16,2009,atp.15.
12 Moodys, Press Release, Moodys affirms Lehmans A1 rating; outlook now stable (Mar. 17, 2008), at p. 1
[LBEXDOCID187704].
13JedHorowitz,CreditCrisis:S&PRedFlagsGoldman,Lehman,Wall.St.J.,Mar.22,2008.


loansandcorporateloansandcommitments.14FitchnotedthatLehmanhasmanaged
itsliquidityparticularlywellandmanagesitsmarketriskwell.15InanApril3,2008
ratingssummary,Standard&Poorsexplaineditsnewnegativeoutlook.16Standard&
Poors stated that while Lehmans excess liquidity position is among the largest
proportionatelyoftheU.S.brokerdealers...wecannotignorethepossibilitythatthe
firmcouldsufferseverelyifthereisanadversechangeinmarketperception,however
illfounded.17
Lehmanpaidsignificantattentiontoitscreditrating.18InanApril2008internal
strategy document, Lehman concluded that its ability to avert a rating downgrade
depended on maintaining the rating agencies positive view of Lehmans risk
management and avoiding catastrophic asset writedowns.19 Lehman identified two
keydangerstoitscreditrating:furtherwritedownsandliquidityissues.20Continuing
writedownswereasorespotforratingagencies,inpartbecauseofaperceptionthat
Lehman was hiding something.21 Lehman recognized that even incremental

FitchRatings,PressRelease,FitchRevisesOutlookOnLehmanBrotherstoNegative;AffirmsAA/F1+IDRs,
BusinessWire(Apr.1,2008).
15Id.
16 Standard & Poors, Standard & Poors RatingsDirect Summary: LBHI (Apr. 3, 2008), at p. 2 [S&P
Examiner000894].
17Id.
18See,e.g.,Lehman,LEHRatingsStrategyin08:RatingsAdvisoryGroupDiscussion(Apr.29,2008),atp.
1 [LBHI_SEC07940_490429], attached to email from Kevin Thatcher, Lehman, to Paolo R. Tonucci,
Lehman,etal.(Apr.29,2008)[LBHI_SEC07940_490428].
19Id.
20Id.
21Id.
14


concerns about Lehmans liquidity would trigger a downgrade.22 Foreshadowing
Lehmanslatersurvivalstrategies,includingeffortstoseekastrategicpartneraswellas
SpinCo, the internal strategy document recommends that Lehman could ameliorate
those threats to its ratings via a strategic transaction with a strong depositbased
franchise, coupled with a restructuring transaction that would transfer the risk of
Lehmanstroubledassetstoanotherentity.23
C. June2008Warnings
On June 2, 2008, Standard & Poors downgraded Lehman from an A+ rating to
A.24 FollowingtheStandard&Poorsdowngrade,press reports noted that [a]nother
downgrade . . . for Lehman could force Lehman to post $5.2 billion in additional
collateral.25 Moodys privately informed Lehman that its concern was how much
worsecanitget,evenifLehmanraisescommonequity.26
On June 9, 2008, the day of Lehmans preannouncement of its second quarter
earnings,FitchdowngradedLehmanfromAAtoA+.27Fitchspressreleasenotedthat
Fitch is concerned that [sales of riskier real estate assets] may remove the most
attractive assets, leaving a concentrated level of least desirable or more problematic

Id.
Id.atp.2.
24 Sarah OConnor, S&P Cuts Its Ratings for Merrill, Morgan Stanley andLehman, Financial Times, June4,
2008,atp.31.
25Id.
26EmailfromBlaineA.Frantz,Moodys,toPaoloR.Tonucci,Lehman(June5,2008)[MOODYS1171].
27 Fitch, Press Release, Fitch Downgrades Lehman Brothers LT & ST IDRs to A+/F1; Outlook Negative,
BusinessWire,June9,2008.
22
23


assets on the balance sheet, and that maximum equity credit of [hybridpreferred
equity]hasbeenreachedinFitchcalculatedleverageratios.28LehmanaskedFitchto
reconsider the downgrade, citing Lehmans successful June 12, 2008 closing of a $6
billion capital raise, reductions in its commercial real estate exposure, and improving
market conditions.29 Lehman also asserted that it was holding its best assets in
expectationofamarketrecovery.30Notwithstandingthoseargumentsandaneffortby
Fuldtointervenepersonally,LehmansappealtoFitchwasunsuccessful.31
OnJune10,2008,MoodyslowereditsratingoutlookforLehmanfromstable
to negative.32 Moodys explained its lowered rating by stating that [t]he rating
action . . . reflects Moodys concerns over risk management decisions that resulted in
elevatedrealestateexposuresandthesubsequentineffectivenessofhedgestomitigate
theseexposuresintherecentquarter.33OnFriday,June13,2008,Moodysannounced
thatitwasplacingthelongtermcreditratingofLehmananditssubsidiariesonreview
forpossibledowngrade,citingLehmansJune12,2008,seniormanagementupheavalas
potentiallyexacerbat[ing]erosionininvestorconfidenceandincreas[ing]theriskof

Id.
Lehman,PresentationtoFitchRatingsRatingAppeal(June9,2008),atp.1[LBHI_SEC07940_339202],
attached to email from Paolo R. Tonucci, Lehman, to Ian T. Lowitt, Lehman (June 9, 2008)
[LBHI_SEC07940_339201].
30Id.
31SeeemailfromPaoloR.Tonucci,Lehman,toEileenA.Fahey,Fitch,etal.(June9,2008)[FITCHLEH
BK00002457].
32MoodysChangesLehmansRatingOutlooktoNegative,FinancialTimes,June10,2008.
33Id.
28
29


franchise impairment.34 Prior to the announcement, Lehman senior managers called
Moodys, seeking to soften Moodys extreme press release. During the call, they
asked Moodys to delete, among other things, a reference stating that ongoing losses
wouldraiseseriousconcernsabouttheeffectivenessofLehmansriskmanagement.35
Justoveramonthlater,onJuly17,2008,MoodyslowereditsratingofLehmans
longterm senior debt to A2 from A1, with its rating outlook remaining negative.36
Moodys press release cited expectations for additional marktomarket losses on
Lehmans residential and commercial mortgage portfolios, which continue to pose a
significant challenge, and observed that Lehman has very limited capacity for
additional preferred securities in its capital structure, and the difficult market
environment for Lehman in raising common equity capital . . . limits its ability to
respondtofurtherunexpectedlosses.37
FollowingtheJuneandJulydowngrades,Lehmansmanagementdiscussedthe
impactofratingsoncollateralrequirementsinmaterialspreparedforLehmansJuly22,

Moodys,PressRelease[Draft],MoodysplacesLehmanA1ratingonreviewfordowngrade(June13,2008),
atp.2[LBHI_SEC07940_659482],attachedtoemailfromBlaineA.Frantz,Moodys,toPaoloR.Tonucci,
Lehman,etal.(June13,2008)[LBHI_SEC07940_659481].
35 Compare Lehman, Moodys Press Release [Draft], Moodys places Lehmans A1 rating on review for
downgrade (June 12, 2008), at p. 2 [LBHI_SEC07940_339759], attached to email from Paolo R. Tonucci,
Lehman,toBlaineA.Frantz,Moodys,etal.(June12,2008)[LBHI_SEC07940_339758]withMoodys,Press
Release[Draft](June12,2008),atp.2[LBHI_SEC07940_339751],attachedtoemailfromBlaineA.Frantz,
Moodys,toPaoloR.Tonucci,Lehman,etal.(June12,2008)[LBHI_SEC7940_339750];seealsoemailfrom
Paolo R. Tonucci, Lehman, to Blaine A. Frantz, Moodys (June 12, 2008) [MOODYS 1547] (requesting
appealofwhatLehmanviewedasextremepressrelease).
36 Email from Paolo R. Tonucci, Lehman, to Christian Wait, Lehman (July 17, 2008)
[LBHI_SEC07940_529261](quotingMoodysPressRelease).
37Id.
34


2008 Board Meeting.38 The Board presentation calculated the impact of further
downgrades of one and two notches on the amount of collateral that Lehman would
havetoposttosecureitsmarginaccounts,estimatingtheadditionalrequirementtobe
between$1.1billionand$3.9billion.39
D. September2008Warnings
OnSeptember9,2008,bothStandard&PoorsandFitchplacedLehmansrating
onanegativewatch.40Standard&PoorscitedLehmansintenttoraisecapitalandthe
precipitous decline in Lehmans share price.41 Fitchs action was triggered by
Lehmans decision to move up the date of its third quarter earnings call to announce
SpinCoaswellasLehmansintenttoraisecapitalatthesametime.42Fitchbelievedthe
capitalraisewouldnotbepossibleandwantedtoconveythatmessagetothemarket.43
On the late afternoon of September 10, 2008, Moodys announced that it had
placed Lehmans A2 rating on review with direction uncertain.44 Moodys Senior
VicePresident,BlaineA.Frantz,issuedastatementstating:Akeyratingsfactorwillbe
Lehmans ability to turn around market sentiment. . . . A strategic transaction with a

Lehman, Presentation to the Board of Directors, Liquidity Update (July 22, 2008), at p. 18
[LBHI_SEC07940_028503].
39Id.
40 Email from Stephen Lax, Lehman, to Kevin Thatcher, Lehman, et al. (Sept. 9, 2008)
[LBHI_SEC07940_557829] (quoting Fitch, Press Release, Fitch Places Lehman Brothers on Rating Watch
Negative(Sept.9,2008));S&PPlacesLehmanonNegativeRatingsWatch,AssociatedPress,Sept.9,2008.
41S&PPlacesLehmanonNegativeRatingsWatch,AssociatedPress,Sept.9,2008.
42ExaminersInterviewofEileenA.Fahey,Sept.17,2009,atp.7.
43Id.
44 Email from Paolo R. Tonucci, Lehman, to Carlo Pellerani, Lehman (Sept. 10, 2008)
[LBHI_SEC07940_558653] (forwarding Moodys, Press Release, Moodys Places Lehmans A2 Rating On
ReviewWithDirectionUncertain)(Sept.10,2008)).
38

10


stronger financial partner would likely add support to the ratings and result in a
positiveratingaction.45
ThomasA.Russo,LehmansChiefLegalOfficer,toldtheExaminerthatMoodys
announcement, which he believed arrived before the market had time to digest
Lehmans earnings preannouncement, represented the final turning point when
Lehmans situation began to deteriorate.46 Lehmans management perceived Moodys
statementthatLehmanneededtoreachastrategictransactionwithastrongerpartner
asanultimatumthatcastdoubtonLehmansabilitytoraiseadditionalcapitalandthus
put[Lehman]inaverytightboxforpossiblenextsteps.47FuldtoldtheExaminerthat
Lehmans Chief Financial Officer (CFO) Ian T. Lowitt told him that the rating
agencies expected Lehman to reach a deal within the next week or face a likely
downgrade.48 Lehman began to revise its Gameplan for an impending downgrade
andtheconsequentlossofLehmansabilitytoissuelongtermdebt.49

Id.
ExaminersInterviewofThomasA.Russo,May11,2009,atpp.78.
47EmailfromJeffreyGoodman,Lehman,toVincentDiMassimo,Lehman(Sept.10,2008)[LBEXDOCID
618607]; see email from Larry Wieseneck, Lehman, to Herbert H. McDade, III, Lehman, et al. (Sept. 10,
2008)[LBEXDOCID349235].
48ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.6.
49Lehman,TheGameplanDowngradeScenario(Sept.11,2008)[LBEXDOCID2727669]attachedtoe
mail from Matthew Blake, Lehman, to Ian T. Lowitt, Lehman, et al. (Sept. 11, 2008) [LBEXDOCID
2744462].
45
46

11


II.

BANKHOLDINGCOMPANYPROPOSAL
Duringthespringof2008,LehmanbegantoconsiderapplyingtotheFRBNYto

becomeabankholdingcompany.50InJuly2008,Lehmanfirstraisedthatideawiththe
FRBNY.51 Lehmans proposal to the FRBNY did not reach the level of a formal
submission,butseniorrepresentativesofLehmanandtheFRBNY,includingFuldand
FRBNY President Timothy F. Geithner, had discussions regarding the proposal.52
Geithner told the Examiner that he had considered Lehmans bank holding company
proposal to begimmicky.53TheFRBNY expressedconcernthat themove wouldbe
perceived negatively in the marketplace and trigger a run on the bank.54 Thomas C.
Baxter, Jr., General Counsel to the FRBNY, told the Examiner that Lehman eventually
camearoundtotheFRBNYsviewanddecidednottogoforwardwiththeproposal.55
However,RussotoldtheExaminerthattheproposalneverfullycameoffthetableasan
optionforLehman,althoughtheproposalwasnotapriorityduringthefinalweeks.56
During the same period, Lehman also pursued an exemption to Section 23A of
the Federal Reserve Act with the FRBNY and FDIC.57 Section 23A of the Federal

ExaminersInterviewofThomasA.Russo,May11,2009,atp.8.
ExaminersInterviewofWilliamL.Rutledge,Aug.27,2009,atp.4.
52ExaminersInterviewofThomasC.Baxter,Jr.,May20,2009,atp.8;ExaminersInterviewofThomasA.
Russo,May11,2009,atp.8;ExaminersInterviewofWilliamL.Rutledge,Aug.27,2009,atpp.34.
53ExaminersInterviewofTimothyF.Geithner,Nov.24,2009,atp.6.
54ExaminersInterviewofThomasC.Baxter,Jr.,May20,2009,atp.8
55Id.
56ExaminersInterviewofThomasA.Russo,May11,2009,atp.9.
57 Examiners Interview of William L. Rutledge, Aug. 27, 2009, at p. 2; see also email from Arthur G.
Angulo,FRBNY,toJanVoigts,FRBNY,etal.(July14,2008)[FRBNYtoExam.026357].
50
51

12


Reserve Act limits the transactions that a bank may engage in with its affiliates,
including its parent company.58 If the FRBNY had granted a Section 23A exemption,
LehmanwouldhavebeenabletotransferassetstooneofitsIndustrialLoanCompany
(ILC) subsidiaries so that Lehman could access funds from Lehman Brothers
Commercial Bank.59 Industrial loan companies are financial institutions that may be
owned by nonfinancial institutions and are subject to Section 23A of the Federal
ReserveAct.60
AlthoughtheFRBNYhadthelegalauthoritytoapproveLehmansrequestonits
own,theFDIChaddefactovetopowerbecausetheFDICwouldbetheprimaryfederal
supervisor of the bank.61 Lehman submitted a series of term sheets to the FRBNY
detailingtheassetsthatwouldbetransferredtotheILC.62AttherequestoftheFRBNY,

12U.S.C.371(c)(2009).
ExaminersInterviewofWilliamL.Rutledge,Aug.27,2009,atp.2.
60 Federal Deposit Insurance Corporation, Supervisory Insights: The FDICs Supervision of Industrial
Loan Companies: A Historical Perspective, available at http://www.fdic.gov/regulations/examinations/
supervisory/insights/sisum04/industrial_loans.html.
61Id.
62Sullivan&Cromwell,TermSheetfor23AExemptionforLehmanBrothersCommercialBank(Bank)
[Draft], (July 13, 2008) [LBEXDOCID 018382], attached to email from Andrew S. Baer, Sullivan &
Cromwell, to William L. Rutledge, FRBNY, et al. (July 14, 2008) [LBEXDOCID 071857]; Sullivan &
Cromwell,TermSheetfor23AExemptionforLehmanBrothersCommercialBank(Bank)[Draft],(July
15, 2008) [LBEXDOCID 018385], attached to email from Andrew S. Baer, Sullivan & Cromwell, to
William L. Rutledge, FRBNY, et al. (July 15, 2008) [LBEXDOCID 071859]; Sullivan & Cromwell, Term
Sheetfor23AExemptionforLehmanBrothersCommercialBank(Bank)[Draft],(July20,2008)[LBEX
DOCID1013221],attachedtoemailfromJackieFrommer,Lehman,toWilliamL.Rutledge,FRBNY,etal.
(July21,2008)[LBEXDOCID1063411].
58
59

13


Lehman removed several categories of assets from its proposal, including those with
lowratingsaswellassomelandloans.63
During early August, the FRBNY told Lehman that it had received sufficient
information,andtheprocessthenmovedintothehandsoftheFDIC.64Inmiddletolate
August,LehmanrepresentativeshadaseriesofconversationsandameetingwithFDIC
officials. They responded negatively to the proposal, in part because the FDIC had
concerns that the transaction would negatively affect the bank.65 Lehman then
attemptedtoconvincetheFRBNYtopersuadetheFDICtogranttheexemption.66
On September 21, 2008, following Lehmans bankruptcy, the FRBNY granted
applications by Goldman Sachs and Morgan Stanley to become bank holding
companies.67 Public reports at the time indicated that Goldman Sachs and Morgan
Stanley were motivated to convert to bank holding companies in order to increase

Sullivan&Cromwell,TermSheetfor23AExemptionforLehmanBrothersCommercialBank(Bank)
[Draft], (July 20, 2008) [LBEXDOCID 1013221], attached to email from Jackie Frommer, Lehman, to
WilliamL.Rutledge,FRBNY,etal.(July21,2008)[LBEXDOCID1063411].AccordExaminersInterview
ofWilliamL.Rutledge,Aug.27,2009,atp.3.
64ExaminersInterviewofWilliamL.Rutledge,Aug.27,2009,atp.3.
65 Id.; see email from Timothy F. Geithner, FRBNY, to William L. Rutledge, FRBNY (Aug. 19, 2008)
[FRBNYtoExam.033361];emailfromWilliamL.Rutledge,FRBNY,toTimothyF.Geithner,FRBNY,et
al.(Aug.29,2008)[FRBNYtoExam.032939].AccordExaminersInterviewofThomasA.Russo,May11,
2009,atp.9.
66RichardS.Fuld,Jr.,Lehman,CallLogs(Aug.27,2008)[LBHI_SEC07940_016973];ExaminersInterview
ofThomasA.Russo,May11,2009,atp.9.
67 Federal Reserve System, Orders Approving Formation of Bank Holding Companies (Sept. 21, 2008),
availableat
http://www.federalreserve.gov/newsevents/press/orders/orders20080922a1.pdf;
http://www.federalreserve.gov/newsevents/press/orders/orders20080922a2.pdf.
63

14


confidence in their strength and access to funding.68 Baxter told the Examiner that
Goldman and Morgan Stanley decided to hold hands and jump together into bank
holding company status, as the last two independent banks remaining.69 They hoped
thatbytakingthesameactionatthesametime,theymightavoidincurringanystigma
ornegative perceptions from the conversion.70Baxtersaid that one ofthereasons the
Government opposed Lehmans application was the Governments concern that
converting to bank holding company status would create negative perceptions about
Lehmansfundingstrength.71
III.

JUNE12,2008
On June 12, 2008, Lehman took two important but very different steps: (1)

replacingtwoseniorofficers;and(2)closingamajorequityoffering.
A. ReplacementofOfficers
OnthemorningofJune12,2008,Lehmanpubliclyannouncedthereplacementof
twoofitsofficers.HerbertH.McDade,IIIreplacedPresidentJosephM.Gregoryand

SeeMichaelJ.delaMerced,etal.,AsGoldmanandMorganShift,aWallSt.EraEnds,N.Y.Times,Sept.21,
2008.
69ExaminersInterviewofThomasC.Baxter,Jr.,May20,2009,atp.8.
70Id.
71Id.
68

15


IanT.LowittreplacedCFOErinM.Callan.72OntheeveningofJune11,2008,Fuldhad
previewedtheexecutiveshakeuptotheBoardduringatelephonicmeeting.73
SeveralofLehmansdirectorsattributedthereplacementofGregoryandCallan
to a loss of confidence in them.74 On June 9, 2008, Lehmans second quarter pre
announcement of earnings reported Lehmans first loss as a public company. That
same day, Callan offered to Fuld to resign.75 She acknowledged to Fuld that she had
lost credibility with the public as a result of Lehmans poor performance.76 That was
especiallytrueinlightofupbeatstatementsduringthesecondquarter.77Callantoldthe
Examiner that she thought it would be hard for her to continue to tell Lehmans
story.78 Although Fuld initially rejected her resignation, on June 12, 2008, Fuld
accepteditandinformedtheExecutiveCommitteeofherreplacement.79
SomeofLehmansexecutiveshadlostconfidenceinGregorybythespring,when
complaints regarding Gregory percolated up to at least one director.80 Following
Lehmans announcement of second quarter losses, the Head of Lehmans Investment

See David Ellis, Shakeup at Lehman Brothers, CNNMoney.com, June 12, 2008, available at
http://money.cnn.com/2008/06/12/news/companies/lehman_brothers/index.htm?postversion=2008061213.
73LehmanBrothersHoldingsInc.,MinutesofMeetingofBoardofDirectors(June11,2008),atp.1[LBEX
AM003755].
74 Examiners Interview of Jerry A. Grundhofer, Sept. 16, 2009, at p. 9; Examiners Interview of Sir
ChristopherC.Gent,Oct.21,2009,atpp.1718;ExaminersInterviewofJohnF.Akers,Apr.22,2009,atp.
8;ExaminersInterviewofThomasH.Cruikshank,Oct.8,2009,atp.6.SeeSectionIII.A.3.c.oftheReport,
whichdiscussesCallanspublicfightwithDavidEinhorningreaterdetail.
75ExaminersInterviewofErinM.Callan,Oct.23,2009,atp.8.
76Id.
77Id.
78Id.
79Id.atpp.89.
80ExaminersInterviewofSirChristopherGent,Oct.21,2009,atpp.1718.
72

16


BankingDivision,HughSkipE.McGeeIII,privatelytoldFuldthatachangeinsenior
management was necessary and that Gregory had to go.81 McGee told the Examiner
that Fuld responded by asking him to state his view to the Executive Committee.82
GregorytoldtheExaminerthatthepossibilityofhisdeparturearoseinearlyJune2008
asaresultofmediapressureforheadstoroll.83GregorysaidthatafterMcGeeraised
theissue,GregorytoldtheExecutiveCommitteethatheshouldbetheonetoleave,not
Fuld,asGregorysjobwastoprotecttheofficeoftheChairman.84
LehmanintendedtheshakeuptosignaltothemarketthatLehmanwastaking
proactivestepstorepairmarketconfidence.Nonetheless,Lehmansstocklost7.4%of
its value on June 12 and closed at $22.70.85 The Secretary of the Treasury, Henry M.
Paulson, Jr., told the Examiner that Fuld told him that Fuld believed firing Callan
would bolster market confidence.86 However, Paulson thought that the markets might
viewCallansreplacementasmorealarming,notless.87
By the afternoon of June 12, 2008, one of Lehmans clearing banks, Citibank,
receivedanumberofnovationrequests,fromtradingpartnerssuchasPutnam,GSAM,
Bank of America, King Street, Elliot and Citadel indicating a lack of confidence in

ExaminersInterviewofHughE.McGee,III,Aug.12,2009,atp.26.
Id.
83ExaminersInterviewofJosephM.Gregory,Nov.13,2009,atp.13.
84Id.
85
See
Yahoo!
Finance,
LEH
stock
chart,
June
http://finance.yahoo.com/q?s=LEHMQ.PK(lastvisitedJan.20,2010).
86ExaminersInterviewofHenryM.Paulson,Jr.,June25,2009,atp.14.
87Id.
81
82

17

12,

2008,

available

at


Lehman.88 According to an internal Citibank email, the [m]arket is saying Lehman
cannotmakeitalone.Lossofconfidencehereishugeatthemoment.89Thatsameday,
in connection with the novation requests and its earnings loss, Lehman posted a
$2billion deposit to Citibank to induce Citibank to continue its clearing activities for
Lehman.90LehmaninformedtheFRBNYofthedepositaspartofdailyreportsLehman
madetotheFRBNY.91
B. LehmanClosesa$6BillionOffering
OnJune12,2008,Lehmanclosedits$6billionequityoffering.92OnJune6,2008,
Lehmans management had presented the stock offering to its Board, and the Board
authorized the offering.93 On June 12, 2008, LBHI sold 2 million shares of convertible
preferredstockfor$2billion.94Thatsameday,LBHIsold143millionsharesofcommon
stockatapriceof$28pershare,totaling$4billion.95

SeeemailfromThomasFontana,Citibank,toBrianLeach,Citibank,etal.(June16,2008)[CITILBHI
EXAM00113017](relatingthecounterpartiesthatrequestednovationsthepreviousweek.)
89EmailfromThomasFontana,Citibank,toChristopherM.Foskett,Citibank,etal.(June12,2008)[CITI
LBHIEXAM00081606].
90SeeemailfromDanielJ.Fleming,Lehman,toIanT.Lowitt,Lehman,etal.(June12,2008)[LBEXAM
008608].
91FRBNY,LehmanIBUpdate(June25,2008),atpp.1011[FRBNYtoExam.008224](dataproducedon
June19,2008).SeeSectionIII.A.5.c.oftheReport,whichdiscussesthenovationrequestsanddepositin
greaterdetail.
92LehmanBrothersHoldingsInc.,CurrentReportasofJune9,2008(Form8K)(filedonJune12,2008)
(LBHI8K(June12,2008)).
93LehmanBrothersHoldingsInc.,MinutesofMeetingofBoardofDirectors(June6,2008),atp.3[LBEX
AM003709].
94LBHI8K(June12,2008).
95Id.
88

18


However, even with the injection of additional equity, the Federal Reserve
remainedskeptical.96IntheweekspriortoLehmansJune12offering,Lehmanhadmet
with the Federal Reserve and sketched out an Apocalypse Now liquidity scenario,
which was intended to reflect circumstances that were far more severe than what
Lehmanthoughtcouldhappen.97BymidJune2008,however,theFRBNYwasawareof
thenovationrequestsandtheirpotentialimpactonLehmansliquidity.98
On the evening of June 12, 2008, the Vice Chairman of the Federal Reserve,
Donald L. Kohn, wrote Chairman of the Federal Reserve Ben S. Bernanke regarding
Kohns concern that Lehmans $6 billion capital infusion may not cure Lehmans
problems.99KohnthoughtthatthepossibilityexistedthatthisisThursdayof[Bear
Stearns] weekend, and equity holders could wake up Monday morning with no
value.100 According to Kohns email, [Fuld] really [had] no alternative plan at this
point. Lining up [sovereign wealth fund] investors is a slow process and there is
nobody is [sic] interested in buying them.101 Kohn went on to discuss what would

SeeemailfromDonaldL.Kohn,FederalReserve,toBenS.Bernanke,FederalReserve,etal.(June12,
2008)[FRBtoLEHExaminer000073].
97 See Lehman, Presentation to the Federal Reserve, Update on Capital Leverage & Liquidity (May 28,
2008)[LBEXWGM718569].AccordExaminersInterviewofRobertAzerad,Apr.20,2009,atp.3.
98SeeFRBNY,LehmanIBUpdate(June25,2008),atpp.1011[FRBNYtoExam.008224](dataproduced
onJune19,2008).
99EmailfromDonaldL.Kohn,FederalReserve,toBenS.Bernanke,FederalReserve(June13,2008)[FRB
toLEHExaminer000073].
100Id.
101Id.
96

19


become Lehmans strategic alternatives.102 He stated that while [p]rivate equity
partners are a possibility, Lehmans proposed bank or financial holding company
with Fed consolidated regulation would take time to get regulatory approvals and
provideuncertainreliefunlesstheyacquiredalotofdepositsveryfast.103Kohnalso
previewedwhatwouldbecomeSpinCo,suggestingthatLehmanmightcreat[e]abad
bank,ontheUBSmodel,[but]withthelousymortgagestheyhold[,it]wouldrequire
interest from equity investors to buy into the bad bank.104 Finally, Kohn noted that
usingourbalancesheettofacilitateanorderlywinddownwiththediscountwindow
orbyassumingtheliabilitiesalaJPMishardbecausewedonthavetheauthoritiesof
thefdic(aswellasforpolicyreasons).105Earlythenextmorning,Kohnconcludedthe
emailexchangewithBernankebytellingBernankethatinstitutionalinvestorsbelieved
that itwas not aquestionofwhetherLehman wouldfail, but when thefailure would
occur.106
Halfwayacrosstheworld,inHongKong,arumorcirculatedthatLehmanwould
begonethatnight,takenoutbytheFederalReserve.107

Id.
Id.
104Id.
105Id.
106EmailfromDonaldL.Kohn,FederalReserve,toBenS.Bernanke,FederalReserve(June13,2008)[FRB
toLEHExaminer000781].
107 See Bloomberg chat from James Archibald, ABN AMRO Asia Ltd., to Ben Suttie, ABN AMRO
Australia,etal.(June12,2008),atpp.12[ABNAMRO000002].
102
103

20


IV.

LAZARDSCVSPROPOSAL
During the summer of 2008, Lehman worked with Lazard, Frres & Co.

(Lazard) as a strategic advisor.108 Lehman formally engaged Lazard in September


2008.109GaryParr,theengagementpartnerforLazard,toldtheExaminerthatthescope
ofLazardsworkforLehmanwastobeavailableforafairnessopinion.110Parrsaidthat
Fuld asked Lazard to tell us if were missing anything.111 Lazard addressed and
evaluatedanarrayofoptionsprovidedbyLehman.112Beyondthat,Lazardproposedan
alternativetoSpinCo,whichwasknownascontingentvaluestock(CVS).
Lazards CVS alternative would have meant segregating Lehmans commercial
real estate assets on the balance sheet and tracking those assets value using a
contingentvaluestock.113TheCVSconceptwasintendedtopermitLehmantoachievea
segmentation of risk similar to SpinCo, while enabling Lehman to finance the
commercialrealestateassetsbyraisingmoneyatthecleanerparentcompanylevel,
ratherthantryingtoraisemoneyforanentitycomposedentirelyofbadassets.114Parr
told the Examiner that there was a pretty good chance that he was the person who
cameupwiththeCVSconcept.115

ExaminersInterviewofGaryParr,Sept.14,2009,atp.6.
Id.
110Id.
111Id.
112Id.atp.7.
113Id.atpp.1011.
114Id.atp.11.
115Id.
108
109

21


On July 28, 2008, Lazard prepared a presentation that explained the CVS
proposalandcomparedittoSpinCo.116ThepresentationdescribedCVSasanewclass
ofLehmanstock,qualifyingasTier1capitalandratingagencyequitycapital.117Each
shareof CVS would represent a participationintheeconomics ofthecommercial real
estate portfolio, where each dollar of loss attributed to commercial real estate would
resultinareductionofthefacevalueoftheshareofCVS.118Lazardanticipatedthatthe
CVSwouldberegisteredandtradable,totheextenttherewasamarketfortheshares.119
LazardsCVSproposalalsoinvolvedacapitalraise.120TheLazardpresentation
described the potential recapitalization through the creation of CVS as a fourstep
process.121First,LBHIwouldcreateanewshareclass.122Second,LBHIwoulddistribute
the new shares to Lehman shareholders in a taxfree manner.123 Third, LBHI would
issue$4billionincommonequity.124Finally,LBHIwouldissuenewrestrictedstockto
Lehmansemployees.125
LazarddescribedtheCVSproposalasadvantageoustoLehman.126Lazardlisted
whatitsawasseveraladvantagesoftheCVSproposal,including:separatereportingof

Lazard,ProjectGreenDiscussionMaterials[Draft](July28,2008)[LAZA00000131].
Id.atp.1.
118Id.
119Id.
120Id.atp.2.
121Id.
122Id.
123Id.
124Id.
125Id.
126Id.
116
117

22


Lehmans results and the commercial real estate portfolios results; no change in the
consolidated financials of Lehman as a result of the CVS issuance; the ability to
maintain theequityassociatedwiththe commercial real estateportfolio;separationof
the commercial real estate exposure into a different security might allow for an
additionalLBHIequityraise;andtheoptiontoredeemCVSforcashorLBHIcommon
equity.127
LazardsCVSproposalwasnotwithoutflaws.First,theissuanceofCVSwould
not remove any assets from Lehmans balance sheet.128 Second, there would be an
execution delay due to the time required to register the CVS, publish the required
financial statements and proxy and receive the results of the required shareholder
vote.129Finally,LazardnotedthatitwasunclearhowtheCVSwouldtrade.130
On Saturday, August 9, 2008, Lehman senior management, including Fuld,
Russo, Jeffrey L. Weiss (Lehmans coHead of Global Finance), Larry Wieseneck
(LehmansGlobalHeadofFinance)andLesGorman(LehmanManagingDirector)held
a Project Green meeting and conference call at Fulds home in Connecticut.131 Parr
alsoattendedaportionofthemeeting,andhelistedthealternativesthenunderreview:
SpinCo;theCVSproposal;asaleof100%ofIMD;saleof51%or49%ofIMD;or,agoing

Id.
Id.
129Id.
130Id.
131ExaminersInterviewofGaryParr,Sept.14,2009,atp.12.
127
128

23


private transaction.132 The Lazard presentation rated the CVS proposal as more
desirableforLehmansbalancesheetthanSpinCo,evenwhileacknowledgingthatthe
CVSwouldnotreducethebalancesheet.133
Wieseneck summarized the meeting for McGee, who was unable to attend.
WieseneckreportedthatParrpushedtheCVSideaasbetterthanspincobutLehman
managersrejectedtheidea:134
After discussing the economic benefits (tax shield at corporate) and
potentialtiming,itwastheconsensusthatthefirmdoesnothaveenough
credibilitytohavetheCVSortrackerastheanswer[.]Ifwecantdospin
co it would be a fall back but that we would be accused of financial
engineering if we rolled out tracker now. Dick ended by saying go full
speedaheadonSpinCowithanattempttoringfencerealestatenowuntil
spin.RealissueishowmuchequitydoweneedtosellbySept.15anddo
we need some mezzpreplacedso that equity buyersbelieve we can get
spincodone.135
Weiss added that Parr was pushing his agenda. People saw through it.136
Parrssummaryofthemeetingnotedthatthe[c]onclusion[was]tocontinuefocused
onspinwithcapitalraise.Primaryconcernwithcvsisperception.Meeting[was]not
tooconfrontational.Dicklikedourworkandthefulldiscussion.[Thereis][n]othing

Lazard, Project Green Discussion Materials [Draft] (Aug. 7, 2008), at p. 1 [LBHI_SEC07940_647930],


attached to email from Angela Judd, Lehman, to Hugh E. McGee, III, Lehman, et al. (Aug. 8, 2008)
[LBHI_SEC07940_647929].
133Id.at5.
134 Email from Larry Wieseneck, Lehman, to Hugh E. McGee, III, Lehman, et al. (Aug. 9, 2008)
[LBHI_SEC07940_406661].
135Id.
136Id.
132

24


elsetodofornow.137ParrtoldtheExaminerthathedidnotpushanysingleideaasthe
bestidea.138
LehmandidnotpursuetheCVSproposalfurther.
V.

THECHRONOLOGICALDEVELOPMENTOFSPINCO
A. MarchApril2008:EarlyVersionsofSpinCo
LehmansofficersbegantocontemplateshiftingLehmanstroubledandilliquid

realestateassetstoanoffbalancesheetentityinearlyMarch2008.139Callansentane
mailtoMarkA.Walsh,theHeadofLehmansGlobalRealEstateGroup,suggestingthe
possibilityofputtingsomeofLehmanscommercialmortgageassetsintoanewreal
estateinvestmenttrustandspinningit(i.e.,transferringequityownershipofthenew
entity)toLehmansshareholders.140WalshbroughtSteveR.Hash,LehmansGlobal
HeadofRealEstateInvestmentBanking,intothediscussion.141Inthoseinitial
discussions,Lehmansmanagementidentifiedmajorobstaclestoexecutingthespinoff,
includingtheneedtofundthenewcompanysassetsandtheneedtoattractthirdparty
investors.142
DuringApril2008,someofLehmansseniormanagement(includingCallan,
Walsh,Hash,LarryWieseneck,KennethCohen,HeadofU.S.Originations,PaulA.

EmailfromGaryParr,Lazard,toDiWu,Lazard,etal.(Aug.9,2008)[LAZC00020061].
ExaminersInterviewofGaryParr,Sept.14,2009,atp.11.
139 See email from Erin M. Callan, Lehman, to Mark A. Walsh, Lehman (Mar. 12, 2008)
[LBHI_SEC07940_116854].
140Id.
141Id.
142Id.
137
138

25


Hughson,HeadofCreditDistribution,DanielKerstein,HeadofGlobalFinance
Solutions,PaoloR.Tonucci,GlobalTreasurerandDavidGoldfarb,GlobalHeadof
StrategicPartnership)continuedtodiscussvariationsonamortgageassetspinoff.143
ThosediscussionscoalescedaroundtheideaofspinningmostorallofLehmans
commercialrealestateholdingsintoaseparateentitythatwouldbeownedby
Lehmansshareholders.144Theybelievedthatthespinoffeventuallycouldbesold
publicly,whileinthemeantimeitwouldremovetheriskofcommercialrealestate
markdownsfromLehmansbalancesheet.145Lehmanexecutivesreferredtothespin
offentityasSpinCo.146
Lehmansseniormanagementrecognizedthatcriticalchallengesmightmakethe
SpinCoplanimpractical.147Inparticular,Lehmansmanagementacknowledgedthe
difficultyoffindingindependentfinancingforSpinCo,andalsoacknowledgedthatthe

See email from Steven R. Hash, Lehman, to Daniel Kerstein, Lehman, et al. (Apr. 11, 2008)
[LBHI_SEC07940_089122];emailfromErinM.Callan,Lehman,toStevenR.Hash,Lehman,etal.(Apr.
17,2008)[LBHI_SEC07940_274912];Lehman,ManagingtoaBadAssetSolution(Apr.23,2008)[LBEX
DOCID1400312],attachedtoemailfromDavidBaron,Lehman,toDavidGoldfarb,Lehman,etal.(Apr.
23,2008)[LBEXDOCID1558959].
144Id.
145See,e.g.,Lehman,ManagingtoaBadAssetSolution(Apr.23,2008),atp.2[LBEXDOCID1400312]
(identifying pros of REIT spinoff as, inter alia, Segregate the bad assets and Equity upside
participation).
146Id.
147 Email from Erin M. Callan, Lehman, to Steven R. Hash, Lehman, et al. (Apr. 17, 2008)
[LBHI_SEC07940_274912].
143

26


newentitywouldrequirealargeinfusionofequityfromLehman,leavingaholein
Lehmanscapitalstructure.148
B. JuneJuly2008:SpinCoasSurvivalStrategy
Asthemarketforcommercialrealestateassetscontinuedtodeteriorateinmid
2008,149Lehmansshareholders,creditors,andthemarketexpressedincreasingconcern
about the size and concentration of [Lehmans] positions and their impact on overall
creditworthiness, and they have put increasing pressure on the firm to reduce
exposure[.]150AlthoughLehmanmanagedto sellmore than$6 billion in commercial
realestateassetsduringthesecondandthirdquartersof2008atpriceswithin60basis
pointsof thoseassets marks, Lehmanfacedfurther writedowns of itsremaining real
estateassets.151Atthesametime,Lehmanhopedtoavoidtheneedforamassiveselloff
ofitsmoreliquidcommercialrealestateassets,whichLehmansawasafiresaleforthe

Seeid.(Ithoughtwehaddecidedthe[mortgageREIT]structurewouldnotworkbecauseindependent
financing is not available. There were other issues but this seemed the biggest.); email from Daniel
Kerstein,Lehman,toStevenR.Hash,Lehman,etal.(Apr.11,2008)[LBHI_SEC07940_089122]([E]quity
comesfromeitherusorIPOequityinvestors);Lehman,ManagingtoaBadAssetSolution(Apr.23,
2008)[LBEXDOCID1400312](BadAssetSolutionslidesdescribesconsofREITspinoffasMaterial
reductioninParentequityandFinancingrequiredatSpinCo).
149 See email from Steven R. Hash, Lehman, to David Erickson, Lehman, et al. (June 10, 2008) [LBEX
DOCID 1475677] ([T]here is really no independent financing for [CRE] assets in the market today.).
AccordExaminersInterviewofHughE.McGee,III,Aug.12,2009,atpp.2223;ExaminersInterviewof
ThomasA.Russo,Dec.1,2009,atpp.1415.
150 Lehman, The Gameplan (Sept. 2008) [LBEXDOCID 2727665]; see also memorandum from Timothy
Lyons,Lehman,toDavidGoldfarb,Lehman,re:StrategicImperativesfortheFirm(July3,2008),atp.1
[LBEXDOCID 1377945] (We have a large overhang of illiquid, devaluing assets which are dragging
down our earnings, threatening our capital base and undermining the confidence of investors,
counterpartiesandemployees.).
151ExaminersInterviewofRichardS.Fuld,Jr.,May6,2009,atp.6;seealsoExaminersInterviewofMark
A. Walsh, Oct. 21, 2009, at pp. 11, 14; Examiners Interview of Paul A. Hughson, Oct. 28, 2008, at p. 5;
ExaminersInterviewofKennethCohen,Oct.20,2009,atp.12.
148

27


vultures.152 Lehman recognized that it needed to find a remedy for its outsized
exposuretocommercialrealestateassetsbeforethey[took]downthemothership.153
InearlyJune2008,McGeerevisitedtheCREspinoffidea,suggestingtoagroup
ofLehmaninvestmentbankers:[W]ecreateavehicle(trust)todumpabunchofthis
[realestateexposure]intoandgiveittoourshareholders.Theygetupsideandweget
out of the are we marked correctly game. A bit like good bank/ bad bank.154
Recalling discussions of a similar idea in March and April 2008, McGees investment
bankingteaminitiallyvoicedreservationsaboutthespinoffidea,155butMcGeepushed
ahead,forminganinvestmentbankingteamtoexploretheidea.156
Despitetheinitialdoubts,atMcGeesinstigationtheSpinCoplansoonbecamea
critical component of Lehmans postBear Stearns survival strategy.157 In preliminary
planning documents from early July 2008, Project Green included other possible

Id.
Lehman, Lehman Commercial Mortgage Exposure is Outsized Relative to Peers (June 10, 2008)
[LBHI_SEC07940_339455],attachedtoemailfromKevinThatcher,Lehman,toIanT.Lowitt,Lehman,et
al.(June10,2008)[LBHI_SEC07940_339451];emailfromHughE.McGee,III,Lehman,toMarkA.Walsh,
Lehman(June13,2008)[LBHI_SEC07940_123660].
154 Email from Hugh E. McGee, III, Lehman, to Larry Wieseneck, Lehman, et al. (June 11, 2008)
[LBHI_SEC07940_398653].
155 See email from Larry Wieseneck, Lehman, to Hugh E. McGee, III, Lehman (June 11, 2008)
[LBHI_SEC07940_398653] (Kerstein proposed this 3 months ago. Combo of Goldfarb and parts of RE
rejectedit....Ibelievebecauseitrequiredtoomuchequitybeneathit);seealsoemailfromStevenR.
Hash,Lehman,toDavidErickson,Lehman,etal.(June10,2008)[LBEXDOCID1475677]([P]roblemis
financingandtheassetsthatgregowns.[T]hereisreallynoindependentfinancingfortheseassetsinthe
market today. No financing means no actual business plan. And just dumping problem assets to
shareholdersisabadidea,inmyhumbleopinion.).
156 See email from Hugh E. McGee, III, Lehman, to Mark A. Walsh, Lehman (June 13, 2008)
[LBHI_SEC07940_123660] (I have a team of bankers looking at enterprise solutions for real estatei.e.
howtoseparateoutmostorallofitsothatitdoesnttakedownthemothership.).
157See,e.g.,Lehman,ProjectGreenAcresPreliminaryGamePlan(July4,2008)[LBHI_SEC07940_124809].
152
153

28


alternatives for disposing of Lehmans commercial real estate assets, such as strategic
assetsalesorajointventure.158However,LehmanviewedtheSpinCoplanasunique,
in part because SpinCos planners believed it could be developed without third party
assistance.159AnotherperceivedadvantageofthespinoffplanwasthatLehmancould
announce it well in advance of actual distribution contemporaneous planning
documents targeted the third quarter 2008 earnings announcement for the plans
announcement.160 McGee continued to take the lead on Project Green Acres,
LehmanscodenameforthebranchofLehmanssurvivalplanfocusedonthestrategic
imperativeofsolvingLehmanscommercialrealestateoverhang.161
SpinCo became a centerpiece of Lehmans survival strategy.162 A July 11, 2008
Lehman internal accounting analysis concluded that Lehman could accomplish the

Id.; email from Brad Whitman, Lehman, to Richard S. Fuld, Jr., Lehman, et al. (July 9, 2008)
[LBHI_SEC07940_212942].
159 Lehman, Project Green Acres Preliminary Game Plan (July 4, 2008) [LBHI_SEC07940_124809]
(Understand that spinoff is unique in that [it can] be executed without third party involvement); e
mailfromLarryWieseneck,Lehman,toBradWhitman,Lehman(July5,2008)[LBHI_SEC07940_401266]
([CREspinoff]doesnotrequirenegotiationswithsomeonewhowillfeeltheyhaveleverageagainstus
anddemandalowerprice.);butseeLehman,GreenAcresSummaryofStructuralAlternatives(July3,
2008),atp.1[LBHI_SEC07940_008342](SpinOff...[p]ossiblywiththirdpartysponsor),attachedtoe
mail from Brad Whitman, Lehman, to Hugh E. McGee, III, Lehman, et al. (July 3, 2008)
[LBHI_SEC07940_008341]; Lehman, Key Execution Considerations for SpinOff [Draft] (July 11, 2008)
[LBHI_SEC07940_401591](LikelythatSpinCowillneedatleastaportionofthirdpartyfinancing.).
160SeeLehman,ProjectGreenAcresPreliminaryGamePlan(July4,2008)[LBHI_SEC07940_124809](If
spinoff checks out, focus on making announcement regarding plan to spin with 3Q earning.); email
from Brad Whitman, Lehman, to Richard S. Fuld, Jr., Lehman, et al. (July 9, 2008)
[LBHI_SEC07940_212942].
161 Lehman Green Acres Working Group (July23,2008) [LBHI_SEC07940_125904] (showing McGee as
head); memorandum from Timothy Lyons, Lehman, to David Goldfarb, Lehman, re: Strategic
ImperativesfortheFirm(July3,2008),atp.1[LBEXDOCID1377945].
162 Email from Richard S. Fuld, Jr., Lehman, to David Goldfarb, Lehman (July 19, 2008)
[LBHI_SEC07940_213011](Thekeytooursuccessistheviabilityofthespinco.).
158

29


spinoffandachieveacompletedivestitureofthespunoffassets,solongasLehmans
sellerfinancing for SpinCowas onmarketterms andLehman foundsomethirdparty
financing.163 Lehman also believed that it could structure SpinCo to achieve taxfree
status for the distribution to its shareholders, which Lehman regarded as a key
considerationindecidingwhethertoadopttheplan.164Lehmanalsobeganpreparing
detailedcashflowsummariesofitscommercialrealestateassets,andlookingatwhich
assetsitwouldcontributetoSpinCo,includingLehmansArchstoneassets.165Goldfarb
met with Parr to discuss SpinCo financing ideas, which included possibly getting
LehmanssellerfinancingloantoSpinCowrappedbyBerkshireHathaway.166
During July 2008, Lehmans managers involved in the project were aware that
launchingSpinCowouldrequireasignificanttransferofequitycapitalfromLehmanto
the new entity.167 To establish SpinCo as a viable independent entity and to avoid

Email from Daniel Kashdin, Lehman, to Daniel Kerstein, Lehman, et al. (July 11, 2008)
[LBHI_SEC07940_401374].
164
See Lehman, Key Execution Considerations for SpinOff [Draft] (July 11, 2008)
[LBHI_SEC07940_401591];seealsoLehman,DiscussionMaterialsfortheBoardofDirectors[Draft](July
19,2008),atp.10[LBHI_SEC07940_404357].
165 Lehman, Commercial Real Estate Portfolio Cash Flow Projections [Draft] (July 15, 2008) [LBEX
DOCID1400411],attachedtoemailfromDavidOReilly,Lehman,toStevenR.Hash,Lehman,etal.(July
14,2008)[LBEXDOCID1400234];emailfromDanielKerstein,Lehman,toBradWhitman,Lehman,etal.
(July 16, 2008) [LBHI_SEC07940_403931]; email from Timothy Sullivan, Lehman, to Larry Wieseneck,
Lehman,etal.(July18,2008)[LBHI_SEC07940_404086].
166EmailfromHughE.McGee,III,Lehman,toJeffreyL.Weiss,Lehman(July18,2008)[LBEXDOCID
741841]; email from Lee Einbinder, Lehman, to Larry Wieseneck, Lehman, et al. (July 18, 2008)
[LBHI_SEC07940_404298].
167 See, e.g., email from Daniel Kashdin, Lehman, to Daniel Kerstein, Lehman, et al. (July 11, 2008)
[LBHI_SEC07940_401374] (To preclude consolidation, there will need to be a substantial amount of
equityinthedeal.);emailfromDavidGoldfarb,Lehman,toRichardS.Fuld,Jr.,Lehman(July21,2008)
[LBEXDOCID 1224222] (There is a minimum of capital needed to deconsolidate which is approx $6
163

30


consolidationwithLehman,Lehmansmanagementbelieveditwouldhavetocapitalize
SpinCo with sufficient equity at least 20 to 25% of SpinCos net asset value.168 In
midJuly 2008, Lehman estimated that capitalizing $35 billion of SpinCo assets would
requireaminimumof$6billioninequity,andpossiblyasmuchas$14billion.169Some
of Lehmans management concluded that SpinCo was not a viable plan because it
wouldhaveleftLehmanwithtoolittlecapitaltosurvive,170especiallybecauseLehmans
capitalalreadyhadbeendepletedbywritedownsandlosses.171
a) SaleofIMD
Inthesummerof2008,Lehmanalsobegandevelopingplanstosellallorpartof
its crown jewel asset, the Investment Management Division (IMD), and in
particularIMDsprivateassetmanagementarm,NeubergerBerman(NB).172Lehman
seniormanagementhadcontemplatedthepossibilityofsellingallorpartofIMDsince

billion and obviously we would like to raise much more to reduce our ongoing financing of Spinco.).
AccordExaminersInterviewofHughE.McGee,III,Aug.12,2009,atp.23.
168Id.;ExaminersInterviewofRichardS.Fuld,Jr.,May6,2009,atp.7.
169 Email from David Goldfarb, Lehman, to Richard S. Fuld, Jr., Lehman (July 21, 2008) [LBEXDOCID
1224222]; email from Gerard Reilly, Lehman, to Martin Kelly, Lehman (July 19, 2008) [LBEXDOCID
2117905].
170 See, e.g., email from Daniel Kerstein, Lehman, to Larry Wieseneck, Lehman (July 22, 2008)
[LBHI_SEC07940_404505]; email from Timothy Lyons, Lehman, to Alex Kirk, Lehman (July 22, 2008)
[LBHI_SEC07940_174554](Givenyourviewsonthelikelihoodofspinco,Ithinkweneedtomovehard
down the path of Plan B.); email from Eric Felder, Lehman, to Paolo R. Tonucci, Lehman (Aug. 10,
2008)[LBEXDOCID1297372].
171 See, e.g., email from Paolo R. Tonucci, Lehman, to Christian Wait, Lehman (July 17, 2008)
[LBHI_SEC07940_529261] (forwarding Moodys Investors Service, Press Release, Moodys lowers Lehman
Brothers rating to A2; outlook negative (July 17, 2008)); Lehman, Discussion Materials for the Board of
Directors(July19,2008)[LBHI_SEC07940_404357].
172 Examiners Interviews of Steven Berkenfeld, Oct. 5 and 7, 2009, at p. 18; Examiners Interview of
RichardS.Fuld,Jr.,May6,2009,atpp.911;ExaminersInterviewofHughE.McGee,III,Aug.12,2009,
atpp.2324;ExaminersInterviewofGaryParr,Sept.14,2009,atpp.910.

31


2007.173 BymidJuly 2008,Lehmansmanagement linked the idea of selling IMD with
theSpinCoconcept.174TheybelievedthatproceedsfromthesaleofIMDcouldbeused
tofilltheequityholeleftbySpinCo.175
Although some of Lehmans management were concerned that a sale of IMD
combinedwithasignificantassetspinoffcouldreduceLehmanscapitallevelsenough
to trigger a rating downgrade,176 Lehman senior management pushed ahead with the
twoprongedplan.InmaterialspreparedfortheJuly21,2008meetingoftheExecutive
Committee, SpinCo and a sale of IMD were central components of Lehmans survival
plans, which also included significant asset sales and writedowns, headcount
reductions,anda$4billioncapitalraisebythefourthquarterof2008.177

David S. Erickson, Project Hercules (May 18, 2007) [LBEXDOCID 727278], attached to email from
Carol Welter, Lehman, to Angela Judd, Lehman, et al. (May 29, 2007) [LBEXDOCID 760067];
memorandum from Hugh E. McGee, III, Lehman, to Richard S. Fuld, Jr., Lehman, et al., re: Project
Hercules(May29,2007)[LBEXDOCID711211],attachedtoemailfromCarolWelter,Lehman,toAngela
Judd,Lehman,etal.(May29,2007)[LBEXDOCID760067].
174 See email from Herbert H. McDade, III, Lehman, to George H. Walker, Lehman (July 9, 2008)
[LBHI_SEC07940_644297];emailfromBradWhitman, Lehman, to Jeffrey L.Weiss, Lehman, et al.(July
17,2008)[LBHI_SEC07940_403935].
175 Email from Brad Whitman, Lehman, to Jeffrey L. Weiss, Lehman, et al. (July 17, 2008)
[LBHI_SEC07940_403935] (Spinoff CRE w/ plan to fill equity hole would be optimal. . . . Fill with
proceedsfromsaleofIMD,whichmeanseither...[s]ellallofIMDforcash[orsell]largestakeinIMD
forcash....NotethatifCREspinisnotimplemented,IMDdoesnotneedtobesoldtofillcapitalhole.).
176 See email from Lee Einbinder, Lehman, to Jason Trock, Lehman, et al. (July 20, 2008)
[LBHI_SEC07940_404396] (Need to think about rating agency implications of CRE spin, NB carveout,
writeoffsifsomecombinationofthisresultsindowngradetoBBB+,doestheplanholdtogether?).
177Lehman,GamePlanPreliminaryDraftforDiscussion(July20,2008)[LBEXDOCID767208],attached
to email from Hugh E. McGee, III, Lehman, to Jeffrey L. Weiss, Lehman, et al. (July 21, 2008) [LBEX
DOCID 741717] (noting that presentation was for tomorrows Executive Committee meeting).
Presentation outlines plans forspinning off $36 billion of commercial real estate assets along with
$11billionequity,andforsellingnearly100%ofIMDforupto$7billion,togenerate$3.2billionaftertax
gain(includingreducedgoodwill).Id.
173

32


b) July22,2008BoardMeeting
At the July 22, 2008 Board of Directors meeting, McGee presented SpinCo and
the sale of IMD together as key strategic alternatives.178 McGee explained that the
planwastodistributethecommercialrealestatebusinesstostockholdersasaspecial
dividend,andstatedthattheproposedspinoff,ascurrentlycontemplated,wouldbe
taxfreetotheFirmanditsstockholders.179McGeethendescribedthepotentialsaleof
allorpartofIMDandprovidedanoverviewofthebusiness.180Atthesamemeeting,
Parr told the Board that SpinCo was a great idea that Lehman should pursue
aggressively.181
Also on July 22, Lehmans management internally circulated a Lazard
presentationanalyzingvaluationissuesandmonetizationalternativesforIMD.182That
evening, Goldfarb reported to McDade that the cash flows and other accounting
projectionsforSpinColookedbetterthanexpected.183OnJuly31,2008,Fuldreportedto
theBoardthatLehmanmanagementwaspursuingathreeparttransactioninvolving

Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (July 22, 2008), at p. 6
[LBEXAM003866].
179Id.
180Id.
181Id.
182Lazard,ProjectGreenDiscussionMaterials[Draft](July2008)[LBEXDOCID767209],attachedtoe
mailfromKelseySurbaugh,Lehman,toHughE.McGee,III,Lehman,etal.(July22,2008)[LBEXDOCID
717004].
183 Email from David Goldfarb, Lehman, to Herbert H. McDade, III, Lehman (July 22, 2008)
[LBHI_SEC07940_645762].
178

33


the spinout of commercial real estate assets, a sale of IMD and raising additional
capital.184
WhileLehmanseniormanagementcontinuedtodevelopaplantosellIMDtofill
the SpinCo equity hole, management was aware that the need for SpinCo to be
adequatelyfinancedwasanothermajorobstacletotheSpinCoplan.185Inordertogain
accountingrecognitionasaseparateentityfromLehman,SpinCowouldhavetoshow
that it would not entirely rely entirely on Lehman.186 Lehman senior management
believed that the plan would work if Lehman could sell $2 to 6billion of the highest
risk, highestreturn mezzanine tranches of SpinCo debt, and then syndicate part of
theseniordebtfinancingattwotothreepercentaboveLIBOR.187Inaddition,Lehman
managementhopedthatsyndicatingatleastsomeoftheSpinCodebtstructurewould
providemarketconfirmationontheinterestratespreadsforthatdebt,enablingLehman

Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (July 31, 2008), at p. 2
[LBEXAM003875].
185 See, e.g., email from Erin M. Callan, Lehman, to Mark A. Walsh, Lehman (Mar. 12, 2008)
[LBHI_SEC07940_116854]([C]learlyhavetoaddressfinancingoftheassetswhichwewouldprimarily
have to provide to Newco from outset.); email from Steven R. Hash, Lehman, to Erin M. Callan,
Lehman,etal.(Apr.14,2008)[LBHI_SEC07940_274912](Ithoughtwehaddecidedthestructurewould
not work because independent financing is not available.); email from Steven R. Hash, Lehman, to
DavidErickson,Lehman,etal.(June10,2008)[LBEXDOCID1475677].
186 See, e.g., email from Daniel Kashdin, Lehman, to Daniel Kerstein, Lehman, et al. (July 11, 2008)
[LBHI_SEC07940_401374];emailfromRichardS.Fuld,Jr.,Lehman,toDavidGoldfarb,Lehman(July19,
2008) [LBHI_SEC07940_213011] (We need to get others to finance [SpinCo] so it doesnt sit on our
balancesheet.).
187 Email from Martin Kelly, Lehman, to David Goldfarb, Lehman, et al. (July 16, 2008)
[LBHI_SEC07940_213013];emailfromDavidGoldfarb,Lehman,toMartinKelly,Lehman,etal.(July21,
2008)[LBEXDOCID2997880].AccordExaminersInterviewofRichardS.Fuld,Jr.,May6,2009,atpp.6
7.
184

34


to classify the SpinCo notes as Level II assets rather than Level III.188 Unless Lehman
couldattractthirdpartyfinancingforSpinCo,therewouldbenomeaningfulseparation
ofrisk.189
C. August2008:StepstoSpinCosExecution
In early August 2008, the Green Acres Working Group, headed by McGee,190
focused on addressing SpinCos central challenges: the equity hole and the need to
attractoutsidefinancingforSpinCo.191TheGreenAcresteamsmetdailyinthefirst
weeks of August.192 Lehman also continued to explore alternative spinoff scenarios,
including Project Greenland (a spinoff of commercial and residential real estate
assets with up to $20 billion in outside funding) and Green Acres Light (a smaller
version of SpinCo involving roughly $15 billion in commercial real estate assets,

SeeemailfromIanT.Lowitt,Lehman,toDavidGoldfarb,Lehman,etal.(July22,2008)[LBEXDOCID
2997880].GerardReilly,Lehman,replies:OnL3issuefor[seniordebt],sellingmezzcertainlyhelpsasit
supportsvalidityofcapitalstructure.Ifwecanfindother[senior]debtinmarketandgainsomecomfort
onourspreadthenwecouldcallitL2.PlacingsomeS[eniordebt]isbest..Id.
189 Email from Christopher M. OMeara, Lehman, to David Goldfarb, Lehman (July 16, 2008) [LBEX
DOCID213344];emailfromLarryWieseneck,Lehman,toBradWhitman,Lehman,etal.(July21,2008)
[LBHI_SEC07940_404451].
190SeeLehman,GreenAcresWorkingGroup(July23,2008)[LBHI_SEC07940_125904](showingMcGee
as head); email from Hugh E. McGee, III, Lehman, to Richard S. Fuld, Jr., Lehman (Aug. 3, 2008)
[LBHI_SEC07940_213093](McGeesendsFuldaProjectGreenstatusreport).
191See,e.g.,emailfromHughE,McGee,III,Lehman,toLarryWieseneck,Lehman(Aug.5,2008);email
fromHughE.McGee,III,Lehman,toBradWhitman,Lehman(Aug.10,2008)[LBHI_SEC07940_538200]
(Wehavealreadyraisedalotofcapital.Canweusesomeofwhatwealreadyraisedtobridgeushere.
Thenweraisecapitalattimeofdiversionofequitytospinco.).
192See,e.g.,Lehman,ProjectGreenAcresDailyUpdate(Aug.7,2008)[LBEXDOCID2253476];Lehman,
ProjectGreenAcresDailyUpdate(Aug.8,2008)[LBEXDOCID2253477].
188

35


including Archstone).193 The Green Acres team reached out to selected investors,
mostly private equity groups, about SpinCos mezzanine debt.194 Lehman hoped to
attract potential investors by bundling SpinCo mezzanine securities with options to
purchaseasignificantstakeinpostspinLehman.195
1.

FullSpeedAhead

On August 9, 2008, Lehmans senior management held a Project Green


meeting at Fulds home in Connecticut.196 Parr attended the meeting and presented
alternativestotheSpinCo/IMDsaleplan.197Oneofthosealternativesinvolvedissuinga
contingentvaluestock(CVS)thatwouldtrackthevalueofLehmanscommercialreal
estate assets separately from Lehmans share value, without actually removing those
assets from Lehmans balance sheet.198 Lehmans senior management rejected Parrs

Lehman, Project Greenland [Draft] (Aug. 2008) [LBEXDOCID 249386], and Lehman, Green Acres
Light Alternative (Aug. 2, 2008) [LBEXDOCID 363594], attached to email from Brad Whitman,
Lehman,toHughE.McGee,III,Lehman(Aug.3,2008)[LBEXDOCID306887].
194SeeLehman,ProjectGreenAcresDailyUpdate(Aug.8,2008)[LBEXDOCID2253477];emailfrom
Alex Kirk, Lehman, to Mark A. Walsh, Lehman, et al. (Aug. 9, 2008) [LBEXDOCID 544666] (listing
potentialinvestorsincludingApollo,Blackstone,Cerberus,Colony,Fortress,J.E.Roberts,LoneStar,Och
Ziff,Vornado,andWaltonStreet).
195Lehman,ProjectGreenTalkingPointsforPotentialInvestors(Aug.6,2008)[LBEXDOCID363782],
attached to email from Brad Whitman, Lehman, to Hugh E. McGee, III, Lehman, et al. (Aug. 6, 2008)
[LBEXDOCID388296].
196 Email from Jeffrey L. Weiss, Lehman, to Larry Wieseneck, Lehman, et al. (Aug. 9, 2008)
[LBHI_SEC07940_406657];ExaminersInterviewofGaryParr,Sept.14,2009,atp.12.
197Id.
198 Id.; see also Lazard, Project Green Discussion Materials [Draft] (Aug. 9, 2008)
[LBHI_SEC07940_126975]; Lazard, Project Green Supplementary Materials [Draft] (Aug. 9, 2008)
[LBHI_SEC07940_126983]. See infra Appendix 13 IV to the Report, which discusses Lazards CVS
proposalingreaterdetail.
193

36


CVS proposal as less feasible than the spinoff in the current market environment.199
FuldendedthemeetingbysayinggofullspeedaheadonSpinCo.200
Concurrently with SpinCo planning in early August 2009, Lehmans
managementcontinuedtoimplementtheplantosellallorpartofIMD.201InlateJuly
2009,Lehmanhadbeguninitialdiscussionswithpotentialbuyers,mostlyprivateequity
firms.202RumorsbegantocirculateinthemarketplacethatLehmanmightbelookingto
sell some part of IMD.203 At the same time, Lehmans management began exploring
alternativescenariosforIMD,includinganinitialpublicofferingforNeubergerBerman
oraportionofIMD,oracarveoutofIMDsharesintoaseparateentitymodeledona
private equity fund.204 In midAugust, Lehman received initial bids for all or part of

199

Email from Jeffrey L. Weiss, Lehman, to Larry Wieseneck, Lehman, et al. (Aug. 9, 2008)
[LBHI_SEC07940_406657];ExaminersInterviewofGaryParr,Sept.14,2009,atp.12.
200 Email from Larry Wieseneck, Lehman, to Hugh E. McGee, III, Lehman, et al. (Aug. 9, 2008)
[LBHI_SEC07940_406657].
201Lehman,ProjectHerculesProjectStatusSummary(July27,2008)[LBEXDOCID460035],attachedto
emailfromBrianReilly,Lehman,toHughE.McGee,III,Lehman,etal.[LBEXDOCID456422];Lehman,
LehmanBrothersInvestmentManagement(July30,2008)[LBEXDOCID317782],attachedtoemailfrom
Brian Reilly, Lehman, to Hugh E. McGee, III, Lehman, et al. (July 30, 2008) [LBEXDOCID 364820]
(describingIMDpresentationforstrategicinvestorsasHerculesOverview).
202 Id.; emailfrom GeorgeH. Walker, Lehman, to Mark G.Shafir, Lehman, et al. (July24,2008) [LBEX
DOCID296276].
203SeeemailfromWaiLee,Lehman,toKentaroUmezaki,Lehman(Aug.6,2008)[LBEXDOCID387080].
204 See, e.g., email from Daniel Kerstein, Lehman, to David Erickson, Lehman, et al. (Aug. 7, 2008)
[LBHI_SEC07940_406415]; Lehman, LBPE vs. NYSE IPO Announcement (Aug. 11, 2008)
[LBHI_SEC07940_648035], attached to email from George H. Walker, Lehman, to Richard S. Fuld, Jr.,
Lehman, et al. (Aug. 11, 2008) [LBHI_SEC07940_648034]; email from Kentaro Umezaki, Lehman, to
Heather Zuckerman, Lehman, et al. (Aug. 13, 2008) [LBEXDOCID 295904]; Lehman, Project Hercules
(Aug.2008)[LBHI_SEC07940_649454],attachedtoemailfromGeorgeH.Walker,Lehman,toHerbertH.
McDade,III,Lehman(Aug.19,2008)[LBHI_SEC07940_649453].

37


IMD from nine firms, including Blackstone, Hellman & Friedman and Bain Capital.205
Those bids reflected a valuation range of $7 to $8 billion for all of IMD, including
NeubergerBerman.206
2.

PresentationstoRatingAgencies

During the second week of August 2008, Lehman presented its SpinCo plan to
Fitch, Moodys and Standard & Poors.207 Lehman told the agencies that spinning off
Lehmans commercial real estate assets would eliminate the need for a fire sale at
distressedpricesandpreservetheintrinsicvalueofthoseassetsforitsshareholders.208
Meanwhile, postspin clean Lehman would be in a better position to avoid future
writedowns,stabilizeitsearningsandraisecapital.209NoneofLehmanspresentations
totheratingagenciesdiscussedLehmansplanstosellallorpartofIMDinordertofill
theequityhole.210

205 Email from Mark G. Shafir, Lehman, to Brian Reilly, Lehman, et al. (Aug. 14, 2008) [LBEXDOCID

350609];Lehman,ProjectHerculesDiscussionMaterials(Aug.15,2008)[LBEXDOCID616611],attached
to email from Hugh E. McGee, III, Lehman, to Carol Welter, Lehman (Aug. 15, 2008) [LBEXDOCID
741172].
206Id.
207 Lehman, Fitch Ratings Discussion of SpinOff of CRE Portfolio (Aug. 12, 2008) [LBEXDOCID
011904]; Lehman, Moodys Investors Service Discussion of SpinOff of CRE Portfolio (Aug. 13, 2008)
[LBHI_SEC07940_406813];Lehman,Standard&PoorsDiscussionofSpinOffofCREPortfolio(Aug.13,
2008)[LBHI_SEC07940_406905].
208Id.atp.1.
209Id.atp.2.
210Id.

38


After meeting with the rating agencies, Tonucci reported that the agencies
expressed concern about the impact of the spinoff on Lehmans equity levels.211 On
August20,2008,Standard&PoorscontactedLowittandTonucciregardingrumors
ofaplannedsaleofIMD.212Standard&Poorswarnedthatsuchasalewouldbean
unmitigatednegativeforcredit.213
Duringthemeetings,theratingagenciesalsostressedtheimportancetoLehman
ofsyndicatingsomeofSpinCossenior debt.214EileenA. Fahey,managing directorof
Fitch,toldtheExaminerthatherpreliminaryconclusionfromthosemeetingswasthat
Lehman would be left financing SpinCos assets and would still be on the hook for
any SpinCo losses.215 Lehmans senior management recognized that convincing the
rating agencies and potential funders of SpinCos viability was critical216 and Lehman
continued to pursue potential mezzanine and equity investors throughout August

Email from Paolo R. Tonucci, Lehman, to Stephen Lax, Lehman, et al. (Aug. 12, 2008)
[LBHI_SEC07940_406811]; see also email from Ian T. Lowitt, Lehman, to Hugh E. McGee, III, Lehman
(Aug. 13, 2008) [LBHI_SEC07940_364012]; email from Paolo R. Tonucci, Lehman, to Larry Wieseneck,
Lehman, et al. (Aug. 18, 2008) [LBHI_SEC07940_305707] (forwarding email from Blaine A. Frantz,
Moodys(Aug.15,2008):[A]keyconcernofthetransactionisequity,andLehmansneedtoreplaceany
equitydeficitcreatedbyallocatingcapitaltothespinco,andhowexactlyyouwillraisethecapital,when
andhowmuch.).
212 Email from Hugh E. McGee, III, Lehman, to Herbert H. McDade, III, Lehman (Aug. 20, 2008)
[LBHI_SEC07940_649823].
213Id.
214 See, e.g., email from Paolo R. Tonucci, Lehman, to Stephen Lax, Lehman, et al. (Aug. 12, 2008)
[LBHI_SEC07940_406811] ([S]elling the senior debt ability to do so seemed important in [Fitchs]
assessmentofwhathadbeenaccomplished.);emailfromIanT.Lowitt,Lehman,toHughE.McGee,III,
Lehman(Aug.13,2008)[LBHI_SEC07940_364012].
215ExaminersInterviewofEileenA.Fahey,Sept.17,2009,atp.6.
216 Email from Ian T. Lowitt, Lehman, to Hugh E. McGee, III, Lehman (Aug. 13, 2008)
[LBHI_SEC07940_364012].
211

39


2008.217 Some potential capital providers told Lehman that they were enticed by the
prospectof20to25%returnsbutwerenotwillingtorisksignificantamountsofcashup
front.218OtherscouldnotmeetLehmanstimingneeds,astheydemanded4to6weeks
ofadditionalduediligence.219
DuringAugust2008,LehmanusedtheSpinCoplanaspartofitseffortstoattract
three major strategic investors. In early August 2008, Lehman presented the SpinCo
plantoKoreaDevelopmentBank(KDB).220DuringnegotiationswithLehman,KDB
stated that it was interested in Lehman only if Lehman first purged itself of its real
estate and high yield assets.221 Lehman presented the SpinCo plan as part of an
opportunityforKBDtoinvestinCleanLehmanpostspin,whileavoidingexposure
tofuturewritedownsofLehmansrealestateassets.222Second,inmidAugust,Lehman
presented the SpinCo idea to MetLife, as part of an effort to interest MetLife in an
investment in Lehman either pre or postspin.223 Third, in late August and early
September 2008, both the SpinCo plan and a possible acquisition of a share in IMD

See Lehman, Summary of Conversations with Potential Capital Providers (Aug. 27, 2008) [LBEX
DOCID947915],attachedtoemailfromAlexKirk,Lehman,toMichaelGelband,Lehman(Aug.27,2008)
[LBEXDOCID 961894]. List of potential investors includes Apollo, Blackstone, Carlyle, Cerberus,
Colony,Fortress,J.E.Roberts,LoneStar,LubertAdler,OchZiff,VornadoandWaltonStreet.Id.
218Id.
219Id.
220 See email from Herbert H. McDade, III, Lehman, to Hugh E. McGee, III, Lehman (Aug. 7, 2008)
[LBHI_SEC07940_647910].
221Id.
222 Email from Hugh E. McGee, III, Lehman, to Brad Whitman, Lehman, et al. (Aug. 13, 2008)
[LBHI_SEC07940_406804](forwardingemailfromGaryS.Barancik,PerellaWeinbergPartners(Aug.9,
2008)).
223 See email from Mark Wilsmann, MetLife, to Paul A. Hughson, Lehman, et al. (Aug. 15, 2008)
[LBHI_SEC07940_305703].
217

40


featured prominently in Lehmans negotiations with the Investment Corporation of
Dubai(ICD).224
3.

NegotiationswiththeSEC

Lehmans senior management was aware that Lehman would need SEC
approval for SpinCos accounting treatment.225 After consulting with outside
accountantsandlegalcounsel,LehmandecidedinearlyAugust2008tocontacttheSEC
toseekpreclearancefortheaccountingtreatmentthatwaspartoftheSpinCoplan.226
LehmanplannedtoseekawaiveroftherequirementthatLehmanprovidethree
years of audited financial statements for SpinCo, as reflected in SEC talking points
documentsfromearlyAugust2008.227LehmansaccountantstoldtheSECthatunified
historicalfinancialdataforSpinCosdiverseassetswasnotavailable.228Theyfeltthat
such data would not be helpful to potential investors because SpinCo would be

See email from Hugh E. McGee, III, Lehman, to Jeffrey L. Weiss, Lehman (Sept. 4, 2008)
[LBHI_SEC07940_2222166]. See Section III.A.c.4 of the Report, which discuss the role of SpinCo in
LehmanspotentialtransactionswithKDB,MetLife,andICDingreaterdetail.
225 Email from Daniel Kashdin, Lehman, to Daniel Kerstein, Lehman, et al. (July 11, 2008)
[LBHI_SEC07940_401374];ExaminersInterviewofThomasA.Russo,May11,2009,atp.9.
226 Email from Martin Kelly, Lehman, to David Goldfarb, Lehman, et al. (July 17, 2008) [LBEXDOCID
560179];LehmanSpincoTalkingPointsforSEC[Draft](Aug.6,2008)[LBEXDOCID1295521],attached
to email from Daniel Kerstein, Lehman, to Steven Berkenfeld, Lehman (Aug. 6, 2008) [LBEXDOCID
1297492].
227Lehman,SpincoTalkingPointsforSEC[Draft](Aug.6,2008)[LBEXDOCID1295521];Lehman,SEC
TalkingPoints[Draft](Aug.8,2008)[LBEXDOCID851411],attachedtoemailfromMichaelJ.Langer,
Lehman,toThomasA.Russo,Lehman,etal.(Aug.8,2008)[LBEXDOCID965295].
228 Id.; letter from John T. Bostelman, Sullivan & Cromwell, to John White, SEC, re: SpinCo Proposed
Term Sheet (Aug. 19, 2008), at p. 3 [EYLELBHIKEYPERS 3670025], attached to email from John T.
Bostelman, Sullivan & Cromwell, to Larry Wieseneck, Lehman, et al. (Aug. 19, 2008) [EYLELBHI
KEYPERS3670023].
224

41


managing those assets to maximize longterm value, not for shortterm earnings.229
Rather than provide three years of audited historical financial statements for SpinCo,
Lehmanofferedtoprovideanauditedopeningbalancesheetanduptothreeyearsof
prospective financial statements, with additional information about the underlying
propertiesandtheircashflows.230
AfteraninitialmeetingwiththeSEConAugust12,2008,Lowittwascautiously
optimistic.231WieseneckbelievedthattheSECwasreadytobehelpfulinconnection
with the need for the required waiver.232 The next day, McGee reported to the Board
that it would be easier for the SEC to grant the waiver if Lehman made SpinCo a
liquidatingentity,notanongoingoperatingbusiness.233Thewaiveralsowouldpermit
Lehmantoannouncethespinofftransactionatthesametimeitmadepublicitsthird
quarter 2008 earnings.234 However, making SpinCo a liquidating entity had adverse

LetterfromJohnT.Bostelman,Sullivan&Cromwell,toJohnWhite,SEC,re:SpinCoProposedTerm
Sheet (Aug. 19, 2008), at pp. 34 [EYLELBHIKEYPERS 3670025], attached to email from John T.
Bostelman, Sullivan & Cromwell, to Larry Wieseneck, Lehman, et al. (Aug. 19, 2008) [EYLELBHI
KEYPERS3670023].
230Id.atp.3.
231 Email from Ian T. Lowitt, Lehman, to Paolo R. Tonucci, Lehman (Aug. 12, 2008) [LBEXDOCID
2642438].
232 Email from Larry Wieseneck, Lehman, to Daniel Kerstein, Lehman, et al. (Aug. 12, 2008) [LBEX
DOCID2642438].
233 Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (Aug. 13, 2008), at p. 3
[LBEXAM003879].
234Id.
229

42


consequences,includingmakingthespinofftaxabletoshareholders.235Lehmanhoped
toavoidmakingSpinCotaxable.236
Lehman submitted a SpinCo Proposed Term Sheet to the SEC on August 19,
2008,seekingaformalwaiverofthefinancialstatementrequirementofReg.SXRule3
14.237 According to the proposed term sheet: [Lehman] believes that, in light of the
diverse characteristics of Spincos holdings, presenting propertyspecific financial
statements for select operating real estate assets would not convey meaningful
informationregarding Spinco.238Lehmanproposed to presentadditional tabular data
foroperatingrealestateassets,inadditiontothreeyearsofforecastswithoutauditors
report.239TheproposedtermsheetcontainednoreferencetoSpinCoasaliquidating
entity.240ItstatesthatSpinCosassetswillbemanagedtomaximizelongtermvalue
forSpincoshareholders.241
Lehman also sought permission not to use marktomarket accounting for
SpinCo.242 On August 20, 2008, Fuld reported to the Board of Directors that Lehman

Id.
See, e.g., Lehman, Discussion Materials for the Board of Directors [Draft] (July 19, 2008), at p. 10
[LBHI_SEC07940_404357] (SpinCo will need to be deemed a viable standalone operating business for
40Act,accountingpurposesandtoeffectataxfreedistribution.).
237LetterfromJohnT.Bostelman,Sullivan&Cromwell,toJohnWhite,SEC,re:SpinCoProposedTerm
Sheet(Aug.19,2008),atp.2[EYLELBHIKEYPERS3670025],attachedtoemailfromJohnT.Bostelman,
Sullivan & Cromwell, to Larry Wieseneck, Lehman, et al. (Aug. 19, 2008) [EYLELBHIKEYPERS
3670023].
238Id.atp.3.
239Id.atp.2.
240Id.atpp.15.
241Id.atpp.34.
242ExaminersInterviewofRichardS.Fuld,Jr.,May6,2008,atpp.68.
235
236

43


andtheSEChadresolvedallofSpinCosaccountingproblemsexceptforthemarkto
market accounting requirement, which remained an open item.243 Specifically,
Lehmanhopedtoavoidusingfairvalueaccounting(i.e.,marktomarketaccounting
underSFAS157and159)inreportingthevalueofSpinCosrealestateloanassets,244and
to use hold to maturity accounting for SpinCos debt securities.245 Lehman senior
officers believed that avoiding marktomarket accounting for SpinCos assets was
critical to SpinCos feasibility,246 but it would require Lehman to be a pioneer in
obtainingtheSECsagreementtoallowthataccountingtreatment.247

SeeLehmanBrothersHoldingsInc.,MinutesofMeetingofBoardofDirectors(Aug.20,2008),atp.2
[LBEXAM003891].
244Id.;LetterfromMartinKelly,Lehman,toWayneCarnall,SEC,re:requesttodescribewhySpincodoes
not represent the sale of a business and is not required to apply fair value accounting after the initial
transfer of assets (Aug. 21, 2008), at p. 1 [LBEXDOCID 1298065], attached to email from Robert W.
Downes, Sullivan & Cromwell, to Larry Wieseneck, Lehman, et al. (Aug. 21, 2008) [LBEX DOCID
1297924]; see also Fair Value Measurements, Statement of Fin. Accounting Standards No. 157 (Fin.
Accounting Standards Bd. 2008); The Fair Value Option for Financial Assets and Financial Liabilities,
StatementofFin.AccountingStandardsNo.159(Fin.AccountingStandardsBd.2008).
245 While the hold to maturity issue applied specifically to debt securities, which was only 10% of
SpinCosassets,Lehmanalsoarguedthatitshouldnotberequiredtousefairvalueaccountingforthe
bulkoftheloans,whichwasalmost70%ofSpinCosassets.Lehmanwantedtoaccountfortheloansat
amortizedcostwithamortizationofdiscountorpremiumundertheeffectiveyieldmethodandsubjectto
reserve for loan losses, or essentially the same method Lehmanwanted to use for debt securities. See
letterfromMartinKelly,Lehman,toWayneCarnall,SEC,re:whySpinCoisnotrequiredtoapplyfair
valueaccounting(Aug.21,2008),atp.10[LBEXDOCID1298065].
246 Email from David Goldfarb, Lehman, to Martin Kelly, Lehman, et al. (Aug. 27, 2008) [LBEXSIPA
007017].
247 See LehmanBrothers Holdings Inc., Minutes of Meeting of Board of Directors (July 22, 2008),at p. 6
[LBEXAM 003866]. Accord Examiners Interview of David OReilly, Oct. 26, 2009, at p. 4; Examiners
InterviewofThomasA.Russo,May11,2009,atp.9;ExaminersInterviewofPaulA.Hughson,Oct.28,
2009,atpp.910;ExaminersInterviewofThomasH.Cruikshank,Oct.8,2009,atp.9.
243

44


Lehman made a written request for SpinCos accounting treatment in a
confidentiallettertotheSEConAugust21,2008.248LehmanrequestedthattheSECnot
require SpinCo to provide audited historical financial statements.249 It contended that
thetransferofassetsfromLehmantoSpinCowasnotanacquisitionofabusinessunder
SXRule305andRule1101(d),norwerethoseassetsanoperatingrealestatebusiness
under SX Rule 314.250 Lehman further explained that avoiding marktomarket
accountingwasessential:
[It is] critical to Spincos asset management philosophy, as well as
investors in Spinco, that the accounting framework of Spinco reflect
fundamental asset valuations realizable over longer time horizons, as
opposed to valuations reflective of current market liquidity. This is the
foundationofSpincoandthekeytoitssuccess....IfSpincoweresubject
to fair value accounting, we believe that it would be at a competitive
disadvantagetoitspeersandwouldnotbeabletomanagetheassetsina
fundamentally different manner than how Lehman must manage the
assets now and therefore would not be able to maximize value for its
shareholders.251

LehmansletterstatedthatunderU.S.GAAPanentitythatcandemonstratethe
intentandabilitytoholddebtsecuritiestomaturityisentitledtouseholdtomaturity
accountingforthoseassets.252InSpinCoscase,thatmeantvaluingthebulkofitsassets
atamortizedcostwithamortizationofdiscountorpremiumundertheeffectiveyield

LetterfromMartinKelly,Lehman,toWayneCarnall,SEC,re:whySpinCoisnotrequiredtoapplyfair
value accounting (Aug. 21, 2008) [LBEXDOCID 1298065], attached to email from Robert W. Downes,
Sullivan&Cromwell,toLarryWieseneck,Lehman,etal.(Aug.21,2008)[LBEXDOCID1297924].
249Id.atpp.37.
250Id.atpp.34.
251Id.atp.2.
252Id.atpp.89.
248

45


methodandrecognition ofany otherthantemporary declinesinvalue in earnings.253
However,LehmansformalrequestletteralsoemphasizedthatSpinCowouldusehold
to maturity accounting only for its postspin financial reporting.254 Initially, SpinCo
wouldrecordtheassetsonitsbalancesheetattheirfairvalueatthedateoftransfer,
and its ongoing quarterly and annual filings would include fair valuerelated
information in footnotes and supplemental disclosures.255 The letter stressed that
SpinCowouldnotresemblealiquidatingtrust.256
OnAugust27,2008,theSECresponded,tellingLehmanthattheSEC[had]not
seen a spin off which is not a business (therefore requiring 3 yrs of audited historical
financial statements) but are willing to give on this.257 While the SEC basically
conceded the issue of historical financials in Lehmans favor, Lehmans management
believed that the SEC was seeking to engage in horse trading over the issues.258
Citing investor protection concerns, the SEC offered to grant Lehman waivers of
other requirements (e.g., three years historical financials, auditorreviewed financial
projectionsandupdatedprojectionsandfinancialstatements)inexchangeforLehman

Id.atp.10.
Id.atp.15.
255Id.
256 Id. at p. 13 (We view the profile of [SpinCos] Initial Assets and the actions necessary to monetize
them to be inconsistent with the basic principles of a liquidating trust, for which fair value accounting
wouldberequired.).
257 Email from Martin Kelly, Lehman, to Thomas A. Russo, Lehman, et al. (Aug. 27, 2008) [LBEXSIPA
007017].
258 Email from David Goldfarb, Lehman, to Martin Kelly, Lehman, et al. (Aug. 27, 2008) [LBEXSIPA
007017].
253
254

46


agreeingtoapplyfairvalueaccountingtoSpinCosassetsthroughSFAS159.259Lehman
resisted those tradeoffs, arguing that not using fair value accounting was both
criticaltoSpinCossuccessandtypicalforentitiesofitstype.260Lehmaninsistedthat
its proposed accounting treatment was the right answer.261 Lehman also asked its
accountants,Ernst&Young,tocontacttheSEConLehmansbehalf.262
On August 28, 2008, Lehman resolved the open issues with the SEC.263 The
agreement permitted SpinCo to avoid fair value accounting in exchange for an
agreement to provide updated financial projections for three years.264 Lehman agreed
that SpinCo would use hold to maturity accounting for its debt securities (with
provisions for expected loan losses) and would not have to use marktomarket

Email from Martin Kelly, Lehman, to Thomas A. Russo, Lehman, et al. (Aug. 27, 2008) [LBEXSIPA
007017].
260 Email from David Goldfarb, Lehman, to Martin Kelly, Lehman, et al. (Aug. 27, 2008) [LBEXSIPA
007017].
261Id.
262Id.;emailfromDavidGoldfarb,Lehman,toWilliamJ.Schlich,Ernst&Young(Aug.28,2008)[LBEX
DOCID2997901].
263 See email from Martin Kelly, Lehman, to Larry Wieseneck, Lehman, et al. (Aug. 28, 2008) [EYLE
LBHIKEYPERS0907577](I spoke with Wayne Carnall [SEC] toaccept their offer. Specific agreement
fortherecordisasfollows:Initial3yrPFI[ProjectedFinancialInformation]preparedonaGAAPbasis
withnoauditattestation.AnnuallyupdatedPFIthroughinitial3yrswithfixedenddateandnoaudit
attestation.NonfairvalueaccountingbasisasoutlinedinourletterofAugust21.WaiveronRule314
withnoseparateF/S[FinancialStatement]requiredforsignificantpropertiessubjecttoexposuresbeing
consistentwithwiththoseoutlinedinourletterofAugust21.NohistoricalF/S.Initialopeningaudited
BS[BalanceSheet]atfairvalue.Otherportfoliostratificationinformationasoutlinedinthetermsheet.);
emailfromWilliamJ.Schlich,Ernst&Young,toJanetE.Truncale,Ernst&Young,etal.(Aug29,2008)
[EYLELBHIKEYPERS 0162146]; see also email from David Goldfarb, Lehman, to Beth Rudofker,
Lehman (Aug. 29, 2008) [LBEXDOCID 1609099] (We did get agreement from Securities Exhange
Commissyesterdayfornonfairvalueacctg.Weagreedtoupdateprojectionsfor2years,inlieu.Great
answerforusandlogicalsincehistoricalcostacctgisreflectiveofbusinessplan.).
264Id.
259

47


accountingforitsrealestateloanassets.265However,SpinCowouldcontinuetovalue
its equity securities at fair value, and SpinCos initial balance sheet would be at fair
value.266 The SEC also agreed not to require SpinCo to file three years of audited
historical financial statements.267 Goldfarb lauded the result as a Great answer for
us.268
BytheendofAugust2008,LehmanstillhadnotdecidedwhetherSpinCowould
be organized as a Ccorp or a partnership.269 Accordingly, Lehman could not resolve
whether it would be possible to claim taxfree status for the distribution of SpinCos
assetstoLehmansshareholders.270

265EmailfromMartinKelly,Lehman,toLarryWieseneck,Lehman,etal.(Aug.28,2008)[EYLELBHI

KEYPERS0907577];seealsoemailfromDavidGoldfarb,Lehman,toBethRudofker,Lehman,etal.(Aug.
30,2008)[LBHI_SEC07940_015928];emailfromMartinKelly,Lehman,toDanielKerstein,Lehman,etal.
(Sept.10,2008)[LBHI_SEC07940_916922].
266EmailfromMartinKelly,Lehman,toLarryWieseneck,Lehman,etal.(Aug.28,2008)[EYLELBHI
KEYPERS0907577].
267Id.
268 Email from David Goldfarb, Lehman, to Beth Rudofker, Lehman (Aug. 29, 2008) [LBEXDOCID
1609099].
269LetterfromJohnT.Bostelman,Sullivan&Cromwell,toJohnWhite,SEC,re:SpinCoProposedTerm
Sheet(Aug.19,2008),atp.1[EYLELBHIKEYPERS3670025],attachedtoemailfromJohnT.Bostelman,
Sullivan & Cromwell, to Larry Wieseneck, Lehman, et al. (Aug. 19, 2008) [EYLELBHIKEYPERS
3670023]; email from Ian T. Lowitt, Lehman, to Daniel Kerstein, Lehman, et al. (Aug. 30, 2008) [LBEX
SIPA003759](Attheriskofstatingtheextremelyobvious,[a]keyissue[indecidingbetweenCCorpor
partnership] is not upsetting our SEC agreement. Earlier in the same email chain, Yoav Wiegenfeld,
Lehman,statestoLarryWieseneck,etal.:Ifwewanttodoataxfreespinforshareholderstheentitywill
havetobeaccorp.);Lehman,TheGameplan(Sept.2008),atp.3[LBHI_SEC07940_653637]([SpinCo]
[l]ikelytobetreatedasaCCorp.).
270 See, e.g., email from Larry Wieseneck, Lehman, to Shaun K. Butler, Lehman, et al. (Aug. 29, 2008)
[LBHI_SEC07940_651788]([W]ecannotrefertoSpincoasaLiquidatingTrust.Itcanneverbediscussed
asakintoonenotthatitisone.Itneitherisliquidatingnorisitatrust.Iwanttohighlightthisbecauseit
iscurrentlyreferencedassuchinthedocumentandthisisahugeaccountingissue.IfitwereaLiqTrust,
wewouldendupinaverybadplaceaccountingwise.);emailfromYoavWiegenfeld,Lehman,toLarry
Wieseneck,Lehman,etal.(Aug.30,2008)[LBEXSIPA003759](Weneedtodeterminewhetherwecan
doataxfreespin,whichdependson...identifyingaqualifyingactivetradeorbusiness(wediscussed

48


On September 3, 2008, Fuld reported to the Board that Lehman had received
confirmation fromthe SECthat Lehman had resolved withthe SEC themajorpoints
that were required to be addressed for the proposed transaction to proceed, and
indeed,thatSpinCowasproceedingnicely.271
D. EarlySeptember2008:PreparingtoAnnounceREIGlobal
InlateAugust2008,LehmanbegantodevelopastrategytoannounceSpinCoto
thepublicduringitsthirdquarterearningscall.272AtthebeginningofSeptember2008,
Lehmanconfirmedtothenewsmediathatitwasplanningtospinoffitstroubledreal
estateassetsintoaseparatecompany;onereportcalleditabadLehmanspinoff.273
On September 4, 2008, Lehman learned that Bloomberg was preparing to run a story
reportingthatLehmanwouldcontribute$5billionofequitytoSpinCo,with$3billion

Aurora) . . . . We are in the process of vetting Aurora as a qualifying business and once we are
comfortableitmeetsthetaxrequirementsweexpecttoimmediatelygototheSEC.).AccordExaminers
Interview of Richard S. Fuld, Jr., May 6, 2009, at pp. 78 (Fuld recalled that SpinCo had to be a non
operatingentitytoavoidmarktomarkettreatment,butasaresult,thespinoffwasnolongertaxfree.
FuldsaidthatLehmanneverresolvedthatissue.).
271 Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (Sept. 3, 2008), at pp. 12
[LBEXAM003899].
272SeeemailfromLarryWieseneck,Lehman,toHerbertH.McDade,III,Lehman,etal.(Aug.27,2008)
[LBHI_SEC07940_1237670]; email from Larry Wieseneck, Lehman, to Shaun K. Butler, Lehman, et al.
(Aug. 29, 2008) [LBHI_SEC07940_651788] (forwarding email draft Earnings Speech RSF Remarks,
announcing formation ofLehman Commercial Real Estate Partnership); email from David Goldfarb,
Lehman,toBethRudofker,Lehman,etal.(Aug.30,2008)[LBHI_SEC07940_015933].
273PeterEavis,LehmansStickySituationRealEstateAssetsPoseProblemsEvenInPossibleSpinoff,WallSt.J.,
Sept.2,2008,atp.C10.

49


provided by outside investors (possibly KDB).274 McGee worried that the story may
raisefalseexpectationsabouttheSpinCoannouncement.275
Thatsameday,LehmangaveSpinCoanofficialname:RealEstateInvestments
(REI) Global (REI Global).276 In Lehman internal Q&A presentations, as well as
Gameplan presentations for investors and rating agencies, Lehman announced that
thecreationofREIGlobalwouldremovesubstantiallyallofourcommercialrealestate
(CRE) exposures, by transferring the large majority of our commercial real estate
related assets to an appropriately capitalized new entity.277 Lehman described REI
Globalasnearlyreadytolaunch.278SECapprovalsforthenewentitywereinplace,
cash flow forecasts were complete, draft balance sheets were being prepared, and the
processofdeterminingtherequiredconsentsandtransferringassetstoREIGlobalwas
underway.279 The Gameplan presentation discussed Lehmans decision to sell 55% of
IMD, and the need to raise $3 billion in the fourth quarter of 2008, in advance of the

Email from Monique Wise, Lehman, to Hugh E. McGee, III, Lehman, et al. (Sept. 4, 2008)
[LBHI_SEC07940_408952].
275 Email from Hugh E. McGee, III, Lehman, to Monique Wise, Lehman, et al. (Sept. 4, 2008)
[LBHI_SEC07940_408952] (If we have a story that says we have outside investors for both equity and
debtandthenshowupwithnooutsideinvestors,itcouldcreateissueswherewehavenone.Spincoisa
bigpositiveandweneedittobeconsideredassuch.).
276 Email from Beth Anisman, Lehman, to Beth Rudofker, Lehman (Sept. 4, 2008) [LBEXDOCID
1606873].
277 Lehman, The Gameplan (September 2008), at p. 2 [LBEXDOCID 2727667]; Lehman, Q3 Firmwide
Q&ASummary(nodate),atp.45[LBHI_SEC07940_750660].
278 Lehman, The Gameplan (September 2008), at p. 6 [LBEXDOCID 2727667]; Lehman, Q3 Firmwide
Q&ASummary(nodate),atp.49[LBHI_SEC07940_750660].
279Id.
274

50


spin.280 The internal presentation links the IMD sale to the impact of the spin on
Lehmans equity capital: We continue to strengthen our capital position through the
sale of [a] majority stake in IMD and through continuing discussions with strategic
partnersfollowingtheplannedspinoutofREIGlobal.281
LehmanpubliclyintroducedREIGlobalaspartofitsearningspreannouncement
onSeptember10,2008.282
VI.

DISCUSSIONSWITHPOTENTIALSTRATEGICPARTNERS
This Section supplements the discussion in Section III.A.3.c of the Report by

providingdetails on Lehmansdiscussionswithadditional potentialstrategic partners


followingthenearcollapseofBearStearns.
A. AIG
LehmanhelddiscussionswithAIGaboutapotentialtransactionstartingin2006
andcontinuinguntilafterMarch2008.In2006,Fuldhadmultipleconversationswith
Maurice Hank R. Greenberg, then Chairman and CEO of AIG, about AIG buying
Lehman.283 When Greenberg was replaced as AIGs Chairman, those conversations
continuedwithGreenbergssuccessor,MartinSullivan.284

Lehman,TheGameplan(September2008),atpp.2,25,32[LBEXDOCID2727667].
Lehman,Q3FirmwideQ&ASummary(nodate),atpp.34,5354[LBHI_SEC07940_750660].
282FinalTranscriptofLehmanBrothersHoldingsInc.ThirdQuarter2008PreliminaryEarningsCall(Sept.
10,2008),atp.4[LBHI_SEC07940_3466969].SeeSectionIII.A.3.coftheReport,whichdiscussestheSept.
10earningscallingreaterdetail.
283ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.21.
284Id.
280
281

51


In2008,FuldcontinuedconversationsaboutAIGbuyingLehmanwithSullivan,
and Frank Zarb, a former member of AIGs board and the former actingChairman of
AIG.285 In March 2008, Lehman drafted a presentation analyzing a potential merger
with AIG, under which AIG would have obtained a 20% stake in Lehman at $50 per
share.286Thepresentationdescribedthe$50shareprice,whichwasa25%premiumto
Lehmans book value, as a con of the deal.287 At some point, Sullivan or Zarb told
FuldthatAIGhadhugepositionsofitsowntoaddress,andthatAIGwouldnotbeable
todealwithLehman.288
B. UBS
Asearlyas2006or2007,FuldmetwithMarcelOspel,ChairmanoftheBoardof
UBS, to discuss a potential merger.289 Fuld suggested that Lehman merge with
Warburg, UBSs investment banking unit, and that UBS finance the merger, and
Lehmanrunthecombinedfirm.290FuldandOspelmetinSwitzerlandandNewYork
City in connection with that potential deal.291 Fuld thought that a possible Lehman
merger with UBS remained a real possibility.292 In February 2008, Lehman drafted an

RichardS.Fuld,Jr.,Lehman,CallLogs(variousdates)[LBEXWGM674311;LBHI_SEC07940_016911];
YalmanOnaran&JohnHelyar,FuldSoughtBuffettOfferHeRefusedasLehmanSank(Update1),Bloomberg,
Nov.10,2008;ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.21.
286Lehman,AIG(March2008),atp.1[LBEXWGM694967].
287Id.atp.2.
288ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.21.
289Id.atpp.2122.
290Id.atp.22.
291Id.
292ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.22.
285

52


analysis regarding a merger with UBS.293 That analysis noted that UBS took
significantly larger than expected writedowns in the fourth quarter of 2007, and that
UBS also disclosed significant exposure to high risk assets.294 However, on April 2,
2008,OspelwasreplacedasChairmanofUBSbecauseofitslargesubprimelosses,and
subsequently the deal faded away.295 Over the course of April and May 2008, there
werepassingreferencestopotentialtransactionswithUBSbyJeremyM.Isaacs,CEOof
LBIE, Jeffrey L. Weiss, CoHead of Global Finance, and David Goldfarb, Lehmans
Global Head of Strategic Partnerships, in emails to Fuld, but there were no serious
discussionswithUBSatthattime.296
C. GE
In late March 2008, Fuld reached out to Jeffrey Immelt, Chairman and CEO of
GeneralElectric.297FuldandImmeltdiscussedadeal[f]or20%ofastrategicstakein
Lehman.298 According to Paulson, in spring 2008, Fuld had touted GE as a potential
investor at the same time that Fuld told Paulson about the potential Buffett

Lehman,Presentation,ProjectTiger(Feb.21,2008)[LBHI_SEC07940_755446],attachedtoemailfrom
Timothy G. Lyons, Lehman, to Christopher M. OMeara, Lehman (Feb. 27, 2008)
[LBHI_SEC07940_755445].
294Id.atp.3.
295ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.22.
296 See, e.g., email from Jeffrey L. Weiss, Lehman, to Richard S. Fuld, Jr., Lehman (Apr. 3, 2008)
[LBHI_SEC07940_033729];emailfromJeremyM.Isaacs,Lehman,toRichardS.Fuld,Jr.,Lehman(May
26,2008)[LBHI_SEC07940_034982];emailfromDavidGoldfarb,Lehman,toRichardS.Fuld,Jr.,Lehman
(May29,2008)[LBHI_SEC07940_035043].
297RichardS.Fuld,Jr.,Lehman,CallLogs(Mar.27Apr.1,2008)[LBHI_SEC07940_016916].
298Id;ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.13.
293

53


investment.299 Paulson told the Examiner that he thought the idea of GE investing in
Lehmanwasabsurd.300OnMarch30,2008,CallanemailedImmeltatermsheetfor
proposedconvertiblestock.301GEdeclinedtotakeastrategicstakeinLehman.302
InearlyAugust2008,FuldbrieflydiscussedwithImmeltajointventurewithGE
to spin off some of the commercial real estate held by Lehman and GE.303 Fuld could
not recall the details of those discussions, but Fuld assumed that he had received
enoughbadvibesthathedidnotpresstheissue304anditneverwentforward.305
D. CarlosSlim
On or about June 23, 2008, Steven M. Lessing, Lehmans Head of Client
RelationshipManagement,suggestedthatLehmanreachouttoCarlosSlim,aMexican
telecommunicationsbillionaireandoneoftherichestmenintheworld.306InearlyJuly
2008, Lehman requested that Jeb Bush, who was a Lehman advisor, discuss Project
VerdewithSlim.307JebBushhadjoinedLehmaninAugust2007asanadvisorinthe

ExaminersInterviewofHenryM.Paulson,Jr.,June25,2009,atp.12.
Id.
301 Lehman, Term Sheet, Summary Terms of the Proposed Convertible Preferred Stock (Mar. 20, 2008
[LBEXDOCID 1103972], attached to email from Erin M. Callan, Lehman, to Jeffrey Immelt, General
Electric,etal.(Mar.20,2008)[LBEXDOCID1165875].
302ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.13.
303Id.;RichardS.Fuld,Jr.,Lehman,CallLogs(Aug.45,2008)[LBHI_SEC07940_016969].
304ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.13.
305Id.
306 See email from Stephen M. Lessing, Lehman, to Richard S. Fuld, Jr., Lehman (June 23, 2008)
[LBHI_SEC07940_035822].AccordExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.27.
307 Email from Stephen M. Lessing, Lehman, to Richard S. Fuld, Jr., Lehman (June 23, 2008)
[LBHI_SEC07940_035822]; email from Jeb Bush, Lehman, to Matt Casner, Lehman (July 5, 2008)
[LBHI_SEC07940_212905].
299
300

54


Private Equity Group.308 On July 5, 2008, Bush reported that the meeting had been
unsuccessfulbecauseSlimdidnotexpressinterestinjvorstockpurchase.hedidsay
hewouldbeinterestedinlookingatassetsforsale.309Lehmandidnotfurtherpursuea
strategicpartnershipwithSlim.310
E. MorganStanley
On July 11, 2008, Fuld reached out to John Mack, CEO of Morgan Stanley,
regardingapotentialmergerbetweenLehmanandMorganStanley.311Fuldknewthata
mergerwithMorganStanleywouldbechallengingbecauseoftheoverlapbetweenthe
firmsbusinessesandtheirdifferentcultures.312Nonetheless,Fuldrequestedameeting
withMack,whichtookplaceatMackshouseinRye,NewYorkonJuly12,2008.313
Atthatmeeting,FuldandMack,alongwithotherLehmanandMorganStanley
executives,discussedapotentialmergerbetweenLehmanandMorganStanley.314Fuld

Dan Wilchins, Lehman Hires Jeb Bush as Private Equity Advisor, Reuters, Aug. 30, 2007, available at
http://www.reuters.com/article/idUSN3046902620070830.
309EmailfromJebBush,Lehman,toMattCasner,Lehman(July5,2008)[LBHI_SEC07940_212905].
310ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.27.Fuldcharacterizedthediscussions
aboutadealwithSlimasaninformalconversationinthehallway.Id.
311RichardS.Fuld,Jr.,Lehman,CallLogs(July11,2008)[LBHI_SEC07940_016962];ExaminersInterview
ofRichardS.Fuld,Jr.,Sept.30,2009,atpp.2728.
312 Email from David Goldfarb, Lehman, to Richard S. Fuld, Jr., Lehman (July 11, 2008)
[LBHI_SEC07940_036500];ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.28.
313ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atpp.2728.
314InhisinterviewwiththeExaminer,Fulddeclinedtosayonesidespecificallyproposedcombiningthe
firms,althoughthediscussiondidfocusontheimpactofsuchacombination.ExaminersInterviewof
RichardS.Fuld,Jr.,Sept.30,2009,atp.28.
308

55


andMackbothconcludedthattherewastoomuchoverlapbetweenthetwofirmsfor
theretobemuchtogainfromamerger.315
FuldandMackhadanotherconversationsometimeafterthatmeetinginwhich
Fuld urged that combining Lehman and Morgan Stanley would create a very strong
firm.316 Mack subsequently called Fuld to express concern about who would run that
mergedcompany.FuldrespondedbytellingMackthathewasperfectlywillingtostep
asideforMack.317Ultimately,Mackdeclinedtocontinuediscussionsbecausetherewas
toomuchoverlapbetweenLehmanandMorganStanley,andMorganStanleycouldnot
handleamergeratthattime.318
On September 9, 2008, Fuld updated the Board on discussions with two
unspecified potential domestic partners.319 One of those potential partners, which
was not named in the Board minutes, was described as having concerns about the
degreeofoverlapbetweenLehmananditsownbusiness.320
On September 11, 2008, Fuld told the Board that Fuld had recently contacted
Mackaboutapotentialmerger,butMackwasnotinterestedbecausehefelttherewas

Id.
Id.
317Id.
318Id.
319LehmanBrothersHoldingsInc.,MinutesofMeetingofBoardofDirectors(Sept.9,2008),atp.3[LBEX
AM003910].
320Id.
315
316

56


too much overlap between the firms, and not enough time for Morgan Stanley to
announceadealbySeptember14,2008.321
FuldreachedouttoMackagainonSunday,September14,2008,becauseLehman
wasinatoughspot.322MacksaidtherewastoomuchgoingonforMorganStanleyto
consideradealwithLehman.323
F. CITIC
In late July and early August 2008, Lehman discussed a potential transaction
withCITICSecuritiesCompanyLimited(CITIC),aChinesesecuritiesfirm.324Bymid
July 2008, Fuld was aware of and welcomed contacts with CITIC about a potential
transaction325andhaddiscussedthemwithAIGsGreenberg.326
On August 2, 2008, Lehman created materials for an upcoming meeting with
CITIC.327 Those materials included a PowerPoint presentation proposing that the

Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (Sept. 11, 2008), at p. 2
[LBEXAM003918].
322ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.28.
323Id.
324Id.;ExaminersInterviewofRichardS.Fuld,Jr.,Nov.19,2009,atp.18;ExaminersInterviewofHugh
E.McGee,III,Aug.12,2009,atp.25(McGeetoldtheExaminerthatGaryParrofLazardbroughtCITICto
Lehmanasapotentialinvestor).DuringhisinterviewwiththeExaminer,ParrcouldnotrecallwhoC
mighthavebeenwhenshownadocumentreferencingCITICasC.ExaminersInterviewofGaryParr,
Sept.14,2009,atp.13.
325 See email from Hugh E. McGee, III, Lehman, to Richard S. Fuld, Jr., Lehman (July 19, 2008)
[LBHI_SEC07940_213012];emailfromRichardS.Fuld,Jr.,Lehman,toHerbertH.McDade,III,Lehman
(July20,2008)[LBHI_SEC07940_036638];ExaminersInterviewofRichardS.Fuld,Jr.,Sept30,2009,atp.
30.
326Lehman,RichardS.Fuld,Jr.,CallLogs(July25,28,2008)[LBHI_SEC07940_016968].
327 Lehman, CheatSheet CITIC Securities Strategic Partnership (July 25, 2008) [LBEXDOCID 492732];
Lehman,StrategicPartnershipDiscussionPaper(July25,2008)[LBEXDOCID492750],attachedtoemail
from Marisa Forte, Lehman, to Herbert H. McDade, III, Lehman, et al. (Aug. 2, 2008) [LBEXDOCID
556085]; Lehman, Breakfast Meeting outline (Aug. 2, 2008) [LBEXDOCID 543493], attached to email
321

57


partiestransactionshouldinvolveLehmanissuingnewstocktoCITIC,CITICbuying
onthemarketadditionalLehmansharestotaling5%,andCITICissuingnewsharesto
Lehman, representing 5% of CITICs total shares on the market.328 Lehman further
proposed that CITIC would receive 33% of Lehmans Asia franchise, and Lehman
would receive 33% of CITICs investment banking in China and 49% of CITICs fund
management in China.329 In addition, the proposal called for CITIC to make a net
payment to Lehman of between $1.25 billion (based on Lehmans June 23, 2008 share
priceof$21.10)and$4.66billion(basedonaconsensusDecember2008targetpriceof
$38.11).330
On August 4 and 5, 2008, Fuld and McDade met with CITIC Securities
Chairman and CEO Wang Dong Ming and CITIC securities advisor Donald Tang to
discussapotentialtransaction.331Priortothemeetings,FuldhadtoldGeithnerthathe
wasincontactwithCITICaboutapotentialtransaction.332GeithneradvisedFuldthat
anydealwouldbewelcome,solongasitwasnotthesortofdealwhereCITICinvested

from Marisa Forte, Lehman, to Herbert H. McDade, III, Lehman, et al. (Aug. 2, 2008) [LBEXDOCID
556085].
328 Lehman, Strategic Partnership Discussion Paper (July 25, 2008), at p. 1 [LBEXDOCID 492750],
attachedtoemailfromMarisaForte,Lehman,toHerbertH.McDade,III,Lehman,etal.(Aug.2,2008)
[LBEXDOCID556085].
329Id.
330Id.atp.2.
331 Lehman, Richard S. Fuld, Jr., Call Logs (Aug. 45, 2008) [LBHI_SEC07940_016969]; email from
Zhizhong Yang, Lehman, to Jasjit Bhattal, Lehman (Sept. 1, 2008) [LBEXDOCID 2830954]; Examiners
InterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.30.
332ExaminersInterviewofRichardS.Fuld,Jr.,Nov.19,2009,atp.18.

58


$1 billion in Lehman and Lehman invested $1 billion in CITIC.333 In subsequent
meetingswithCITIC,FuldlearnedthatwasexactlythekindofdealCITICwasseeking.
FuldfeltthatthedealCITICsoughtcalledforCITICsinvestmentinLehmantobeon
much more favorable terms than Lehmans investment in CITIC.334 Fuld told the
Examinerthatheleftthemeetingswithoutagoodfeelingfortheprospectofapossible
dealwithCITIC.335LehmandidnothaveanyfurthersignificantcontactswithCITIC.336
G. SumitomoMitsuiBankingCorporation
In midJanuary 2008, Masayuki Oku, the CEO of Sumitomo Mitsui Banking
Corporation (SMBC), a Japanese bank, confirmed interest in establishing a strong
relationship with Lehman.337 In order to achieve that end, SMBC wanted quietly to
accumulateshares duringFebruary andworkon partneringideas.338SMBCwanteda
briefopportunitytoperformduediligencepriortoinvesting.339Fuldwasscheduledto
meet with Oku at the end of February 2008.340 There is no evidence to suggest that
anythingcameofthosediscussions.

Id.
Id.
335ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.30.
336Id.
337 Email from Akio Katsuragi, Lehman, to Jasjit Bhattal, Lehman, et al. (Jan. 17, 2008) [LBEXDOCID
2376060].
338Id.
339EmailfromAkioKatsuragi,Lehman,toDavidGoldfarb,Lehman,etal.(Jan.18,2008)[LBEXDOCID
2376060].
340 Email from Akio Katsuragi, Lehman, to Jasjit Bhattal, Lehman, et al. (Jan. 17, 2008) [LBEXDOCID
2376060].
333
334

59


InlateMarch2008,GoldfarbsuggestedreachingouttoSMBCtosolicitinterestin
Lehmans April capital raise.341 On March 30, 2008, Jasjit Jesse Bhattal, CEO of
Lehman AsiaPacific, spoke with SMBC and learned that although SMBC wanted to
participate, timing was an obstacle, given the planned April 1, 2008 announcement of
theoffering.342InlateApril2008,FuldandGoldfarblearnedthatSMBCwasinterested
in buying $1 billion of Lehmans convertible preferred shares, with the goal being a
strategic partnership where SMBC could invest in up to 20% of Lehman.343 Goldfarb
responded that Lehman already had issued convertible preferred and would be
interestedonlyifSMBCwantedtobuyrealequity.344Fuldagreed.345
On September 4, 2008, Bhattal informed McDade and McGee that senior
executivesof SMBC recently told him SMBCthatwasinterestedin investingupto $1
billioninCleanLehman.346Laterthatday,Lehmansentanondisclosureagreementto
SMBC.347 However, on September 5, Lehman learned that SMBC had decided not to

Email from David Goldfarb, Lehman, to Jasjit Bhattal, Lehman, et al. (Mar. 29, 2008)
[LBHI_SEC07940_212271].
342 Email from Larry Wieseneck, Lehman, to Matt Johnson, Lehman, et al. (Mar. 30, 2008)
[LBHI_SEC07940_084494].
343 Email from Akio Katsuragi, Lehman, to Jasjit Bhattal, Lehman, et al. (Apr. 22, 2008)
[LBHI_SEC07940_034265];emailfromDavidGoldfarb,Lehman,toAkioKatsuragi,Lehman,etal.(Apr.
23,2008)[LBHI_SEC07940_034265].
344 Email from David Goldfarb, Lehman, to Akio Katsuragi, Lehman, et al. (Apr. 22, 2008)
[LBHI_SEC07940_034265].
345 Email from Richard S. Fuld, Jr., Lehman, to David Goldfarb, Lehman, et al. (Apr. 23, 2008)
[LBHI_SEC07940_034265].
346 Email from Jasjit Bhattal, Lehman, to Herbert H. McDade, III, Lehman, et al. (Sept. 4, 2008)
[LBHI_SEC07940_653470].
347Lehman,NondisclosureAgreement[Draft](Sept.4,2008)[LBEXDOCID2862475],attachedtoemail
fromBradWhitman,Lehman,toAkioKatsuragi,Lehman,etal.(Sept.4,2008)[LBEXDOCID3056954];e
341

60


sign the confidentiality agreement because SMBC did not think it could make an
investmentdecisionbytheendofthenextweek.348OnSeptember10,SMBCconfirmed
thatitstillwantedseveralmoredaysbeforedecidingwhethertosigntheconfidentiality
agreement.349BySeptember14,LazardlistedSMBCasapartythathadnointerestina
saleorstrategicinvestmentinLehman.350
H. StandardCharteredBank
In midApril 2008, Lehmans Chief Risk Officer, Christopher M. OMeara,
consideredthepossibilityofacombinationwithStandardChartered,butheconcluded
thatLehmansExecutiveCommitteewouldnotsupportsuchadeal.351
On July 15, 2008, McDade informed McGee and Fuld that Lehman was in the
processofreachingouttoStandardChartered.352InaSeptember14,2008presentation

mail from Akio Katsuragi, Lehman, to Jasjit Bhattal, Lehman, et al. (Sept. 5, 2008)
[LBHI_SEC07940_653927].
348 Email from Akio Katsuragi, Lehman, to Jasjit Bhattal, Lehman, et al. (Sept. 5, 2008)
[LBHI_SEC07940_653927].
349 Email from Akio Katsuragi, Lehman, to Herbert H. McDade, III, Lehman, et al. (Sept. 10, 2008)
[LBHI_SEC07940_409803].
350 Lazard, Project Green Situation Overview [Draft] (Sept. 14, 2008), at p. 6 [LBHI_SEC07940_410298],
attached to email from Brad Whitman, Lehman, to Hugh E. McGee, III, Lehman (Sept. 14, 2008)
[LBHI_SEC07940_410297].
351 Email from Christopher M. OMeara, Lehman, to Enrico Corsalini, Lehman (Apr. 14, 2008) [LBEX
DOCID184119].
352 Email from Hugh E. McGee, III, Lehman, to Herbert H. McDade, III, et al. (July 15, 2008)
[LBHI_SEC07940_036551].

61


forLehman,LazardlistedStandardCharteredasapartythathadnointerestinasaleor
strategicinvestmentinLehman.353
I.

HSBC

InMayandJuly2008,Lehmanexecutivesmadeseveralbriefemailreferencesto
apotentialdealwithHSBC,354butnodealmovedbeyondthetheoreticalstage.355Fuld
said that he went to London to discuss a strategic partnership with Stephen Green,
Group Chairman of HSBC, and that the two had conversations in midJuly 2008, but
thatthosetalkswerenotaboutamergerorsellingLehmantoHSBC.356OnSeptember
14, 2008, Lazard listed HSBC as a party that had no interest in a sale or strategic
investmentinLehman.357
J.

BNPParibas

OnJuly15,2008,McDadeinformedMcGeeandFuldthatLehmanwasreaching
out to BNP Paribas (BNPP), a global banking group headquartered in France.358
However,BNPPtoldLehmanthatBNPPwasconcernedaboutseveralissuesrelatedto

Lazard, Project Green Situation Overview [Draft] (Sept. 14, 2008), at p. 6 [LBHI_SEC07940_410298],
attached to email from Brad Whitman, Lehman, to Hugh E. McGee, III, Lehman (Sept. 14, 2008)
[LBHI_SEC07940_410297].
354 See email from Richard S. Fuld, Jr., Lehman, to David Goldfarb, Lehman (May 16, 2008)
[LBHI_SEC07940_034773];emailfromDavidGoldfarb,Lehman,toRichardS.Fuld,Jr.,Lehman(May29,
2008) [LBHI_SEC07940_035043]; email from David Goldfarb, Lehman, to Richard S. Fuld, Jr., Lehman
(July12,2008)[LBHI_SEC07940_036502].
355ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.29.
356 Lehman, Richard S. Fuld, Jr., Call Logs (July 11, 14, 2008) [LBHI_SEC07940_016962]; Examiners
InterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.29.
357 Lazard, Project Green Situation Overview [Draft] (Sept. 14, 2008), at p. 6 [LBHI_SEC07940_410298],
attached to email from Brad Whitman, Lehman, to Hugh E. McGee, III, Lehman (Sept. 14, 2008)
[LBHI_SEC07940_410297].
358 Email from Hugh E. McGee, III, Lehman, to Herbert H. McDade, III, Lehman, et al. (July 15, 2008)
[LBHI_SEC07940_036551].
353

62


Lehman.359ThoseconcernsincludedtheU.S.markets,problemswithaEuropeanfirm
running a Wall Street firm and BNPPs preference for a deal with Socit Gnrale.360
LehmanconcludedthatBNPPwasunlikelytobeinterestedinadeal.361BySeptember
14, 2008, Lazard listed BNPP as a party that had no interest in a sale or strategic
investmentinLehman.362
K. RoyalBankofCanada
OnJuly15,2008,McDadeinformedMcGeeandFuldthatLehmanwasreaching
out to Royal Bank of Canada.363 However, Lazards September 14, 2008 presentation
listed Royal Bank of Canada as a party that had no interest in a sale or strategic
investmentinLehman.364
L. SocitGnrale
On July 15, 2008, McDade told McGee and Fuld that Lehman was exploring
Socit Gnrale as a potential partner.365 However, the September 14, 2008 Lazard

Email from Antonio Villalon, Lehman, to Jeffrey L. Weiss, Lehman (July 17, 2008)
[LBHI_SEC07940_644715].
360Id.
361Id.
362 Lazard, Project Green Situation Overview [Draft] (Sept. 14, 2008), at p. 6 [LBHI_SEC07940_410298],
attached to email from Brad Whitman, Lehman, to Hugh E. McGee, III, Lehman (Sept. 14, 2008)
[LBHI_SEC07940_410297].
363 Email from Hugh E. McGee, III, Lehman, to Herbert H. McDade, III, Lehman, et al. (July 15, 2008)
[LBHI_SEC07940_036551].
364 Lazard, Project Green Situation Overview [Draft] (Sept. 14, 2008), at p. 6 [LBHI_SEC07940_410298],
attached to email from Brad Whitman, Lehman, to Hugh E. McGee, III, Lehman (Sept. 14, 2008)
[LBHI_SEC07940_410297].
365 Email from Hugh E. McGee, Lehman, to Herbert H. McDade, III, Lehman, et al. (July 15, 2008)
[LBHI_SEC07940_036551].
359

63


presentationlistedSocitGnraleasapartythathadnointerestinasaleorstrategic
investmentinLehman.366
M. Lloyds
OnJuly15,2008,McDadedescribedLloydsasapartytowhomLehmanmight
reach out.367 The July 22, 2008 Discussion Materials for the Board presentation lists
Lloydsasapartythathadnotbeencontacted.368TheExaminersinvestigationdidnot
uncoveranyevidencethatLehmancontactedLloydsaboutapartnership.
N. MitsubishiUFJFinancialGroup
In September 2008, the Times Online U.K. reported rumors that Mitsubishi UFJ
Financial Group (Mitsubishi), a Japanese bank, would invest in Lehman.369 On
September4,aMitsubishicompanyspokespersonconfirmedthatMitsubishiwouldnot
invest in Lehman.370 On September 14, Lazard listed Mitsubishi a party that had no
interestinasaleorstrategicinvestmentinLehman.371

Lazard, Project Green Situation Overview [Draft] (Sept. 14, 2008), at p. 6 [LBHI_SEC07940_410298],
attached to email from Brad Whitman, Lehman, to Hugh E. McGee, III, Lehman (Sept. 14, 2008)
[LBHI_SEC07940_410297].
367 Email from Hugh E. McGee, Lehman, to Herbert H. McDade, III, Lehman, et al. (July 15, 2008)
[LBHI_SEC07940_036551].
368 Lehman, Discussion Materials for the Board of Directors (July 22, 2008), at p. 7
[LBHI_SEC07940_028484].
369 Leo Lewis, Tokyo Mitsubishi Joins Queue of Suitors for Lehman Brothers, Times Online, Sept. 4, 2008,
available
at
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/
article4670213.ece; email from Mark Lane, Lehman, to Scott J. Freidheim, Lehman, et al. (Sept. 3, 2008)
[LBEXDOCID2882961](forwardingarticlefromTheTimes).
370EmailfromTedHolzman,SandlerONeill,toJeffreyHarte,SandlerONeill(Sept.4,2008)[LBEXSON
016361](forwardingarticlefromDowJones).
371 Lazard, Project Green Situation Overview [Draft] (Sept. 14, 2008), at p. 6 [LBHI_SEC07940_410298],
attached to email from Brad Whitman, Lehman, to Hugh E. McGee, III, Lehman (Sept. 14, 2008)
[LBHI_SEC07940_410297].
366

64


O. NomuraSecurities
On September 10, 2008, Nomura Securities met with Lehmans representatives
andsaiditwasinterestedinastrategicpartnershipwithLehman.372Nomurasaidthatit
would closely analyze Lehmans third quarter numbers.373 On September 12, 2008,
Bhattal had a meeting at Nomura, which he described as very interesting.374 On
September 14, 2008, Lazard noted that Lehman had recent inbound inquiries from
Nomura.375
OnSeptember22,2008,NomurabidsuccessfullyforLehmansAsianoperations,
beatingoutStandardChartered,Barclays,CITIC,andSamsungSecurities.376
P. PotentialPartnersApproachedbyLehman
By September 14, 2008, Lehman had contacted more than 30 potential strategic
partners.377 In addition to the parties discussed above, Lehman contacted numerous
otherentities.

See email from Akio Katsuragi, Lehman, to Herbert H. McDade, III, Lehman, et al. (Sept. 10, 2008)
[LBHI_SEC07940_409803].
373Id.
374 Email from Jasjit Bhattal, Lehman, to Herbert H. McDade, III, Lehman, et al. (Sept. 12, 2008)
[LBHI_SEC07940_656143].
375 Lazard, Project Green Situation Overview [Draft] (Sept. 14, 2008), at p. 5 [LBHI_SEC07940_410298],
attached to email from Brad Whitman, Lehman, to Hugh E. McGee, III, Lehman (Sept. 14, 2008)
[LBHI_SEC07940_410297].
376 Vivian Waiyin Kwok, Nomura Wins The Lehman Asian Stakes, Forbes.com, Sept. 22, 2008, available at
http://www.forbes.com/2008/09/22/nomuralehmandealmarketsequitycx_vk_0922markets03.html.
377 Lazard, Project Green Situation Overview [Draft] (Sept. 14, 2008), at p. 5 [LBHI_SEC07940_410298],
attached to email from Brad Whitman, Lehman, to Hugh E. McGee, III, Lehman (Sept. 14, 2008)
[LBHI_SEC07940_410297].
372

65


Lehman approached Banco Bilbao Vizcaya Argentaria (BBVA) during July
2008.378 Although BBVA met with Lehman, BBVA was focused on retail banking and
notinterestedinLehman.379
Kohlberg,Kravis&Robertsperformedduediligence,butbySeptember14,2008,
wasnotinterestedinapotentialtransactionwithLehman.380
Lehman had exploratory discussions with Texas Pacific Group and Warburg
PicnusbutneitherpartyexpressedinterestinatransactionwithLehman.381
By September 14, 2008, Lehman also had approached Bank of China, Deutsche
Bank,AbuDhabiInvestmentAuthority,TheCarlyleGroup,ChineseInvestmentCorp.,
Kuwait Investment Authority, Kuwait Industries, Mubadala Development Company
and Qatar Investment Authority, but none of these parties were interested in even
havingdiscussionsregardingapotentialtransaction.382

378

Lehman, Discussion Materials for the Board of Directors (July 22, 2008), at p. 7
[LBHI_SEC07940_028484].
379Id.
380 Lazard, Project Green Situation Overview [Draft] (Sept. 14, 2008), at p. 5 [LBHI_SEC07940_410298],
attached to email from Brad Whitman, Lehman, to Hugh E. McGee, III, Lehman (Sept. 14, 2008)
[LBHI_SEC07940_410297].
381Id.
382Id.atp.6.

66

APPENDIX14:VALUATIONCDO
Appendix 14 provides the Examiners model prices for the Collateralized Debt
Obligation (CDO) securities tested and the assumptions used in performing this
valuation. These model prices are discussed in Sections III.A.2.i(2)(a) & (3) of the
Report. This analysis was performed by Duff & Phelps, the Examiners financial
advisor.
CDOPositions,ExaminersModelPriceasofMay31,2008
A total of $544.5 million of CDO assets were testedby the Examiners financial
advisorasofMay31,2008.TheExaminersfinancialadvisorsmarksaresummarized
below:
Name
CEAGO20071AA1
CEAGO20071AA2
CEAGO20071AB
CEAGO20071AC
CEAGO20071AD
CEAGO20071AS
CBRE20071AD

CBRE20071AE

ACCDO5AB
NEWCA20057A3

Cusip
14984XAA6

AssetComposition

RMBSMidprime
andSubprime
14984XAC2 RMBSMidprime
andSubprime
14984XAD0 RMBSMidprime
andSubprime
14984XAE8 RMBSMidprime
andSubprime
14984XAF5 RMBSMidprime
andSubprime
14984XAB4 RMBSMidprime
andSubprime
1248MLAL7 50%CMBS;
16%CMBSCreditTenanatLease;
26%REIT
1248MLAN3 50%CMBS;
16%CMBSCreditTenanatLease;
26%REIT
00388EAB7 MostlyRMBSPrime
651065AE4 50%CMBSConduit;
20%RMBS;
10%CMBSLargeLoans

OriginalRating:

May2008Rating:

Moodys/S&P/Fitch

Moodys/S&P/Fitch

Price

Aaa/AAA/NA

Baa2/BB/NA

65.1

Aaa/AAA/NA

B2/CCC+/NA

26.3

Aa2/AA/NA

B3/CCC/AA+

16.6

A2/A/NA

Ca/CCC/NA

0.9

Baa2/BBB+/NA

C/A/A

1.1

Aaa/AAA/NA

A1/A/NA

84.2

A2/A/A

A2/A/A

50.4

A3/A/A

A3/A/A

50.7

NA/AA/AA
A3/A/A

NA/AA/AA+
A3/A/A

40.3
50.7


As discussed above, the assumptions used in estimating the prices for each
CUSIPareasfollows:

Name
CEAGO20071AA1
CEAGO20071AA2
CEAGO20071AB
CEAGO20071AC
CEAGO20071AD
CEAGO20071AS
CBRE20071AD
CBRE20071AE
ACCDO5AB
NEWCA20057A3

Cusip
14984XAA6
14984XAC2
14984XAD0
14984XAE8
14984XAF5
14984XAB4
1248MLAL7
1248MLAN3
00388EAB7
651065AE4

DiscountMargin
(DM)

Conditional
DefaultRate(CDR)

PrepaymentRate
(CPR)

659bps
1747bps
4009bps
4249bps
4250bps
659bps
1003bps
1003bps
1747bps
1003bps

DefaultRateCurve
DefaultRateCurve
DefaultRateCurve
DefaultRateCurve
DefaultRateCurve
DefaultRateCurve
0.1%
0.1%
DefaultRateCurve
3.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
0.0%
0.0%
8.0%
1.0%

Loss
Severity
55%
55%
55%
55%
55%
55%
68%
68%
55%
68%

Forecasted
Collateral
Loss
27.5%
27.5%
27.5%
27.5%
27.5%
27.5%
5.8%
5.8%
13.0%
12.0%

A monthly default curve was used for Ceago and ACCDO, which are CDOs
backed by RMBS. The default curve construction was done at the RMBS level by
converting ABX indices prices to representative default rates. The default rate curve
changed between May 2008 and August 2008 because of changes in the ABX indices
values. NEWCA and CBRE are CDOs backed primarily by CMBS and conduit loans,
which typically do not require complex default rate modeling; therefore, a constant
defaultratewasassumedfortheseCDOs.
The constant default rates for May 2008 and August 2008 were obtained from
Moodys research reports. In order to estimate prepayment rates, the Examiners
financial advisor analyzed the recent amortization history of the underlying collateral
securities.TheExaminersfinancialadvisorestimatedtherecoveryratesbycomputing
the weighted average recoveries of each collateral security, as reported by the three
rating agencies, S&P, Moodys and Fitch. The discount margins were obtained from


JPMorganStructuredFinanceresearchreportsforMay2008andAugust2008basedon
theratingsoftheCDOtranches.
CDOPositions,ExaminersModelPriceasofAugust31,2008
A total of $415.5 million of CDO assets were testedby the Examiners financial
advisor as of August 31, 2008. The Examiners financial advisors marks are
summarizedbelow:
Name
CEAGO20071AA1
CEAGO20071AA2
CEAGO20071AB
CEAGO20071AC
CEAGO20071AD
CEAGO20071AS
CBRE20071AD

CBRE20071AE

ACCDO5AB
NEWCA20057A3

Cusip

AssetComposition

14984XAA6

RMBSMidprime
andSubprime
14984XAC2 RMBSMidprime
andSubprime
14984XAD0 RMBSMidprime
andSubprime
14984XAE8 RMBSMidprime
andSubprime
14984XAF5 RMBSMidprime
andSubprime
14984XAB4 RMBSMidprime
andSubprime
1248MLAL7 50%CMBS;
16%CMBSCreditTenanatLease;
26%REIT
1248MLAN3 50%CMBS;
16%CMBSCreditTenanatLease;
26%REIT
00388EAB7 MostlyRMBSPrime
651065AE4 50%CMBSConduit;
20%RMBS;
10%CMBSLargeLoans

OriginalRating:

August2008Rating:

Moodys/S&P/Fitch

Moodys/S&P/Fitch

Price

Aaa/AAA/NA

Baa2/BB/NA

59.9

Aaa/AAA/NA

B2/CCC+/NA

21.0

Aa2/AA/NA

B3/CCC/AA+

12.3

A2/A/NA

Ca/CCC/NA

1.0

Baa2/BBB+/NA

C/A/A

1.2

Aaa/AAA/NA

A1/A/NA

80.1

A2/A/A

A2/A/A

42.5

A3/A/A

A3/A/A

42.7

NA/AA/AA
A3/A/A

NA/AA/AA+
A3/A/A

31.6
39.0


Asdiscussedabove,theassumptionsusedinestimatingthepricesforCUSIPare
asfollows:

Name
CEAGO20071AA1
CEAGO20071AA2
CEAGO20071AB
CEAGO20071AC
CEAGO20071AD
CEAGO20071AS
CBRE20071AD
CBRE20071AE
ACCDO5AB
NEWCA20057A3

Cusip
14984XAA6
14984XAC2
14984XAD0
14984XAE8
14984XAF5
14984XAB4
1248MLAL7
1248MLAN3
00388EAB7
651065AE4

DiscountMargin
(DM)
873bps
2317bps
5398bps
5629bps
5629bps
873bps
1406bps
1406bps
2317bps
1406bps

Conditional
DefaultRate(CDR)

PrepaymentRate
(CPR)

DefaultRateCurve
DefaultRateCurve
DefaultRateCurve
DefaultRateCurve
DefaultRateCurve
DefaultRateCurve
2.3%
2.3%
DefaultRateCurve
3.7%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
0.0%
0.0%
8.0%
1.0%

Loss
Severity
55%
55%
55%
55%
55%
55%
64%
64%
55%
82%

Forecasted
Collateral
Loss
32.0%
32.0%
32.0%
32.0%
32.0%
32.0%
3.0%
3.0%
19.0%
18.0%

APPENDIX15:NARRATIVEOFSEPTEMBER4THROUGH
15,2008
Appendix15discussestheeventsbetweenSeptember4,2008andSeptember15,2008in
chronologicalorder,asareferenceinsupportofthetextofSectionsIII.A.3and5,and
III.C.6oftheReport.1AchartofLehmansstockpricebythehourleadsthediscussion
ofeachday.
I.

September4,2008................................................................................................................. 4
A. JPMorganmetwithLehman. ........................................................................................ 5
B. LehmanapproachedDavidL.SokolaboutSpinCofinancing................................. 7

II.

September5,2008................................................................................................................. 8
A. JPMorganconsideredLemansconditionandprospects. ...................................... 10
1. JPMorgansfeedbackonRatingAgencyPresentation ....................................... 10
2. JPMorganwarnedLehmanthatadditionalcollateralmayberequired. ......... 10
3. JPMorgantalkedtoKDB......................................................................................... 12
B. CitiinternallydowngradedLehmanscreditworthiness........................................ 13

III. September7,2008............................................................................................................... 13
IV. September8,2008............................................................................................................... 14
A. BofAagreedtobeginduediligence. .......................................................................... 15
B. Lehmanprevieweditsthirdquarter2008resultstoCiti. ....................................... 16
V.

September9,2008............................................................................................................... 17
A. KDBsannouncement................................................................................................... 19
B. Ratingagenciesreacted................................................................................................ 20
C. LehmanupdateditsBoard. ......................................................................................... 21

1OrderDirectingAppointmentofanExaminerPursuanttoSection1104(c)(2)oftheBankruptcyCode,at

p.4,Dkt.No.2569,InreLehmanBrothersHoldingsInc.,No.0813555(Bankr.S.D.N.Y.Jan.16,2009).


D. LehmanexecutedcashdeedswithHSBC. ................................................................ 22
E. JPMorganrequestsanadditional$5billionincollateral. ....................................... 23
F. TheJPMorganSecurityAgreement,Guaranty,andAmendmenttotheClearance
agreement....................................................................................................................... 24
VI. September10,2008............................................................................................................. 25
A. Lehmanspreannouncementearningsconferencecall. ......................................... 26
B. MoodysplacedLehmansratingonreview. ........................................................... 28
C. CititoldLehmanitcuttradinglines. ......................................................................... 29
D. Lehmanbeganinitialbankruptcyplanning. ............................................................ 29
E. TheFRBNYsagendaformeetingsregardingLehman. ......................................... 30
F. BarclayscontactedtheFSA. ........................................................................................ 31
VII. September11,2008............................................................................................................. 31
A. FuldresignedfromtheFRBNYBoard....................................................................... 32
B. BofAbeganduediligence............................................................................................ 33
C. BarclaysexpressedinterestinLehman...................................................................... 34
D. JPMorganrequestedadditionalcollateral................................................................. 35
E. WeilGotshalcontinuedtoprepareforLehmanbankruptcy. ................................ 36
F. LehmansmanagementupdatedtheBoard.............................................................. 37
VIII.September12,2008............................................................................................................. 39
A. LehmanbegandiscussionswithBarclays................................................................. 40
B. LehmansnegotiationswithBofA. ............................................................................. 43
C. MeetingsattheFRBNY................................................................................................ 44
D. ManagementdisclosedbankruptcyplanningtotheBoard. .................................. 45


E. LehmansCompensationCommitteemet................................................................. 46
F. CitiamendeditsClearingAgreement. ...................................................................... 47
G. Lehmanposted$5billionincashtoJPMorgan........................................................ 47
H. LiquidityPool................................................................................................................ 47
IX. September13,2008............................................................................................................. 48
A. NegotiationswithBofAfailed. ................................................................................... 48
B. Barclaysdiscussionscontinued. ................................................................................. 49
C. FRBNYinformedthatbankruptcyplanningwasskeletal...................................... 51
X.

September14,2008............................................................................................................. 52
A. TheFSArefusedtowaivetheshareholderapprovalrequirementfortheBarclays
deal.................................................................................................................................. 53
B. LehmanreachedouttoMorganStanley. .................................................................. 54
C. FuldlearnedabouttheUnitedKingdomsruleofinsolvency........................... 54
D. FRBNY. ........................................................................................................................... 55
1. WallStreetconsortiumagreedtoprovide$20billiontofacilitateBarclays
acquisitionofLehman. ............................................................................................ 55
2. Lehmandevelopedaplanforanorderlyliquidation. ....................................... 55
3. SundaymeetingsattheFRBNY............................................................................. 56
4. TheFRBNYexpandsthePDCFwindow.............................................................. 56
5. TheFRBNYdirectedLehmantofileforbankruptcy.......................................... 58
E. LehmansuggestedasaleinbankruptcytoBarclays............................................... 59
F. TheSeptember14,2008Boardmeeting..................................................................... 59

XI. September15,2008............................................................................................................. 62
A. Lehmanfilesforbankruptcyprotection.................................................................... 62


B. JPMorgansclearingactivities..................................................................................... 62
C. TheFRBNYslimitationonacceptablecollateral. .................................................... 63
D. NegotiationsbetweenLehmanandBarclays. .......................................................... 64

I.

SEPTEMBER4,2008
DuringthedayonThursday,September4,2008,JPMorganmetwithLehmanto

discussLehmansanticipatedthirdquarterresults.2Thatsameday,Lehmanpresented
theSpinCoplantoDavidL.Sokol,thePresidentofMidAmericanEnergyHoldingsCo.,
a company majorityowned by Berkshire Hathaway, as part of Lehmans efforts to
attractoutsidefinancing.3
Thatday,Lehmansstockopenedat$16.73,downfromthepreviousdaysclose
at$16.94.Atthatpoint,Lehmansstockhadlostover60%ofitsvaluesinceMarch14,
2008,whichwasthelasttradingdaypriortothenearcollapseofBearStearns.4

2JPMorgan,

Lehman Brothers Holdings Inc. Briefing Memorandum (Sept. 4, 2008), at p. 1 [JPM2004


0006171], attached to email from Mark G. Doctoroff, JPMorgan, to Barry L. Zubrow, JPMorgan, et al.
(Sept. 3, 2008) [JPM2004 0006170]; see also Lehman, JPMorgan Agenda (Sept. 4, 2008) [LBEXDOCID
445367],attachedtoemailfromEmilCornejo,Lehman,toEmilCornejo,Lehman(Sept.3,2008)[LBEX
DOCID458321].
3Lehman,TheGameplan(Sept.2008)[LBHI_SEC07940_653681],attachedtoemailfromHughE.McGee,
III, Lehman, to David L. Sokol, MidAmerican Energy Holdings Co., et al. (Sept. 4, 2008)
[LBHI_SEC07940_653680]. Accord Examiners Interview of Hugh E. McGee, III, Aug. 12, 2009, at p. 17;
ExaminersInterviewofDavidL.Sokol,Sept.22,2009,atp.4.
4SeeYahoo!Finance,HistoricalLEHstockprices,availableathttp://finance.yahoo.com/q?s=LEHMQ.PK.


LBHIStockPrice:Sept.4,2008

A. JPMorganMetwithLehman
On Thursday, September 4, 2008, Barry L. Zubrow, JPMorgans Chief Risk
Officer,andagroupofJPMorganexecutivesmetwithLehmansChiefFinancialOfficer,
IanT.Lowitt,GlobalTreasurer,PaoloR.TonucciandChiefRiskOfficer,ChristopherM.
OMeara, to discuss Lehmans third quarter results, which were scheduled to be
releasedonSeptember18,2008.5Inpreparationforthemeeting,JPMorganprepareda
briefing memorandum about, and its executives discussed, Lehmans strategy and
challenges. These issues included Lehmans anticipated additional writedowns on

5SeeJPMorgan,LehmanBrothersHoldingsInc.BriefingMemorandum(Sept.4,2008),atp.1[JPM2004

0006171, attached to email from Mark G. Doctoroff, JPMorgan, to Barry L. Zubrow, JPMorgan, et al.
(Sept. 3, 2008) [JMP2004 0006170]; see also Lehman, JPMorgan Agenda (Sept. 4, 2008) [LBEXDOCID
445367],attachedtoemailfromEmilCornejo,Lehman,toEmilCornejo,Lehman(Sept.3,2008)[LBEX
DOCID458321].


real estate assets, a potential capital injection from KDB, the sale of all or part of the
Investment Management Division (IMD) and SpinCo.6 The meeting was an
opportunityforLowitttoupdateJPMorganonLehmansthirdquarterearningsandthe
statusofSpinCo.7
The meeting focused on SpinCo, but the companies executives also discussed
issuesconcerningvaluationsofLehmanscollateral,tripartyrepoandLehmansposted
collateral.8 Lehman told JPMorgan that it believed JPMorgan was overcollateralized
against Lehmans intraday risk.9 In its briefing memorandum, JPMorgan recognized
that Lehman disagreed with JPMorgans collateral valuations and JPMorgan also felt
that collateral substitutions might be necessary.10 The memorandum noted that

6JPMorgan,

Lehman Brothers Holdings Inc. Briefing Memorandum (Sept. 4, 2008), at p. 1 [JPM2004


0006171], attached to email from Mark G. Doctoroff, JPMorgan, to Barry L. Zubrow, JPMorgan, et al.
(Sept.3,2008)[JMP20040006170](Thereisastrongdesireat[Lehman]tohaveopenandfrankdialogue
with JPM at all levels of our organizations. . . . As [Lehman]s primary operating services provider,
[Lehman]managementwanttoensurethatwearefullybriefedontheirstrategyandchallengesasthey
needoursupporttooperatetheirbusiness.).
7ExaminersInterviewofPaoloR.Tonucci,Sept.16,2009,atpp.1011.
8SeeJPMorgan,LehmanBrothersHoldingsInc.BriefingMemorandum(Sept.4,2008),atp.2[JPM2004
0006171], attached to email from Mark G. Doctoroff, JPMorgan, to Barry L. Zubrow, JPMorgan, et al.
(Sept.3,2008)[JMP20040006170].AccordExaminersInterviewofBarryL.Zubrow,Sept.16,2009,atp.
7;ExaminersInterviewofPaoloR.Tonucci,Sept.16,2009,atp.11;ExaminersInterviewofIanT.Lowitt,
Oct.28,2009,atp.17.SeeSectionIII.A.5.boftheReport,whichdiscussestheSeptember4,2008meeting
betweenLehmanandJPMorganingreaterdetail.
9Id.
10JPMorgan, Lehman Brothers Holdings Inc. Briefing Memorandum (Sept. 4, 2008), at p. 2 [JPM2004
0006171], attached to email from Mark G. Doctoroff, JPMorgan, to Barry L. Zubrow, JPMorgan, et al.
(Sept.3,2008)[JMP20040006170].


Lehmanscollateralpostingswerepartof[its]liquiditypool...despitetheirlessthan
cashliquidityprofile.11
Lehman presented its SpinCo plan at the meeting; however, JPMorgan left the
meeting with doubts about the plans viability.12 Zubrow did not understand how
LehmancouldinfuseenoughmoneyintoSpinCotocovertheexposureofSpinCosreal
estate loans.13 Zubrow told Lowitt that Lehman needed to provide more clarity on
SpinCobecausewithoutthatclarity,LehmanwouldspookthemarketwithaSpinCo
announcement.14 Tonucci confirmed that JPMorgan expressed doubts about SpinCos
viabilitywhenLehmanfirstpresentedtheideatoJPMorganonSeptember4.15
JPMorgan offered to assist Lehman by providing feedback on Lehmans draft
presentationsonSpinCoprior toLehmansupcoming meetingswithratingagencies.16
OntheeveningofSeptember4,TonuccisentJPMorganadraftversionofapresentation
Lehmanintendedforratingagencies,seekingJPMorganscomments.17
B. LehmanApproachedDavidL.SokolAboutSpinCoFinancing
OnSeptember4,2008,HughSkipE.McGee,III,headofLehmansInvestment
BankingDivision,sentSokol,acopyoftheTheGameplan,whichoutlinedLehmans

11Id.
12ExaminersInterviewofMarkG.Doctoroff,Apr.29,2009,atp.15.
13ExaminersInterviewofBarryL.Zubrow,Sept.16,2009,atp.7.
14Id.
15ExaminersInterviewofPaoloR.Tonucci,Sept.16,2009,atp.11.
16ExaminersInterviewofBarryL.Zubrow,Sept.16,2009,atp.7.
17EmailfromPaoloR.Tonucci,Lehman,toMarkG.Doctoroff,JPMorgan,etal.(Sept.4,2008)[JPM2004

0006300].


survivalplansfocusingonSpinCo.18LehmansPresidentandChiefOperatingOfficer,
HerbertBartH.McDade,III,andMcGeealsohadatelephonecallwithSokol,during
which they explained a good bank/ bad bank plan (i.e., SpinCo) and that Lehman
wouldneedaninvestortoexecutetheplan.19Sokolwasnotinterestedininvestingin
SpinCo. Sokol relayed the idea to Berkshire Hathaways Chief Executive Officer
(CEO),WarrenE.Buffett,20butSokoldidnotgiveBuffettTheGameplan.21During
thatdiscussion,Buffettdismissedtheideaasunrealistic.22
II.

SEPTEMBER5,2008
On Friday, September 5, 2008, JPMorgan provided Lehman feedback from the

September 4, 2008 meeting.23 That same day, Zubrow called Lowitt to warn him that
JPMorgan might request an additional $5 billion in collateral to protect against an
adverse market reaction to Lehmans plans.24 JPMorgan learned from Korea
Development Bank (KDB) that Lehmans negotiations with KDB were not

18See Lehman, The Gameplan (Sept. 2008) [LBHI_SEC07940_653681], attached to email from Hugh E.

McGee, III, Lehman, to David L. Sokol, MidAmerican Energy Holdings Co., et al. (Sept. 4, 2008)
[LBHI_SEC07940_653680]. Accord Examiners Interview of Hugh E. McGee, III, Aug. 12, 2009, at p. 17;
ExaminersInterviewofDavidL.Sokol,Sept.22,2009,atp.4.
19ExaminersInterviewofDavidL.Sokol,Sept.22,2009,atp.4.
20BerkshireHathawayownedamajorityofMidAmericanEnergyHoldingsCo.
21Id.SokoldoesnotrecallspecificallywhetherhecommunicatedLehmansSpinCoplantoBuffett.Id.at
p.3.However,BuffettrecalledSokolbriefinghimonthebasiccontoursoftheplanoratleast,athing
theytossedoutaboutaCREspin.ExaminersInterviewofWarrenE.Buffett,Sept.22,2009,atp.4.
22ExaminersInterviewofWarrenE.Buffett,Sept.22,2009,atp.4.
23Email from Mark G. Doctoroff, JPMorgan, to Paolo R. Tonucci, Lehman (Sept. 5, 2008)
[LBHI_SEC07940_556179].
24ExaminersInterviewofBarryL.Zubrow,Sept.16,2009,atp.10.


advancing.25 On September 5, 2008, Citigroup internally downgraded Lehmans
creditworthiness.26
That Friday, Lehmans stock opened at $14.71, down from Thursdays close at
$15.17.Overthecourseoftheday,Lehmansstockclimbedupwardtocloseat$16.20.27
LBHIStockPrice:Sept.5,2008

25Email

from Steven Lim, JPMorgan, to Jamie L. Dimon, JPMorgan, et al. (Sept. 5, 2008) [JPM2004
0006258].
26SeeemailfromMelissaJ.Torres,Citigroup,toJohnJ.Foley,Citigroup,etal.(Sept.6,2008)[CITILBHI
EXAM 00088683] (noting this change was made on Friday, September 5, 2008); see also email from
Gregory Frenzel, Citigroup, to NA IRM Weekly Updates group, Citigroup (Sept. 7, 2008) [CITILBHI
EXAM 00107376] (Frenzels weekly update from September 5, 2008); email from Michael Mauerstein,
Citigroup,toKatherineLukas,Citigroup,etal.(Sept.8,2008)[CITILBHIEXAM00051890](notingthat
the classification is strictly an internal Citi matter, they have not communicated anything to Lehman
aboutthechangeinitsinternalclassificationofLehman,norhasCitichangeditsoperationswithLehman
duetotheclassificationchange).
27SeeYahoo!Finance,HistoricalLEHstockprices,availableathttp://finance.yahoo.com/q?s=LEHMQ.PK.


A. JPMorganConsideredLehmansConditionandProspects
1.

JPMorgansFeedbackonRatingAgencyPresentation

OnFriday,September5,MarkG.Doctoroff,anexecutivedirectoratJPMorgan,
sent an email to Tonucci conveying the compiled JPMorgan feedback on Lehmans
rating agencies presentation, which Tonucci had sent to JPMorgan the previous day.28
Amongotherconcerns,JPMorganflaggedseveralareaswhereitfeltLehmanneededto
providemorespecificinformation,including:anoperationstimelinewithspecificdates
and information, more aggressive expense reduction and other items such as
management changes.29 JPMorgan executives also suggested more of a focus on
liquidity,especiallyoverthe12to18monthsahead.30JPMorganfurthersuggestedthat
Lehmans Chief Executive Officer, Richard S. Fuld, Jr., participate in future rating
agencymeetings.31TonucciagreedwithJPMorgansfeedbackandsaidthat hewould
pushFuldtoparticipateinfuturemeetingswiththeagencies.32
2.

JPMorganWarnedLehmanthatAdditionalCollateralMayBe
Required

At a September 5, 2008 JPMorgan Investment Bank Risk Committee (IBRC)


meeting, IBRC members discussed investment banks, trading, markets and the

28See

email from Mark G. Doctoroff, JPMorgan, to Paolo R. Tonucci, Lehman (Sept. 5, 2008)
[LBHI_SEC07940_556179].
29Seeid.
30Id.
31Id.
32Email fromMark G. Doctoroff, JPMorgan, to Barry L. Zubrow,JPMorgan, etal. (Sept. 5,2008) [JPM
20040006304].

10


skittishnessofhedgefundsregardingnovations.33JPMorganalsodiscussedtheriskof
runs on the banks, with particular concerns about Lehman and Merrill Lynch.34
JPMorgansharedinformationdiscussedinIBRCmeetingswiththeFRBNY.35
Late in the day on September 5, 2008, Zubrow called Lowitt to tell him that
JPMorganmightneedanadditional$5billionincollateralduetoitsconcernsaboutan
adversemarketreactiontoLehmansplans.36Zubrowcharacterizedthecallasaplace
marker in case JPMorgan followed through with a collateral request.37 According to
Zubrow, Lowitt said that although he hoped that JPMorgan would not make the
request,he understood the natureofthe situation.38Lowitttold theExaminerthat he
recalled speaking with Zubrow on September 5, but only vaguely recalled Zubrow
suggestingthatJPMorganmightneedmorecollateral.39AccordingtoLowitt,thefocus
oftheconversationwasthedraftratingagencypresentation.40

33ExaminersInterviewofDonnaDellosso,Oct.6,2009,atp.6.LehmanwasawarebytheendofJuly

2008thatnovationrequestswereincreasing,andsomebanksbesidesJPMorganweredecliningnovation
requestsfromLehmancounterparties.SeeemailfromEricFelder,Lehman,toIanT.Lowitt,Lehman,et
al.(July28,2008)[LBEXDOCID028924].
34ExaminersInterviewofDonnaDellosso,Oct.6,2009,atp.6.
35Id.atp.11;seeemailfromArthurG.Angulo,FRBNY,toTimothyF.Geithner,FRBNY,etal.(Sept.10,
2008) [FRBNY to Exam. 014605] (attaching September 7, 2008 JPMorgan Lehman Brothers Exposure
Overview). See Section III.A.5.b of the Report, which discusses the details of this meeting in greater
detail.
36ExaminersInterviewofBarryL.Zubrow,Sept.16,2009,atp.10.
37Id.
38Id.
39ExaminersInterviewofIanT.Lowitt,Oct.28,2009,atp.18.
40Id. See Section III.A.5.b of the Report, which discusses JPMorgans analysis and basis for requiring
additionalcollateralingreaterdetail.

11


3.

JPMorganTalkedtoKDB

On September 5, 2008, Steven Lim, JPMorgans Senior Country Officer and


Managing Director in Investment Banking for Korea, sent an internal email to James
JamieL.Dimon,CEOofJPMorgan,StevenD.Black,CoCEOofJPMorganandother
JPMorgan executives about a draft letter pitching JPMorgan as KDBs investment
banker for its deal with Lehman.41 Lims email noted that KDB previously worked
with Perella Weinberg Partners in connection with its negotiations with Lehman, but
also reported that KDB had said that JPMorgan was the only investment bank with
whichKDBspoke.42Inhisemail,LimstatedthathedidnotbelieveLehmanwouldbe
abletogetadealdonewithKDBbyLehmansSeptember10,2008deadline.43
During an internal meeting that same day, JPMorgan observed that a deal
betweenLehmanandKDBdidnotseemtobemovingforward.44JPMorganconsidered
the status of Lehmans negotiations with KDB to be another sign of Lehmans
deterioratingmarketposition.45

41Email

from Steven Lim, JPMorgan, to Jamie L. Dimon, JPMorgan, et al. (Sept. 5, 2008) [JPM2004
0006258].
42Id.
43Id.
44Id.atp.2.
45SeeSectionIII.A.5.boftheReport,whichdiscussesJPMorgansconsiderationofitsneedforadditional
collateralfromLehmaningreaterdetail.

12


B. CitiInternallyDowngradedLehmansCreditworthiness
On September 5, 2008, Citi decided to downgrade its internal classification of
Lehmans creditworthiness.46 According to Thomas Fontana, Citis Global Financial
InstitutionsRiskManagementOfficer,CititookthisstepbecauseLehmanhadclearly
defined problems,47 whereas Citi only previously saw that Lehman had potential
weakness.48 When Citi internally downgraded Lehmans creditworthiness on
September 5, the credit engine [system] automatically suspended all trading lines,
which did not mean that Citi stopped the trading lines, but that it more carefully
monitoredLehmanstradingactivities.49Citialsoinstitutedarequirementforinternal
approvals for trades with Lehman that were larger, longer in tenor, or riskier than
usual.50
III.

SEPTEMBER7,2008
On Sunday, September 7, 2008, Henry M. Paulson, Jr., the Secretary of the

Treasury, announced that the Government was taking over Fannie Mae and Freddie

46SeeemailfromMelissaJ.Torres,Citigroup,toJohnJ.Foley,Citigroup,etal.(Sept.6,2008)[CITILBHI

EXAM 00088683] (noting this change was made on Friday, September 5, 2008); see also email from
Gregory Frenzel, Citigroup, to NA IRM Weekly Updates group, Citigroup (Sept. 7, 2008) [CITILBHI
EXAM 00107376] (Frenzels weekly update from September 5, 2008); email from Michael Mauerstein,
Citigroup,toKatherineLukas,Citigroup,etal.(Sept.8,2008)[CITILBHIEXAM00051890](notingthat
theclassificationisstrictlyaninternalCitimatter,andtheyhadnotcommunicatedanythingtoLehman
about the change in its internal classification of Lehman, nor had Citi changed its operations with
Lehmanduetotheclassificationchange).
47Handwritten notes of Thomas Fontana, Citigroup (Sept. 5, 2008), at p. 168 [CITILBHIEXAM
00099649].
48Id.atp.191.
49EmailfromKathyElOng,Citigroup,toThomasFontana,Citigroup,etal.(Sept.11,2008)[CITILBHI
EXAM00012823].
50Id.

13


MacandthattheTreasuryDepartmenthadagreedtoprovidethoseentitieswith$200
billioninloans.51TheFederalHousingFinanceAgencyplacedFreddieandFannieinto
conservatorship pursuant to the Housing and Economic Recovery Act of 2008.52
Paulsons statement on September 7, 2008 included the assessment that Fannie Mae
andFreddieMacaresolargeandsointerwoveninourfinancialsystemthatafailureof
either of them would cause great turmoil in our financial markets here at home and
around the globe. . . . And a failure would be harmful to economic growth and job
creation.53
IV.

SEPTEMBER8,2008
On Monday, September 8, 2008, after initial discussions earlier in the summer

and renewed talks in August 2008, Bank of America (BofA) agreed to begin due

51UnitedStatesTreasury,PressRelease:StatementbySecretaryHenryM.Paulson,Jr.,onTreasuryand

Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers (Sept. 7, 2008),
available at http://www.ustreas.gov/press/releases/hp1129.htm(last visited Jan. 31, 2010); Mark Jickling,
Congressional Research Service, CRE Report for Congress: Fannie Mae and Freddie Mac in
Conservatorship(Sept.7,2008),availableathttp://fpc.state.gov/documents/organization/110097.pdf.
52MarkJickling,CongressionalResearchService,CREReportforCongress:FannieMaeandFreddieMac
inConservatorship(Sept.7,2008),atp.2,
availableathttp://fpc.state.gov/documents/organization/110097.pdf.
53UnitedStatesTreasury,PressRelease:StatementbySecretaryHenryM.Paulson,Jr.,onTreasuryand
Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers (Sept. 7, 2008),
availableathttp://www.ustreas.gov/press/releases/hp1129.htm(lastvisitedJan.31,2010).

14


diligenceinsupportofapotentialtransactionwithLehman.54Thatsameday,Lehman
previeweditsthirdquarterearningsforCiti.55
Following the previous days announcement that the Government was placing
FannieandFreddieinconservatorship,Lehmansstockopenedat$17.62,over$1higher
than its previous close.56 Over the course of the day, Lehmans stock traded down in
highvolume.57
LBHIStockPrice:Sept.8,2008

A. BofAAgreedtoBeginDueDiligence
On September 8, 2008, Gregory L. Curl, BofAs Global Strategic Development
and Planning Officer, contacted H. Rodgin Cohen, the Chairman of the law firm

54ExaminersInterviewofGregoryL.Curl,Sept.17,2009,atp.7.CurlstatedthatonSeptember8or9,

BankofAmericaagreedtobegindiligence.Id.BynoononSeptember9,FuldreportedtotheBoardthat
hewasawaitingareturnphonecallfromapotentialdomesticpartner[].LehmanBrothersHoldings
Inc.,MinutesofMeetingofBoardofDirectors(Sept.9,2008),atp.2[LBEXAM003910].
55See email from Christopher M. Foskett, Citigroup, to Ian T. Lowitt, Lehman (Sept. 8, 2008) [LBEX
DOCID070422].
56SeeYahoo!Finance,HistoricalLEHstockprices,availableathttp://finance.yahoo.com/q?s=LEHMQ.PK.
57Id.

15


Sullivan & Cromwell, LLP.58 Cohen previously had served as the intermediary in
negotiationsbetweenBofAandLehman.59CurlcontactedCohentobegintheprocessof
lookingintoLehman.60InlateAugust2008,FuldmetwithKennethD.Lewis,CEOof
BofA.61 Sometime after September 1, 2008, Henry M. Paulson, Jr., contacted Curl,
expressing concern about Lehman.62 Paulson asked Curl to look into whether BofA
couldhelp.63BofAremainedreluctanttolookintoLehmanuntilCurlcalledCohenon
September8.64
B. LehmanPreviewedItsThirdQuarter2008ResultstoCiti
On September 8, 2008, Lehman presented its expected results for third quarter
2008, as well as its game plan for going forward, to Citi.65 Citis managing director
ChristopherM.FoskettthoughtthatLehmansplanmadesense,butthatexecutingthe

58ExaminersInterviewofGregoryL.Curl,Sept.17,2009,atp.7.CurlstatedthatonSeptember8or9,

BankofAmericaagreedtobegindiligence.Id.BynoononSeptember9,FuldreportedtotheBoardthat
hewasawaitingareturnphonecallfromapotentialdomesticpartner[].LehmanBrothersHoldings
Inc.,MinutesofMeetingofBoardofDirectors(Sept.9,2008),atp.2[LBEXAM003910].
59Id.
60Id.
61Fuldwasuncertainofthedateofthisconversationbuthiscalllogsindicatethathehadatelephonecall
with Lewis accompanied by the description proposed deal. Richard S. Fuld, Jr., Lehman, Call Logs
(Aug. 26,2008) [LBHI_SEC07940_016973]. Accord Examiners Interview ofRichard S. Fuld, Jr., Apr. 28,
2009,atp.5;ExaminersInterviewofKennethD.Lewis,Sept.24,2009,atp.4.
62ExaminersInterviewofGregoryL.Curl,Sept.17,2009,atp.7.
63Id.Paulsondescribedhisjobduringthistimeperiodas,amongotherthings,workingwithTimothy
F. Geithner to finalize a deal to sell Lehman to Bank of America or Barclays. Examiners Interview of
HenryM.Paulson,Jr.,June25,2009,atp.17.
64ExaminersInterviewofGregoryL.Curl,Sept.17,2009,atp.7.
65See email from Christopher M. Foskett, Citi, to Ian T. Lowitt, Lehman (Sept. 8, 2008) [LBEXDOCID
070422].

16


plan was going to be challenging.66 Foskett commented that Lehman was the most
open amongst the brokers about [third quarter 2008] results and plans to address the
stressandstrainofthecurrentenvironment.67
V.

SEPTEMBER9,2008
OnTuesday,September9,2008,aSouthKoreangovernmentofficialannounced

the end of KDBs negotiations with Lehman, citing concerns over the United States
markets,amongotherreasons.68KDBalsoinformedJPMorganthatKDBwasendingits
negotiations with Lehman.69 The press reported the South Korean officials statement
laterthatday.70
That same day, Fitch and Standard and Poors placed Lehmans rating on a
negativewatch.71OnTuesday,BlackcalledFuldtorequestanadditional$5billionin
collateral; Fuld agreed to post $3 billion immediately.72 Later that evening, JPMorgan
requested that Lehman execute new Security and Guaranty Agreements and an

66Id.
67Id.
68JinYoungYook,KoreaFSC:KDB,LehmanInvestmentTalksHaveEnded,DowJonesInternationalNews

(Sept.9,2008)[LBEXDOCID131058];SteveGoldstein,KoreanregulatorsaysKDBtalkswithLehmanended,
MarketWatch,Sept.9,2008[LBEXDOCID131059];EvanRamstad&JinYoungYook,TalksBetweenKDB,
LehmanOnPossibleInvestmentEnd,WallSt.J.Online,Sept.9,2009[LBEXDOCID224552].
69Email from Steven Lim, JPMorgan, to Jamie L. Dimon, JPMorgan, et al. (Sept. 9, 2008) [JPM2004
0006320].
70SeeemailfromCatherineJones,Lehman,toHughE.McGee,III,Lehman,etal.(Sept.9,2008)[LBEX
DOCID131058];emailfromTimothySullivan,Lehman,toMarkG.Shafir,Lehman,etal.(Sept.9,2008)
[LBEXDOCID131059];emailfromHughE.McGee,III,Lehman,toJasjitBhattal,Lehman,etal.(Sept.9,
2008)[LBEXDOCID224552].
71Email from Stephen Lax, Lehman, to Rajiv Muthyala, Lehman, et al. (Sept. 9, 2008)
[LBHI_SEC07940_557829] (forwarding Fitch press release, Fitch Places Lehman Brothers on Rating Watch
Negative);S&PplacesLehmanonnegativeratingswatch,AssociatedPress(Sept.9,2008).
72ExaminersInterviewofStevenD.Black,Sept.23,2009,atp.6.

17


amendment to the Clearance Agreement.73 Lehman also executed a cash deed with
HSBC, encumbering nearly $1 billion that Lehman had posted the previous week to
ensureHSBCscontinuedclearingservices.74
On Tuesday morning, Lehmans stock opened down, at $12.92, over the prior
days close.75 After the days public announcements (from the South Korean
governmentofficialandtheratingagencies),Lehmansstockhadlostnearlyhalfofits
value, closing at $7.79.76 The trading volume was more than triple the prior days
volume.77 After watching Lehmans share price collapse, another of Lehmans
remainingpotentialstrategicpartners,ICD,saiditneededatimeoutinnegotiations
withLehman.78
LBHIStockPrice:Sept.9,2008

73SeeinfraSectionV.FofthisAppendixandSectionIII.A.5.boftheReport,whichdiscusestheSeptember

agreementsingreaterdetail.
74HSBC,CashDeedbetweenHSBCandLBIE(Sept.9,2008)[HBUS00001180];HSBC,CashDeedbetween

HSBCandLBHI(U.K.)(Sept.9,2008)[HBUS00001190].
75SeeYahoo!Finance,HistoricalLEHstockprices,availableathttp://finance.yahoo.com/q?s=LEHMQ.PK.
76Id.
77Id.
78ExaminersInterviewofHughE.McGee,III,Aug.12,2009,atp.22.

18

A. KDBsAnnouncement
OnthemorningofSeptember9,2008,LimemailedDimon,Blackandothersat
JPMorgan to inform the group that KDBs Governor EuooSung Min had called Lim
that day to confirm that KDB had ended negotiations with Lehman due to execution
andtimingconcerns.79
Several hours later, the Chairman of South Koreas Financial Services
Commission, Jun Kwangwoo, made a public statement, confirmed by another South
Koreangovernmentofficial,thattalksbetweenKDBandLehmanwereover.80KDB,on
theotherhand,declinedtocomment.81AfterChairmanKwangwoosannouncement,

79Email

from Steven Lim, JPMorgan, to Jamie L. Dimon, JPMorgan, et al. (Sept. 9, 2008) [JPM2004
0006320].
80JinYoungYook,KoreaFSC:KDB,LehmanInvestmentTalksHaveEnded,DowJonesInternationalNews
(Sept.9,2008)[LBEXDOCID131058];SteveGoldstein,KoreanregulatorsaysKDBtalkswithLehmanended,
MarketWatch,Sept.9,2008[LBEXDOCID131059];EvanRamstad&JinYoungYook,TalksBetweenKDB,
LehmanOnPossibleInvestmentEnd,WallSt.J.Online,Sept.9,2009[LBEXDOCID224552].
81Id.

19


thecostofinsuringLehmansdebtsurgedbyalmost200basispoints,someofLehmans
hedgefundclientspulledoutandshorttermcreditorscutlendinglines.82
On September 9, 2008, Fuld called Lewis to tell him that Lehman was going to
preannounceitsthirdquarterresultsbecauseofthepublicstatementabouttheendof
KDB negotiations and because the rating agencies were making noise about taking
action related to Lehmans rating.83 Lewis told Fuld to keep him apprised of any
developmentsgoingforward.84
B. RatingAgenciesReaction
During the afternoon of September 9, Fitch and Standard and Poors placed
Lehmans ratings on a negative watch.85 Fitchs rating action was triggered by
Lehmans decision to move up the date of its earnings call to announce SpinCo and
Lehmans intent to raise capital.86 Lehman had told Fitch just five days earlier that
LehmanwouldannounceSpinCoandtheearningsreportseparately,withtheformerto
occur first.87 Fitch believed Lehman would have difficulty raising capital in the third

82Yalman

Onaran & John Helyar, Fuld Sought Buffett Offer He Refused as Lehman Sank (Update 1),
Bloomberg,Nov.10,2009,availableat
http://www.bloomberg.com/apps/news?sid=aZ1syPZH.RzY&pid=20601109.
83ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.5.
84Id.
85Email from Stephen Lax, Lehman, to Rajiv Muthyala, Lehman, et al. (Sept. 9, 2008)
[LBHI_SEC07940_557829] (forwarding Fitch, Press Release, Fitch Places Lehman Brothers on Rating Watch
Negative(Sept.9,2008));S&PplacesLehmanonnegativeratingswatch,AssociatedPress,Sept.9,2008.
86ExaminersInterviewofEileenA.Fahey,Sept.17,2009,atp.7.
87Id.

20


quarter and wanted to convey that message to the market.88 Standard and Poors
September 9 negative watch statement also cited Lehmans intent to raise capital and
theprecipitousdeclineinLehmansshareprice.89
C. LehmanUpdatedItsBoard
AtnoononSeptember9,2008,LehmanheldaregularlynoticedBoardmeeting.90
Atthemeeting,LehmansmanagementwarnedtheBoardthatthemeetingwouldbe
abbreviated in light of the mornings events, and that Lowitt was unavailable to
present his usual Financial Update becausehe was preparing for a possible earnings
preannouncement.91
FuldupdatedtheBoardondiscussionswithtwopotentialdomesticpartners,
includingBofA.92TheotherpotentialpartnerisnotnamedintheBoardminutesbutis
describedashavingconcernsaboutthedegreeofoverlapbetweenLehmananditsown
business.93 John Mack, Morgan Stanleys CEO, had expressed that concern about a
potentialLehmanandMorganStanleymergerinJuly2008,whenFuldfirstsuggested
combiningLehmanandMorganStanley.94

88Id.
89S&PplacesLehmanonnegativeratingswatch,AssociatedPress(Sept.9,2008).
90LehmanBrothersHoldingsInc.,MinutesofMeetingofBoardofDirectors(Sept.9,2008),atp.1[LBEX

AM003910].
91Id.atpp.12.
92Id.atp.3.
93Id.
94ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.28.

21


D. LehmanExecutedCashDeedswithHSBC
On September 9, 2008, LBHI (U.K.) and LBIE executed Cash Deeds to
encumber the nearly $1 billion it posted to HSBC during late August and early
September2008.95BothCashDeedsrequireddepositstocoverintradayexposure.One
oftheCashDeedsrequiredLBHI(U.K.)andLBIEtomaintainadepositintheamount
that HSBC estimated, in its good faith, to cover aggregate intraday exposures on
specifiedaccountsheldbycertainLehmanentities.96Thedepositwouldbeavailableto
Lehman only if HSBC were satisfied that none of the Lehman entities covered by the
Cash Deeds owed any outstanding debt to HSBC.97 HSBC had the right to setoff the
deposit against Lehmans clearing obligations.98 The Cash Deed formally recognized
that any extension of credit by HSBC to parties to the Cash Deed was left to HSBCs
discretion.99
On September 9, 2008, Lowitt executed a Guaranty Amendment between Citi
andLBHI.100TheAmendmentaddednineLehmansubsidiariestotheparentguaranty
andexpandedtheguarantytocustodyagreements.101

95SeeSectionIII.A.5.doftheReport,whichdiscussestheHSBCCashDeedsingreaterdetail.
96HSBC, Cash Deed between HSBC and LBIE (Sept. 9, 2008), 5 [HBUS00001180]; HSBC, Cash Deed

betweenHSBCandLBHI(U.K.)(Sept.9,2008),5[HBUS00001190].
97HSBC, Cash Deed between HSBC and LBIE (Sept. 9, 2008), 4 [HBUS00001180]; HSBC, Cash Deed
betweenHSBCandLBHI(U.K)(Sept.9,2008),6[HBUS00001190].Debtisusedinthenarrowsense
containedintheCashDeed.Id.
98HSBC, Cash Deed between HSBC and LBIE (Sept. 9, 2008), 5 [HBUS00001180]; HSBC, Cash Deed
betweenHSBCandLBHI(U.K.)(Sept.9,2008),4[HBUS00001190].
99HSBC,CashDeedbetweenHSBCandLBHI(U.K.)(Sept.9,2008),10[HBUS00001190].
100SeeSectionIII.A.5.coftheReport,whichdiscussestheCitGuarantyAmendmentingreaterdetail.

22


E. JPMorganRequestedanAdditional$5BillioninCollateral
On September 9, 2009, JPMorgans Black called Fuld to request $5 billion in
additional collateral.102 Black explained to Fuld that the requested collateral was
intendedtocoverJPMorgansexposuretoLehmaninitsentirety,andwasnotlimited
to tripartyrepo exposure.103 According to Black, Lehman offered to post $3 billion
immediately and post an additional $2 billion at a later time.104 Lehman pledged $1
billionincashandapproximately$1.7billionofmoneymarketfundstoJPMorganthat
day.105

101Id.
102Examiners

Interview of Steven D. Black, Sept. 23, 2009, at p. 6; Examiners Interview of Barry L.


Zubrow, Sept. 16, 2009, at p. 10; Examiners Interview of Jane BuyersRusso, Sept. 25, 2009, at p. 7.
Decipheringacontemporaneousnote,BuyersRussorecalledthatJPMorganwouldaskfor$5billion,but
accept$3billionfromLehman.ExaminersInterviewofJaneBuyersRusso,Sept.25,2009,atp.9;Jane
BuyersRusso, Unpublished Notes (Sept. 9, 2008), at p. 1 [JPMEXAMINER00006052]. In a later
contemporaneous note on September 9, BuyersRusso wrote, Black called Dick[,] asked for $3B said
ok.ExaminersInterviewofJaneBuyersRusso,Sept.25,2009,atp.10;JaneBuyersRusso,Unpublished
Notes(Sept.9,2008),atp.3[JPMEXAMINER00006052].
103ExaminersInterviewofStevenD.Black,Sept.23,2009,atp.7.
104Examiners Interview of Steven D. Black, Sept. 23, 2009, at pp. 6, 9; see also JPMorgan, JPMorgans
ResponsestoExaminersFirstSetofQuestionsreLehman/JPMAccounts&CollateraldatedSept.3,2009,
atp.17.BlackscommunicationsdidnotoccurinasingletelephonecallwithLehmanthatday,butin
multiplecalls.ExaminersInterviewofStevenD.Black,Sept.23,2009,atpp.69.Lehmansacceptanceof
the$3billionrequestisconsistentwiththeSeptemberGuaranty,whichspecificallyinvokedthatfigurein
establishingmaximumliability.Guaranty(Sept.9,2008),atp.2[JPM20040005813](TheGuarantors
maximum liability under this Guaranty shall be THREE BILLION DOLLARS ($3,000,000,000) or such
greater amount that the Bank has requested from time to time as further security in support of this
Guaranty.). There is evidence that Lehman agreed to post only $4 billion in response to JPMorgans
Sept.9request.SeeemailfromDonnaDellosso,JPMorgan,toStevenD.Black,JPMorgan,etal.(Sept.10,
2008)[JPM20040006377]([Lehman]willmaintaincollateralof$4blntocoverintradayexposure.);e
mail from Daniel J. Fleming, Lehman, to Mark G. Doctoroff, JPMorgan (Sept. 12, 2008) [LBEXDOCID
405652](JPMnowhasatotalof4.6bn,600mmmorethenagreed.).
105JPMorgan,JPMorgansResponsestoExaminersSecondSetofQuestionsreLehman/JPMAccounts&
Collateral (Oct. 13, 2009) at p. 9; Lehman, Collateral Pledged to JPM for Intraday As of 9/12/2008 COB
[LBEXAM042364];seealsoemailfromMarkG.Doctoroff,JPMorgan,toJaneBuyersRusso,JPMorgan,et
al.(Sept.9,2008)[JPM20040032520];emailfromDanielFleming,Lehman,toPaoloR.Tonucci,Lehman

23


F. TheJPMorganSecurityAgreement,Guaranty,andAmendmenttothe
Clearanceagreement
OnSeptember9,2008,at9:00p.m.,106JPMorgansentdraftSecurityandGuaranty
Agreements to Andrew Yeung, one of Lehmans inhouse lawyers.107 Later that
evening, JPMorgan sent a draft amendment to the Clearance Agreement.108 Yeung
spoke with Gail Inaba, an inhouse lawyer at JPMorgan, about the agreements.109 She
told him that the terms of the agreements had already been agreed to by senior
management.110 Inaba told Yeung that the agreements had to be executed prior to
Lehmansacceleratedearningsannouncementscheduledforthenextmorning.111Fuld
didnotrecallanyconversationwithBlackonthetopicandotherwisewasunawareof
theseagreementsatthetimeofInabasstatementtoYeung.112

(Sept.9,2008)[LBEXDOCID073380].Lehmanposted$300millionmoreforatotalof$3billionon
Sept.10.JPMorganSecondWrittenResponseatp.9.
106AlltimesrefertoEasternTime,unlessotherwisespecified.
107Email from Jeffrey Aronson, JPMorgan, to Andrew Yeung, Lehman, et al. (Sept. 9, 2008) [JPM2004
0005594];ExaminersInterviewofAndrewYeung,Mar.13,2009,atp.4.
108Email from Jeffrey Aronson, JPMorgan, to Andrew Yeung, Lehman, et al. (Sept. 9, 2008) [JPM2004
0005039].AdraftAuroraGuarantyanddraftControlAgreementweresentwiththedraftAmendmentto
theClearanceAgreementaswell.Seeid.
109ExaminersInterviewofAndrewYeung,Mar.13,2009,atp.3.
110Id. at p. 4. According to Yeung, when he expressed his concern over the expanded scope of the
collateralpledge,InabasaidifyouhaveconcernsaboutthiswewillcontactDickFuld.Id.Although
she did not remember Yeung calling her, Inaba stated to the Examiner that she told Yeung and Paul
Hespel that an agreement had been reached by very senior management at both firms, though not
necessarily that Fuld and Black had reached agreement. Examiners Interview of Gail Inaba, Apr. 28,
2009,atp.7.
111Examiners Interview of Andrew Yeung, Mar. 13, 2009, at p. 4; Examiners Interview of Gail Inaba,
Apr.28,2009,atp.8.
112ExaminersInterviewofRichardS.Fuld,Jr.,May6,2009,atp.15.

24


The agreements were negotiated through the night by Lehman counsel and
executed by Tonucci on the morning of September 10, 2008.113 The agreements
expanded JPMorgans lien on Lehman accounts and extended LBHIs liability,
guaranteeingallobligationsratherthanonlythoserelatedtoclearingactivitiesfor
allofLBHIssubsidiaries.114
VI.

SEPTEMBER10,2008
InlightoftheeventsofSeptember9,Lehmanaccelerateditsearningscalleight

days to Wednesday, September 10, 2008.115 During the earnings call, Fuld and Lowitt
explained Lehmans planned restructuring and announced Lehmans third quarter
losses.116 Rating analysts on the call reacted negatively to Lehmans efforts to
restructure through SpinCo.117 By Wednesday afternoon, Moodys placed Lehman on
negative watch for a downgrade, if Lehman failed to consummate a transaction by
Monday,September15,2008.118Duringtheday,BarclaysadvisedtheFinancialServices
Authority(FSA)thatitwasconsideringadealwithLehman.119

113Email

from Andrew Yeung, Lehman, to Gail Inaba, JPMorgan, et al. (Sept. 10, 2008) [JPM2004
0005218].
114SeeSectionIII.A.5.boftheReport,whichdiscussestheSeptemberAgreementsingreaterdetail.
115ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.5;ExaminersInterviewofThomasA.
Russo,May11,2009,atp.7.
116 Final Transcript of Lehman Brothers Holdings Inc. Third Quarter 2008 Preliminary Earnings Call
(Sept.10,2008)[LBHI_SEC07940_612771].
117See, e.g., email from Robert Ferguson, Barclays Capital, to Mike Keegan, Barclays Capital (Sept. 10,
2008) [BCIEX(S)00035195]; email from Vincent Curotto, Sanford Bernstein, to Stuart Schwadron,
SanfordBernstein(Sept.11,2008)[SBSEC048150].
118Email from Paolo R. Tonucci, Lehman, to Carlo Pellerani, Lehman (Sept. 10, 2008)
[LBHI_SEC07940_558653] (forwarding Moodys Investor Service, Press Release, Moodys Places Lehmans

25


On September 10, Lehman also took the first steps toward planning for a
bankruptcy filing.120 Meanwhile, an internal FRBNY agenda suggested that federal
assistance to Lehman was a possibility.121 That agenda did not necessarily reflect the
viewsofseniorFRBNYmanagement;indeeditwasnotcirculatedtoGeithner.122
On Wednesday, Lehmans stock opened up, at $9.15, over the previous days
closeat$7.79.123Overthecourseoftheday,Lehmansstocklostvalue,officiallyclosing
Wednesday,September10,at$7.25.124
LBHIStockPrice:Sept.10,2008

A. LehmansPreannouncementEarningsConferenceCall

On Wednesday, September 10, 2008, at 8:00 a.m., Lehman conducted its


preliminarythirdquarterearningscall.125LehmanwasrepresentedonthecallbyFuld,

A2RatingOnReviewWithDirectionUncertain(Sept.10,2008));ExaminersInterviewofRichardS.Fuld,
Jr.,Apr.28,2009,atp.6.
119FSA,StatementoftheFSA(Jan.20,2010),7.
120See Weil, Gotshal & Manges LLP, Time Records (Sept. 10, 2008) [LBEXWGM 1146447]. Accord
ExaminersInterviewsofStevenBerkenfeld,Oct.5and7,2009,atp.21.
121FRBNY, Liquidation Consortium (Sept. 10, 2008) [FRBNY to Exam. 003517], attached to email from
MichaelNelson,FRBNY,toChristineCumming,FRBNY,etal.(Sept.10,2008)[FRBNYtoExam.003516].
122Id.
123SeeYahoo!Finance,HistoricalLEHstockprices,availableathttp://finance.yahoo.com/q?s=LEHMQ.PK.
124Id.

26


Lowitt, McDadeandShaunButler, its Director of Investor Relations.Severalanalysts
participated in the call as well, including: Glen Schorr (UBS), Michael Hecht (Banc of
AmericaSecurities),MikeMayo(DeutscheBank),DouglasSipkin(Wachovia),William
Tanona(GoldmanSachs)andGuyMoszkowski(MerrillLynch).126
Fuldbeganhisremarksbysayingthatthecallwasconductedonclearlyshort
notice and that the company was announcing several important financial and
operating changes that amount to a significant repositioning of the firm, including
aggressivelyreducing[its]exposuretobothcommercialrealestateandresidentialreal
estateassets.127Hethenturnedtothequarterslosses,whichheblamedmostlyon
thesalesandwritedownsofourresidentialandcommercialrealestateassetsandthe
creditmarkets.128
Next, Fuld introduced Lehmans plan to address its commercial real estate
assets.129 He explained that a majority of the commercial real estate assets would be
separated from the companys core business by spinning off those assets to our
shareholders and to an independent publicly traded entity which will be adequately

125 Final Transcript of Lehman Brothers Holdings Inc. Third Quarter 2008 Preliminary Earnings Call

(Sept.10,2008)[LBHI_SEC07940_612771].
126Id.
127Id.atp.2.
128Id.
129Id.atp.3.

27


capitalized,130 i.e. SpinCo. He further stated that the company would sell a majority
stakeinitsIMDbusiness.131
Whenthecallwasopenedforanalystquestions,theanalystsaskedaboutthesale
ofIMDandtheSpinCoplan,marktomarketaccounting,valuationsofLehmansassets
beforethespinoffandthesourceoffinancingfortheSpinCotransaction,amongother
issues.132
B. MoodysPlacedLehmansRatingonReview

OnthelateafternoonofSeptember10,2008,Moodysannouncedthatitplaced
LehmansA2ratingonreviewwithdirectionuncertain.133BlaineFrantzofMoodys
issuedastatementthat[a]keyratingsfactorwillbeLehmansabilitytoturnaround
marketsentiment....Astrategictransactionwitha strongerfinancialpartnerwould
likelyaddsupporttotheratingsandresultinapositiveratingaction.134
Lehmans Chief Legal Officer, Thomas A. Russo, told the Examiner that the
Moodys announcement was the event that represented the final turning point when

130Id.
131Id.
132Id.atpp.1225.SeeSectionIII.A.3.c.4oftheReport,whichdiscussestheSpinCoplaningreaterdetail.
133Email

from Paolo R. Tonucci, Lehman, to Carlo Pellerani, Lehman (Sept. 10, 2008)
[LBHI_SEC07940_558653] (forwarding Moodys Investor Service, Press Release, Moodys Places Lehmans
A2RatingOnReviewWithDirectionUncertain(Sept.10,2008)).
134Id.

28


Lehmanssituationbegantodeteriorate.135RussofeelsthattheMoodysannouncement
camebeforethemarkethadtimetodigestLehmansearningsannouncement.136
LowitttoldFuldthattheratingagenciesexpectedLehmantoreachadealwitha
strategicpartnerwithinthenextweekorelseLehmanwouldfacealikelydowngrade.137
Lehman began to plan for an impending downgrade and the consequent loss of
Lehmansabilitytoissuelongtermdebt.138
C. CitiToldLehmanItCutTradingLines
OnSeptember10,CitipersonnelmistakenlyinformedLehmanthatCitihadcut
thetradinglines.139Thatwasnotthecase.140Citithereafterremindeditsemployeesto
beextravigilantsothatmisinformationwouldnotbecommunicatedtoLehmanorthe
marketplace.141
D. LehmanBeganInitialBankruptcyPlanning
OnSeptember10,2008,StevenBerkenfeld,LehmansHeadofLegal,Compliance
andAudit,calledStephenJ.Dannhauser,theChairmanofthelawfirmWeil,Gotshal&

135ExaminersInterviewofThomasA.Russo,May11,2009,atp.8.
136Id.
137ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.6.
138SeeLehman,TheGameplanDowngradeScenario(September2008)[LBEXDOCID2727669],attached

to email from MatthewBlake, Lehman, to Ian T. Lowitt, Lehman, et al., (Sept.11,2008) [LBEXDOCID
2744462].
139Email from Kathy El Ong, Citi, to Ajaypal S. Bunga, Citi, et al. (Sept. 11, 2008) [CITILBHIEXAM
00012823].
140Id.
141Id.

29


MangesLLP(Weil),tobeginworkingonapossiblebankruptcyfilingforLehman.142
Berkenfeldhadnotobtainedanyinternalauthorizationtomakethatcall.143Russodid
not know that Berkenfeld made the call until later.144 Harvey R. Miller, the Chair of
Weilsbankruptcydepartment,firstbilledtimetopreparingforaLehmanbankruptcy
onSeptember10,2008.145
E. TheFRBNYsAgendaforMeetingsRegardingLehman
On September 10, 2008, the FRBNY staff internally circulated an outline, the
Revised Consortium Gameplan, for the FRBNYs upcoming meeting with industry
leaders.146TheRevisedConsortiumGameplandetailedaplantoholdmeetingswith
industry participants to fund Lehmans bad assets.147 According to the outline, the
FRBNYexpectedtodecidebeforethemeetingsbeganonamaximumamountofcapital
that it was willing to finance, but did not intend to disclose that amount to industry
participants.148

142SeeWeil,Gotshal&MangesLLP,TimeRecords(Sept.10,2008),atp.1[LBEXWGM1146447].Accord

ExaminersInterviewsofStevenBerkenfeld,Oct.5and7,2009,atp.21.
143ExaminersInterviewsofStevenBerkenfeld,Oct.5and7,2009,atp.21.
144ExaminersInterviewofThomasA.Russo,May11,2009,atp.8.
145Weil, Gotshal & Manges LLP, Time Records (Sept. 10, 2008), at p. 1 [LBEXWGM 1146447] (noting
MillersfirsttimebilledtoLehmanasT/CsSJD5x).
146FRBNY, Liquidation Consortium (Sept. 10, 2008) [FRBNY to Exam. 003517], attached to email from
MichaelNelson,FRBNY,toChristineCumming,FRBNY,etal.(Sept.10,2008)[FRBNYtoExam.003516].
ThisdocumentwasnotseenorapprovedbyGeithner.Id.
147Id.
148Id.atp.2

30


F. BarclaysContactedtheFSA
DuringthedayonSeptember10,JohnVarley,GroupCEOofBarclays,contacted
HectorSants,CEOoftheFSA,toadviseSantsthatBarclayswasconsideringbiddingfor
Lehman.149Santsdidnotobjecttotheidea,buttoldVarleythattheFSAwouldneedto
bekeptcloselyinformedofthedevelopmentandthedealsdetails.150
VII.

SEPTEMBER11,2008
On Thursday, September 11, 2008, at the FRBNYs suggestion, Lehman entered

into initial talks with Barclays, and began due diligence with BofA.151 Fuld resigned
from the FRBNYs Board that afternoon.152 He did so at the suggestion of Thomas C.
Baxter,Jr.,GeneralCounseltotheFRBNY,andFRBNYPresidentTimothyF.Geithner,,
because they told him to resign, in case [they had] to do something [for or with
Lehman]thatweekend.153Beforetheendoftheday,JPMorgancalledLehman,seeking
yetanother$5billioninnewcollateral.154

149FSA,StatementoftheFSA(Jan.20,2010),7.
150Id.
151LehmanBrothersHoldingsInc.,MinutesofMeetingofBoardofDirectors(Sept.11,2008)[LBEXAM

003918].
152ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.11.
153Id.
154ExaminersInterviewofRichardS.Fuld,Jr.,May6,2009,atp.13;ExaminersInterviewofJamieL.
Dimon, Sept. 29, 2009, at pp. 910; Examiners Interview of Steven D. Black, Sept. 23, 2009, at p. 12;
ExaminersInterviewofIanT.Lowitt,Oct.28,2009,atp.21.

31


Between Wednesdays official close of $7.25 and Thursdays opening at $4.47,
Lehmansstocklostalmost40%ofitsvalue.155OnThursday,Lehmansstocktradedin
itshighestvolumefortheentireweektoclosedownat$3.79.156
LBHIStockPrice:Sept.11,2008

A. FuldResignedfromtheFRBNYBoard
On Thursday, September 11, Baxter called Russo and suggested that Fuld step
downfromthe Board of theFRBNY.157AfterRusso toldFuld aboutthe conversation,
Fuld called Geithner.158 During that call, Geithner asked Fuld to step down from the
Board in case we have to do something for you or with you this weekend.159 Fuld
saidhisconversationwithGeithnerleftFuldwiththefeelingthat,ifitcamedowntoit,
theFRBNYandGeithnerwouldbetheretoprovideassistancetoLehman.160Geithner

155SeeYahoo!Finance,HistoricalLEHstockprices,availableathttp://finance.yahoo.com/q?s=LEHMQ.PK.
156Id.
157ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.11;ExaminersInterviewofThomas

Baxter,Jr.,Aug.31,2009,atp.9.
158ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.11.
159Id.AccordExaminersInterviewofThomasC.Baxter,Jr.,Aug.31,2009,atp.9.
160ExaminersInterviewofRichardS.Fuld,Jr.Apr.28,2009,atp.11.

32


toldtheExaminerthathedoesnotrecallmakingthestatement,buthewascertainhe
wascarefulnottoimplythatLehmancouldexpecttheFRBNYssupport.161AFRBNY
meeting agenda dated September 10, 2008 suggests that at least one FRBNY
representativecontemplatedprovidingpublicfundstoLehmanatthattime.162
B. BofABeganDueDiligence
BofA began due diligence on a potential deal with Lehman on September 11,
2008.163FuldcalledLewisonSeptember11,2008toinformhimthattheratingagencies
were comforted when they heard that Lehman was negotiating with a major bank.164
Fuld told the Examiner that during their conversation, he remarked to Lewis, You
knowweregoingtodothisdeal,dontyou,Ken?towhichLewisresponded,Yes,I
do,Dick.165AccordingtoLewis,heneverindicatedtoFuldthatadealwouldgetdone,
butratherhewasnoncommittalinhisanswer.166

161ExaminersInterviewofTimothyF.Geithner,Nov.24,2009,atp.9.
162SeeFRBNY,LiquidationConsortiumpresentation(Sept.10,2008)[FRBNYtoExam.003517],attached

toemailfromMichaelNelson,FRBNY,toChristineCumming,FRBNY,etal.(Sept.10,2008)[FRBNYto
Exam. 003516]. Accord Examiners Interview of William Brodows, Aug. 20, 2009, at p. 6; Examiners
InterviewofJanH.Voigts,Aug.25,2008.
163Examiners Interview of Richard S. Fuld, Jr., Apr. 28, 2009, at p. 5. Curl told Examiner that Bank of
AmericabeganitsduediligenceofLehmanonSept.9or10,2008.ExaminersInterviewofGregoryL.
Curl,Sept.17,2009,atp.7.
164ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.5.
165Id.
166ExaminersInterviewofKennethD.Lewis,Sept.24,2009,atp.5.

33


C. BarclaysExpressedInterestinLehman
On Thursday, September 11, 2008, Fuld informed the Board that he had not
heard from Barclays directly, but that he had been advised of its potential interest by
theFirmsregulators.167
AlsoonSeptember11,VarleyinformedtheFSAthattheBarclaysBoardwould
meet that day to consider whether Barclays should approach Lehman.168 Varley told
Sants that a bid for Lehman would be put together if three conditions were met: (1)
therewasahighdegreeofconfidencethatadealcanbecompletedwiththenecessary
supportfromtheFederalReservetoensurethis;(2)therewasliquiditysupportfrom
theFederalReserve;and(3)therewasadiscountonLehmansnetassetvalues.169Sants
responded that the FSAsreview would focus onthe impactany transactionstructure
wouldhaveonBarclaysliquidityandcapital,warningthattheFSAwouldnotapprove
any core Tier 1 number below the minimum requirement.170 Later that day, Callum
McCarthy, the Chairman of the FSA, contacted Geithner to discuss Lehman.171

167Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (Sept. 11, 2008), at p. 2

[LBEXAM 003918]. Fuld told the Examiner that, prior to September 11, 2008, he had at least two
conversationswithDiamond.Eachtime,DiamondtoldFuldtherewastoomuchoverlaptodoadeal.
Also,sometimeearlyintheweekofSeptember8,2008,CheckioftheFRBNYtoldFuldthatBarclayswas
interestedinLehman,butwhenFuldcalledDiamondhewasagaintoldthattherewastoomuchoverlap.
ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.7.
168FSA,StatementoftheFSA(Jan.20,2010),8.
169Id.8.
170Id.9.
171Id.10.

34


According to the FSA, during that conversation, according to the FSA, Geithner left
openthepossibilityofGovernmentassistanceforLehman.172
D. JPMorganRequestedAdditionalCollateral
On September 11, 2008, Lehman posted an additional $600 million in cash to
JPMorgan.173Thatsameday,JPMorganexecutivesmettodiscussvaluationissuesthey
had identified with the securities that Lehman had posted as collateral over the
summer.174 JPMorgan had concluded that the securities posted as collateral were not
worth nearly what Lehman claimed.175 JPMorgan decided to request that Lehman
provide $5 billion in cash collateral that day.176 Dimon and Black called Lowitt, who
was joined on the call by Fuld.177 Zubrow and Tonucci recall participating in the
conversation as well.178 On that call, Black and Dimon requested a $5 billion cash
collateraldepositbythenextmorning.179AccordingtoBlack,therewasnodiscussionof

172Id.
173Examiners

Interview of Steven D. Black, Sept. 23, 2009, at p. 12; email from Mark G. Doctoroff,
JPMorgan, to Henry E. Steuart, JPMorgan, et al. (Sept. 11, 2008) [JPM2004 0062065]; JPMorgan Second
WrittenResponses,atp.3.
174ExaminersInterviewofStevenD.Black,Sept.23,2009,atp.12.
175Id.
176Id.;emailfromPaoloR.Tonucci,Lehman,toDanielJ.Fleming,Lehman,etal.(Sept.12,2008)[LBEX
DOCID073346]([JPM]want[s]$5bntomorrowfirstthing).
177Examiners Interview of Richard S. Fuld, Jr., May 6, 2009, at p. 13; Examiners Interview of Jamie L.
Dimon, Sept. 29, 2009, at pp. 910; Examiners Interview of Steven D. Black, Sept. 23, 2009, at p. 12;
ExaminersInterviewofIanT.Lowitt,Oct.28,2009,atp.21.
178Examiners Interview of Barry L. Zubrow, Oct. 20, 2009, at p. 6; Examiners Interview of Paolo R.
Tonucci,Sept.16,2009,atp.16.
179Id.

35


how the request for $5 billion related to the $1.4 billion that Lehman putatively still
owedinresponsetoJPMorgansSeptember9collateralrequestfor$5billion.180
That same day, Jane BuyersRusso, head of JPMorgans brokerdealer unit,
forwarded Tonucci a written notice of the $5 billion collateral call as discussed
between senior management.181 Pursuant to that notice, if JPMorgan did not receive
the$5billionincollateralbytheopeningofbusinessonSeptember12,2008,JPMorgan
wouldexercise[its]righttodeclinetoextendcreditto[Lehman]underthe[Clearance]
Agreement.182
E. WeilGotshalContinuedtoPrepareforLehmanBankruptcy
On September 11, 2008, Shai Waisman, a partner in Weils bankruptcy
department, billed time to Lehman described as filing preparation.183 Also on
September 11, a Weil attorney prepared a draft first day affidavit in support of a

180ExaminersInterviewofStevenD.Black,Sept.23,2009,atpp.1213.ThereisevidencethatLehman

agreedonlytopost$4billioninresponsetoJPMorgansSept.9request.SeeemailfromDonnaDellosso,
JPMorgan, to Steven D. Black, JPMorgan, et al. (Sept. 10, 2008) [JPM2004 0006377] ([Lehman] will
maintain collateral of $4bln to cover intraday exposure.); email from Daniel J. Fleming, Lehman, to
Mark G. Doctoroff, JPMorgan (Sept. 12, 2008) [LBEXDOCID 405652] (JPM now has a total of 4.6bn,
600mmmorethenagreed.).
181Email from Jane BuyersRusso, JPMorgan, to Paolo R. Tonucci, Lehman (Sept. 11, 2008) [JPM2004
0005411].
182Id. at p. 2. At the same time, JPMorgan revised credit lines for some Lehman entities. Email from
David A. Weisbrod, JPMorgan, to Kelly A. Mathieson, JPMorgan (Sept. 12, 2008) [JPM2004 0050026]
(revisedLBIEcreditlineto$1.4billion);ExaminersInterviewofKellyA.Mathieson,Oct.7,2009,atp.16.
SeeIII.A.7oftheReportwhichdiscussesJPMorganscollateralrequestonSeptember11,2008ingreater
detail.
183Weil,Gotshal&MangesLLP,TimeRecords(Sept.11,2008),atp.6[LBEXWGM1146447].

36


potentialfiling.184OtherWeilattorneysassistedinpreparingtheChapter11petition.185
WeilalsodraftedBoardresolutionsapprovingabankruptcyfiling.186
F. LehmansManagementUpdatedtheBoard
OnSeptember11,2008,theBoardheldatelephonicmeeting.187Fuldupdatedthe
Boardonseveralissues.188First,headvisedtheBoardthatLehmanbelievedthatithad
the funding necessary to conduct its business on Friday, September 12, 2008.189 Fuld
alsonotedthatliquidityisforecastedtodecreaseto$30billionthatdayasaresultof
providingcollateral.190FuldinformedtheBoardthatifLehmancouldnotcompletea
transactionovertheweekend,thefundingsituationandratingagencysituationwould
be very difficult because counterparties did not want to accept even high grade
collateralfromLehman.191FuldadvisedtheBoardthatLehmanwasworkingwiththe
FRBNY and the SEC on an orderly liquidation of assets supported by credit from the
FRBNY,ifLehmancouldnotarrangeatransaction.192

184Id.atp.7.
185Id.atpp.10,17,19.
186Id.atp.19.
187Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (Sept. 11, 2008), at p. 1

[LBEXAM003918].
188Id.atpp.12.
189Id.atp.1.
190Id.atp.2.
191Id.
192Id.

37


Second, Fuld informed the Board that Lehman had begun due diligence with
BofAinconnectionwithapossibledeal.193Fuldstatedthatthegoalwastoannouncea
transaction by the evening of Sunday, September 14, 2008.194 McDade told the Board
aboutBofAsongoingduediligence.195
Third,Fuldstatedthathehadbeenadvisedof[Barclays]potentialinterestby
the Firms regulators, although he had not heard this from Barclays directly.196 Fuld
wasreferringtoaconversationwithTerrenceJ.Checki,anexecutivevicepresidentat
theFRBNY,whotoldFuldthatBarclayswasinterestedinLehman.197Fuldhadcalled
Diamond,whotoldFuldtherewastoomuchoverlaptodoadeal.198Nonetheless,Fuld
recalledthathemetwithDiamondonSeptember11or12.199Atthatmeeting,Fuldtold
DiamondthatFuldwaswillingtostepdownasCEOuponcompletionofadeal.200On
September 11, Barclays began assembling its due diligence team and requested due
diligence information, but Lehman was not able to begin delivering the bulk of the
informationuntilthenextday.201

193Id.atp.1.
194Id.atpp.12.
195Id.atp.2.
196Id.
197ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009atp.7.
198Id.
199Id.SeeTomJunod,TheDealoftheCentury,EsquireMagazine,October2009,p.157(statingthemeeting

tookplaceonFriday,September12,2008).
200ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atpp.78.
201See,e.g.,emailfromGerardLaRocca,Barclays,toJamesWalker,Barclays(Sept.11,2008)[BCIEX(S)

00033903];emailfromJamesWalker,Barclays,toPatrickClackson,Barclays(Sept.11,2008)[BCIEX(S)
00021957]; email from Gerard LaRocca, Barclays, to Richard Ricci, Barclays (Sept. 11, 2008) [BCIEX

38


Fourth, Fuld told the Board that he had recently contacted John Mack, Morgan
Stanleys CEO, about a potential merger with Morgan Stanley.202 Mack had told Fuld
that there was too much overlap between the firms.203 Mack also felt there was not
enough time for Morgan Stanley to conduct due diligence and announce a deal by
Sundaynight.204
VIII. SEPTEMBER12,2008
On Friday, September 12, 2008, as BofA continued its due diligence, Barclays
began its own due diligence in connection with a possible deal.205 In response to
JPMorgansrequestthe previous day, Lehman posted$5billioncashcollateral.206 Citi
amended its Clearing Agreement with Lehman, strengthening its lien on Lehmans
assets.207Thatevening,theCEOsoftwelveWallStreetfirmsconvenedattheFRBNYat

00078752]; email from Gerard LaRocca, Barclays, to Richard Ricci, Barclays (Sept. 11, 2008) [BCIEX
00078770]; email from Gerard Reilly, Lehman, to Gerard LaRocca, Barclays, et al. (Sept. 11, 2008)
[BARCLAYSLB00023388].
202Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (Sept. 11, 2008), at p. 2
[LBEXAM003918].
203Id.
204Id.
205LehmanBrothersHoldingsInc.,MinutesofMeetingofBoardofDirectors(Sept.12,2008),atpp.12
[LBEXAM003920].
206SeeemailfromChristopherD.Carlin,JPMorgan,toBarryL.Zubrow,JPMorgan,etal.(Sept.12,2008)
[JPM2004 0033002] (At 1130 EDT current balance in the Lehman Holding Co account is 4 billion 450
million vs the target 5 billion.); email from Christopher D. Carlin, JPMorgan, to Barry L. Zubrow,
JPMorgan,etal.(Sept.12,2008)[JPM20040050902](Last550millionreceivedfromCitiat1:26PMNY
time...balanceintheLehmanHoldingcoaccountisnowat5billion....);seealsoemailfromPaoloR.
Tonucci, Lehman, to Ian T. Lowitt, Lehman (Sept. 12, 2008) [LBEXDOCID 4050567] (JP should have
their$5bn.).
207Citibank,DirectCustodialServicesAgreementDeed(Sept.12,2008)[CITILBHIEXAM00005903].

39


the Governments request to discuss Lehmans situation and possible remedies.208 At
thecloseofbusinessonFriday,Lehmancalculateditsliquiditypooltocontain$2billion
ofeasilymonetizedliquidity.209
Lehmans stock officially opened Friday at $3.84 and traded in high volume
throughouttheday.210ByFridaysofficialclose,Lehmansstockwastradingat$3.65.211
LBHIStockPrice:Sept.12,2008

A. LehmanBeganDiscussionswithBarclays
On Friday, September 12, 2008, at 9:00 a.m., the board of directors of Barclays
authorizeditsmanagementtoundertakeduediligencetodeterminewhethertherewas
anopportunityforatransactionwithLehman.212Barclaysmanagementhadpresented

208ExaminersInterviewofThomasC.Baxter,Jr.,May20,2009,atp.9.
209Lehman,AbilitytoMonetizeChart(Sept.12,2008)[LBEXWGM784607].
210SeeYahoo!Finance,HistoricalLEHstockprices,availableathttp://finance.yahoo.com/q?s=LEHMQ.PK.
211Id.
212TranscriptofdepositiontestimonyofRobertE.Diamond,InreLehmanBrothersHoldingsInc.,CaseNo.

0813555(Bankr.S.D.N.Y.,Sept.11,2009),atpp.2425.

40


its board with two possible acquisition scenarios and both involved transactions that
valuedLehmansstockat$5pershare.213
Varley informed Paulson that Barclays board was prepared to consider a
possible bid for Lehman.214 Paulson also spoke to Alistair Darling, the United
Kingdoms Chancellor of the Exchequer, during the day.215 During that conversation,
according to the FSA, Paulson told Darling that the FRBNY might provide Barclays
with regulatory assistance to support a transaction.216 Paulson told the Examiner that
duringtheconversation,ChancellorDarlingdidnotmentiontheneedforaguarantyof
Lehmans debts, but Darling did say that the FSA would not reject or approve the
deal.217PaulsondescribedChancellorDarlingsstatementasaparticularlyBritishway
ofsayingno.218
The September 12 discussions between the FSA and Barclays focused on
quantifyingthesizeandnatureofLehmansassetsandtheirimpactonBarclayscapital
ratios.219BarclaysadvisedtheFSAthatBarclayscontinuedtoseekunlimitedaccessto

213SeeBarclays,LongIslandTransactionOverview(Sept.12,2008),atp.3[BCIEX(S)00053306_000001].
214FSA,StatementoftheFSA(Jan.20,2010),12.
215Id.23.
216ExaminersInterviewofHenryM.Paulson,Jr.,June25,2008,atp.20.
217Id.
218Id.
219FSA,StatementoftheFSA(Jan.20,2010),27.

41


theFRBNYdiscountwindowalthoughthereremaineddebatewithintheTreasuryasto
whoshouldprovidethefunding.220
Following the meeting of Barclays Board, Diamond met with Fuld to discuss
Barclaysinterest.221AccordingtoDiamond,hetoldFuldthattherecouldbenodealat
a market price, the current market price, because of the risk and because of the
overlap,222andthatBarclaysinterestwasonlyasarescuesituation,meaningifthisis
a very, very distressed price.223 According to Diamond, Barclays had two areas of
concern about any potential deal with Lehman: long term funding and certain risk
assets.224BarclaysanticipatedthattheFSAwouldsharethoseconcerns.225
Sometime between 5:10 p.m. and 6:00 p.m. on September 12, Varley and
DiamondhadacallwithPaulsonandGeithnertodiscussthepotentialdeal.226
During a 4:00 p.m. Board meeting, Fuld informed Lehmans directors that
Barclayshadstartedduediligence,althoughhenotedthattherehadnotyetbeenany
discussion regarding transaction structure or price.227 Fuld also told the Board that

220Id.
221Transcript of deposition testimony of Robert E. Diamond, In re Lehman Brothers Holdings Inc., et al.,

CaseNo.0813555(Bankr.S.D.N.Y.,Sept.11,2009),atpp.2526.
222Id.atpp.2627.
223Id.atp.32.
224Email from John Varley, Barclays, to Robert E. Diamond, Barclays, et al. (Sept. 12, 2008) [BCIEX
00078748].
225Id.
226SeeHenryM.PaulsonJr.,CallLogs(Sept.2008),availableathttp://www.scribd.com/doc/21221123/Too
BigToFailPaulsonCallLogsandCalendarSept2008.
227Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (Sept. 12, 2008), at p. 1
[LBEXAM003920].

42


Barclays would need approval from its stockholders for a transaction and that
Barclayshadonlyrecentlystarteditsduediligenceprocess.228
By Friday evening, Lehmans Global CoHead of Capital Markets, Michael
Gelband,andLehmansGlobalHeadofPrincipalBusiness,AlexKirk,toldMcDadethat
theywereencouragedbythedialoguebetweenLehmanandBarclays.229Gelbandand
Kirk encouraged McDade to leave the BofA negotiations and join the Barclays
discussions.230McDadepromptlymetwithDiamond.231Duringthatmeeting,Diamond
walk[ed]throughwhathisintentionsandneedswereifhewasgoingtodoadealover
the weekend and . . . tr[ied] to get a basic understanding . . . of what the core of the
businesseswereandhow[McDadeandDiamond]feltanintegrationwouldorwould
notworkofthecollectivesetofbusinesses.232AccordingtoMcDade,itwasveryclear
that...atthispoint[Diamond]wascontemplatingthepurchaseofthewholefirm.233
B. LehmansNegotiationswithBofA
AsFriday,cametoaclose,BofAwaswindingdownitsduediligence.234Based
on that due diligence, BofA believed that Lehmans valuations of its own commercial

228Id.
229TranscriptofdepositiontestimonyofHerbertH.McDade,III,InreLehmanBrothersHoldingsInc.,Case

No.0813555(Bankr.S.D.N.Y.,Sept.2,2009),atp.11.
230Id.
231Id.
232Id.atp.12.
233Id.atpp.1314;TranscriptofdepositiontestimonyofRichardRicci,InreLehmanBrothersHoldingsInc.,
No.0813555(Bankr.S.D.N.Y.,Sept.8,2009),atp.13.SeeIII.CoftheReportwhichdiscussesBarclays
duediligenceandLehmansnegotiationswithBarclaysingreaterdetail.
234SeeemailfromDavidM.Belk,BankofAmerica,toWalterJ.Muller,BankofAmerica,etal.(Sept.12,
2008)[BofASEC00003515].

43


real estate positions were too high.235 BofAs due diligence team also identified
approximately $65 to $67 billion worth of Lehman assets that BofA would not have
wantedatanyprice.236Consequently,LewisbelievedthatnodealwithLehmancould
work for BofA unless the Government would provide assistance to offset the
undesirableassets.237
Fuld tried to call Lewis several times on Friday evening but Lewis did not
answeranyofthosephonecalls.238Despitethat,Fulddidnotyetsuspectanythingwas
awrywiththepotentialBofAdeal.239
C. MeetingsattheFRBNY
OntheeveningofSeptember12,theGovernmentsummonedtheCEOsoftwelve
majorinvestmentbankstotheFRBNYsoffices.240NoonefromLehmanwasinvitedor
attended.241BaxtersaidthatrepresentativesfromBofAandBarclayswerenotpresent
becausethosefirmswerenegotiatingpotentialdealstoacquireLehman.242Curltoldthe
ExaminerthathethoughtaBofArepresentativehadbeenpresentatthemeeting.243

235See,e.g.,emailfromDonBenningfield,BankofAmerica,toRochelleDobbs,BankofAmerica,etal.

(Sept.12,2008)[BofASEC00002774].
236ExaminersInterviewofKennethD.Lewis,Sept.24,2009,atp.5;ExaminersInterviewofGregoryL.
Curl,Sept.17,2009,atp.9.
237Id.
238ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.6;ExaminersInterviewofKennethD.
Lewis,Sept.24,2009,atp.6.
239Id.
240ExaminersInterviewofThomasC.Baxter,Jr.,May20,2009,atp.9.
241Id.
242Id.
243ExaminersInterviewofGregoryL.Curl,Oct.19,2009,atp.10.

44


PaulsonbeganthemeetingbynotingtheabsenceofLehmanrepresentatives.He
explainedthatthemeetingwasconvenedtodiscussLehman,244andthatfederalmoney
would not be provided to rescue Lehman.245 As a result, Paulson said, the banking
industry needed to find a solution, because Lehmans failure would impact the entire
industry.246
D. ManagementDisclosedBankruptcyPlanningtotheBoard
WeilsbillingrecordsreflectworkrelatingtoapotentialLehmanbankruptcyon
September12,2008.247TheheadofLehmansrestructuringandfinancegroup,MarkJ.
Shapiro,approachedRussoaboutestablishingabankruptcyremotetrustforemployee
medical costs and taxes.248 At Russos direction, Weil prepared motions to protect
certainLehmanbenefitprograms.249
Lehmans Board invited Miller to make a presentation at its telephonic
September 12, 2008 Board meeting.250 Lehmans Board minutes from that meeting
indicate that Miller advised the Board that bankruptcy would be a very bad option

244ExaminersInterviewofThomasBaxterJr.,May20,2009,atp.9.
245Id.;ExaminersInterviewofHenryM.Paulson,Jr.,June25,2009,atp.16.
246Id.SeeSectionIII.A.6.oftheReport,whichdiscussestheFRBNYmeetingsingreaterdetail.
247SeeWeilGotshal&MangesLLP,TimeRecords(Sept.12,2008)[LBEXWGM1146477].
248ExaminersInterviewofThomasA.Russo,May22,2009,atp.10.
249Id.
250LehmanBrothersHoldingsInc.,MinutesofMeetingofBoardofDirectors(Sept.12,2008)[LBEXAM

003920].MillerdoesnotrecallbeingphysicallypresentataBoardmeetinguntilSunday,September14,
2008.AccordExaminersInterviewofHarveyR.Miller,Apr.23,2009,atp.5.

45


underthecircumstances.251Atthesamemeeting,RussoreportedtotheBoardthatthe
FederalReserveisinterestedinhelpingtofacilitateanorderlywinddownandavoida
bankruptcy.252
Miller told the Examiner that Weil did not begin bankruptcy preparations by
Friday, other than to begin to collect public information regarding Lehman.253 That
evening, Miller had received a call from James L. Bromley, a partner at the law firm
Cleary Gottlieb Steen & Hamilton (Cleary Gottlieb), on behalf of the FRBNY,
requestingameeting.Bromleyexpressednourgencytomeetthatnight.254
E. LehmansCompensationCommitteeMet
OnSeptember12,2008,at5:00p.m.,LehmansCompensationCommitteehelda
telephonic meeting.255 The purpose of the meeting was to discuss how benefits to
Jeremy M. Isaacs, CEO of LBIE, Andrew J. Morton, Lehmans Global Head of Fixed
Income,andBenoitSavoret,ChiefOperatingOfficerofLBIE,wouldbehandledinthe
event of Lehmans sale or bankruptcy.256 The Committee authorized separation
agreements with those three employees.257 The Committee also approved minimum
compensation for Gerald Domini, who was the new global head of Equities, and

251Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (Sept. 12, 2008), at p. 2

[LBEXAM003920].
252Id.
253ExaminersInterviewofHarveyR.Miller,Apr.23,2009,atp.5.
254Id.
255LehmanBrothersHoldingsInc.,MinutesoftheCompensationandBenefitsCommittee(Sept.9,2008),
atp.1[LBEXAM003922].
256Id.
257Id.atp.2.

46


discussed the compensation package for Eric Felder, who was the new head of
LehmansFixedIncomeDivision.258SirChristopherGent,aLehmandirector,toldthe
Examinerthatthepointofthemeetingwastoclarifyforthoseindividualswhatwould
happen if Lehman was sold or filed bankruptcy, even if the approved plans never
wouldbeexecuted.259
F. CitiAmendeditsClearingAgreement
On September 12, 2008, Citi and Lehman agreed to an amendment to their
ClearingAgreement,whichstrengthenedCitislienoverLBIspropertyatCiti.260
G. LehmanPosted$5BillioninCashtoJPMorgan
Following JPMorgans request the previous day, Lehman delivered the full $5
billioncashcollateraltoJPMorganonFriday,September12,2008.261
H. LiquidityPool
BytheendofthedayonSeptember12,2008,Lehmancalculatedthatithadless
than$2billionremainingofeasilymonetizedliquidassets.262

258Id.atpp.23.
259ExaminersInterviewofSirChristopherGent,Oct.21,2009,atp.27.
260Citibank,DirectCustodialServicesAgreementDeed(Sept.12,2008)[CITILBHIEXAM00005903].
261SeeemailfromChristopherD.Carlin,JPMorgan,toBarryL.Zubrow,JPMorgan,etal.(Sept.12,2008)

[JPM2004 0033002] (At 1130 EDT current balance in the Lehman Holding Co account is 4 billion 450
million vs the target 5 billion.); email from Christopher D. Carlin, JPMorgan, to Barry L. Zubrow,
JPMorgan,etal.(Sept.12,2008)[JPM20040050902](Last550millionreceivedfromCitiat1:26PMNY
time...balanceintheLehmanHoldingcoaccountisnowat5billion....);seealsoemailfromPaoloR.
Tonucci, Lehman, to Ian T. Lowitt, Lehman (Sept. 12, 2008) [LBEXDOCID 4050567] (JP should have
their$5bn.).
262Lehman,AbilitytoMonetizeChart(Sept.12,2008)[LBEXWGM784607].

47


IX.

SEPTEMBER13,2008
AtthenoonBoardofDirectorsmeetingonSaturday,September13,2008,Russo

toldtheBoardthattheFederalReservebelievesthatanybankruptcyfilingbytheFirm
wouldbeextremelydisruptive.263Byearlyafternoonthatday,BofAendednegotiations
with Lehman and began talks with Merrill Lynch.264 Lehman continued negotiations
withBarclaysfocusedonapostSpinCotransaction.265DuringthedayonSaturday,the
FRBNYaskedBarclaystoguaranteeLehmansobligationsleadinguptothecloseofthe
transaction. The requirement of the guaranty would have required Barclays
shareholders to approve the transaction.266 Nonetheless, on Saturday night Fuld
believedthatLehmanhadadealwithBarclays.267
A. NegotiationswithBofAFailed
OnthemorningofSaturday,September13,2008,LewisheardthatPaulsonhad
said that the Government would be unwilling to intervene to save Lehman.268 Lewis
contacted Paulson to make it clear that without sufficient Government assistance to
balance out the unwanted Lehman assets, BofA would not do a deal.269 Paulson told

263Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (Sept. 13, 2008), at p. 2

[LBEXAM003927].
264ExaminersInterviewofKennethD.Lewis,Sept.24,2009,atp.7;ExaminersInterviewofHenryM.
Paulson,Jr.,June25,2009,atp.19;ExaminersInterviewofGregoryL.Curl,Sept.17,2009,atp.1112.
265ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.8.
266FSA,StatementoftheFSA(Jan.20,2010),39.
267ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.9.
268ExaminersInterviewofKennethD.Lewis,Sept.24,2009,atp.6.
269Id.

48


LewisthattheGovernmentwouldnotprovidetaxpayermoney,buthealsosaidthathe
wantedtoreconvenewithBofAlaterinthedaytodiscussotheroptions.270
OnSaturdayafternoon,withoutinforminganyoneatLehman,BofAbegantalks
withMerrillLynchaboutapotentialmerger.271LewistoldtheExaminerthatthedeal
between BofA and Merrill did not interfere with any potential BofA deal with
Lehman,272 because by the time Merrill Lynch approached BofA, BofA had concluded
that a deal with Lehman was unlikely.273 BofA already had brought its due diligence
teamhome.274
FuldcontinuedtocallLewisthroughoutthedayonSaturdaywithoutgettinga
response.275Atsomepointlaterintheday,LewiswifeansweredandtoldFuldthatif
her husband wanted to talk to Fuld, Lewis would return the call.276 Lewis told the
Examiner that he did not take Fulds calls because Lewis did not think Fuld was in a
positiontohelpmovethetransactionforward.277
B. BarclaysDiscussionsContinued
On Saturday, September 13, 2008, Lehman and Barclays discussed a potential
deal that Fuld described as life after SpinCo because the contemplated deal did not

270Id.;ExaminersInterviewofGregoryL.Curl,Sept.17,2009,atp.11.
271ExaminersInterviewofKennethD.Lewis,Sept.24,2009,atp.7.
272Id.
273Id.
274Id.
275ExaminersInterviewofRichardS.Fuld,Jr.Apr.28,2009,atp.7.
276Id.
277ExaminersInterviewofKennethD.Lewis,Sept.24,2009,atp.6.

49


include a purchase by Barclays of commercial real estate assets.278 During the day,
Barclays advised the FSA that the FRBNY had asked Barclays to guarantee Lehmans
obligations leading up to the close of the transaction.279 That guaranty would survive
even if the transaction failed and it would make Barclays responsible for Lehmans
existingandnewbusinessupuntilthetimethetransactionfailed.280Lateinthedayin
theUnitedKingdom,VarleyadvisedSantsthatbecauseoftheguaranty,itwasunlikely
thatadealstructurecouldbefoundthatwouldsatisfyBarclaysboard.281
OnSaturdayinNewYork,McDade,KirkandCohentoldFuldthattheapproval
oftheFSAwouldnotbeanissue.282FuldreportedtotheBoardonSaturdayafternoon
that Barclays had offered to purchase the operating subsidiaries of Lehman for $3
billion and that Barclays would guarantee Lehmans debt.283 Under the proposal,
Lehman would receive the cash and would retain its commercial real estate assets,
minority investments in hedge fund managers and limited partnership interests in
Lehmansponsoredprivateequityfunds.284

278ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.8.
279FSA,StatementoftheFSA(Jan.20,2010),39.
280Id.
281Id.40.
282ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.9.
283Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (Sept. 13, 2008), at p. 1

[LBEXAM003929].
284Id.

50


AlsoonSaturday,BarclaysreachedouttoBuffetttoaskwhetherBuffettwould
guarantee Lehmans operations until a LehmanBarclays deal closed.285 Barclays and
Buffett discussed a scenario in which Buffett would provide a guaranty in support of
the deal.286 Buffett expressed interest in that possibility, but Barclays were not able to
reachBuffetttofurtherpursuethatpossibility.287
C. FRBNYInformedThatBankruptcyPlanningWasSkeletal
On Saturday, September 13, 2008, Weils Miller told Cleary Gottliebs Bromley
and six or seven senior people from the FRBNY that Weil had not undertaken any
serious bankruptcy preparation because the Lehman financial people were consumed
withpotentialdealsandthereforeunavailabletothelawfirm.288Weilsbillingrecords
from Saturday related to bankruptcy work reflect numerous phone conferences with
Lehmanemployeesinpreparationforbankruptcyfilings.289AccordingtoMiller,Weil
preparedskeletaltemplatedocuments,andWeilwasonwatchjustastheyhadbeen
withBearStearns.290

285ExaminersInterviewofWarrenE.Buffett,Sept.22,2009,atpp.45.
286Id.
287Id.
288ExaminersInterviewofHarveyR.Miller,Apr.23,2009,atp.6.
289SeeWeilGotshal&Manges,LLP,TimeRecords(Sept.13,2008),atp.2[LBEXWGM1146447].
290ExaminersInterviewofHarveyR.Miller,Apr.23,2009,atp.6.

51


X.

SEPTEMBER14,2008
On Sunday, September 14, 2008, the FSA refused to waive the shareholder

approvalrequirementfortheBarclaysdeal,effectivelyendingthenegotiations.291Fuld
reachedouttoMorganStanleytonoavail.292Duringtheafternoon,Fuldlearnedabout
what he described as the rule of insolvency in the United Kingdom, which Fuld
understoodtomakeoperatingabusinesswhileinsolventillegal.293Duringtheday,the
FRBNY expanded access to its Primary Dealer Credit Facility (PDCF) window but
Lehmanwastolditwasineligibleforthewindow.294RepresentativesoftheFRBNYtold
LehmanrepresentativesthatLehmanneededtodeclarebankruptcy.295DuringaBoard
meeting that evening, SEC Chairman Christopher Cox and other Government
representatives again pressed Lehman to file a bankruptcy petition.296 After that
discussion,theBoardresolvedtodeclarebankruptcy.297

291FSA,StatementoftheFSA(Jan.20,2010),43.
292ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.28.
293ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.12.AccordInsolvencyAct1986,c.45

214(U.K.)(directorsofacompanymaybepersonallyliabletomakeacontributioninsuchamountas
thecourtthinksproperunderstatutebarringwrongfultrading,ifthedirectorskneworoughttohave
concluded that there was no reasonable prospect that the company would avoid going into insolvent
liquidation.).
294ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.13.
295ExaminersInterviewofHarveyR.Miller,Apr.23,2009,atp.7.
296Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (Sept. 14, 2008), at p. 5
[LBEXAM003932].
297Id.

52


A. TheFSARefusedToWaivetheShareholderApprovalRequirementfor
theBarclaysDeal
OnSundaymorningintheUnitedKingdom,theFSAandBarclaysdiscussedthe
FRBNYs requirement that Barclays guarantee Lehmans obligations.298 The FSA
acknowledgedtheoreticallythatitcouldwaivetheshareholderapprovalrequirement.299
However,theFSAconcludedgrantingawaiverwouldrepresentacompromiseofone
of the fundamental principles of the FSAs Listing Regime because no precedent
existed.300DuringtheearlyafternoonintheUnitedKingdom,GeithnerspokewithFSA
Chairman McCarthy, reiterating the FRBNYs requirement of a guaranty and
suggesting that the urgency of the situation required a waiver of the shareholder
approval requirement.301 Later that afternoon, Cox contacted McCarthy to discuss
waivingtheshareholderapprovalrequirement.302McCarthycitedthelackofprecedent
forsuchawaiverandnotedthatBarclayshadyettosubmitaformalproposalforthe
FSAsreviewofthedeal.303By4:00p.m.intheUnitedKingdom,Varleyinformedthe
FSAthatdiscussionshadceased.304
Lehmansmanagement had scheduled a Board meeting for noon on September
14, 2008, but delayed the meeting until 5:00 p.m. in order to try to come to some

298FSA,StatementoftheFSA(Jan.20,2010),43.
299Id.
300Id.
301Id.4647.
302Id.54.
303Id.
304Id.56.

53


resolutionattheFRBNYmeetings.305AtsomepointonSunday,PaulsontoldFuldthat
the FSA would not waive the requirement that a guaranty of Lehmans obligations
required the approval of Barclays shareholders, and therefore the FSA would not
approvetheBarclaysdeal.306FuldaskedPaulsontocallPrimeMinisterGordonBrown,
butPaulsonsaidhecouldnot.307FuldaskedPaulsontoaskPresidentBushtocallPrime
MinisterBrown,butPaulsonsaidhewasworkingonotherideas.308Fuldbrainstormed
aboutothermeanstocontactandconvincetheFSAtopermitthedeal,includinghaving
JebBush,whowasanadvisortoLehmanatthetime,askPresidentBushtocallPrime
MinisterBrown.309
B. LehmanReachedOuttoMorganStanley
Fuld again reached out to Morgan Stanleys Mack on Sunday, September 14,
2008,becauseLehmanwasinatoughspot.310Macksaidtherewastoomuchgoingon
forMorganStanleytoconsideradealwithLehman.311
C. FuldLearnedAbouttheUnitedKingdomsRuleofInsolvency
SometimeduringtheafternoononSeptember14,2008,Fuldlearnedaboutwhat
hedescribedastheruleofinsolvencyintheUnitedKingdomwhichFuldunderstood
tomakeoperatingabusinesswhileinsolventillegal.312

305ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.9.
306Id.
307Id.
308Id.
309Id.atp.10.
310ExaminersInterviewofRichardS.Fuld,Jr.,Sept.30,2009,atp.28.
311Id.

54


D. FRBNY
1.

WallStreetConsortiumAgreedtoProvide$20BilliontoFacilitate
BarclaysAcquisitionofLehman

On Sunday, September 14, 2008, the consortium of banks assembled at the


FRBNYagreedtoprovideatleast$20billioninprivatefinancingtoliquidateLehmans
badassetsinordertoassistBarclayspurchaseofLehman.313
2.

LehmanDevelopedaPlanforanOrderlyLiquidation

On September 14, the FRBNY made clear that, with the potential Barclays deal
dead,itwouldnolongerkeepfundingLehman.314JamesP.Seery,Jr.,LehmansGlobal
HeadofFixedIncomeLoanBusiness,andothersatLehmanthenstartedworkingon
anorderlyliquidationplanforLehman.315Theplancontemplatedthatitwouldtake
sixmonthstoeffectanorderlyunwindingofLehmanspositions.316Duringthattime,
Lehman would have to continue to employ a substantial number of people, and pay
bonuses to keep them.317 The plan also assumed that the FRBNY would provide
financingsupportthroughthewinddownprocess.318Allworkontheliquidationplan

312ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.12.AccordInsolvencyAct1986,c.12,

214(U.K.)(directorsofacompanymaybepersonallyliabletomakeacontributioninsuchamountas
thecourtthinksproperunderstatutebarringwrongfultrading,ifthedirectorsknew,oroughttohave
concludedthattherewasnoreasonableprospectwouldavoidgoingintoinsolventliquidation).
313ExaminersInterviewofHenryM.Paulson,Jr.,June25,2009,atp.18.SeeSectionIII.A.6oftheReport,
whichdiscussestheconsortiumingreaterdetail.
314ExaminersInterviewofJamesP.Seery,Jr.,November12,2009,atpp.12.
315Id.atp.2.
316Id.
317Id.
318Id.

55


came to a halt when word circulated that the Government had told Lehman that
Lehmanwouldneedtofilebankruptcythatevening.319
3.

SundayMeetingsattheFRBNY

By the early afternoon of Sunday, September 14, 2008, Miller learned that
discussions were not going well for Lehman at the FRBNY.320 Miller, and other Weil
attorneys, Dannhauser, Thomas A. Roberts and Lori Fife went to the FRBNY to
representLehman.321OnthewaytotheFRBNYmeeting,Robertsreceivedacallfrom
anotherWeilattorneysayingthatCitihadbeentoldthatLehmanwasbeingliquidated
andrequestingthatWeilGotshalrepresentCiti.322
4.

TheFRBNYExpandedthePDCFWindow

OnSeptember14,2008,theFRBNYissuedapressreleasethatstatedthat[t]he
collateraleligibletobepledgedatthePrimaryDealerCreditFacility(PDCF)hasbeen
broadened to closely match the types of collateral that can be pledged in the triparty
reposystemsofthetwomajorclearingbanks.323Lehmansoonlearnedthatitwasnot
eligibletousethewindowtocontinueitsnormaloperations.324TheFRBNYlimitedthe
collateral LBI could use for overnight financing to collateral that was in LBIs box at

319ExaminersInterviewofJamesP.Seery,Jr.,Nov.12,2009,atp.2;ExaminersInterviewofRichardS.

Fuld, Jr., Apr. 28, 2009, atp. 1213; Examiners Interview of Harvey R. Miller,Apr. 23, 2009, at pp. 78;
ExaminersInterviewofScottAlvarez,Nov.12,2009,atp.8.
320ExaminersInterviewofHarveyR.Miller,Apr.23,2009,atp.7.
321Id.
322Id.
323FRBNY,PressRelease(Sept.14,2008),availableat
http://www.federalreserve.gov/newsevents/press/monetary/20080914a.htm(lastvisitedJan.24,2010).
324ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.13.

56


JPMorgan as of Friday, September 12, 2008.325 That restriction was referred to as the
Fridaycriteri[on].326
Inaddition,theFRBNYimposedlargerhaircutsonLBIsPDCFborrowingthanit
didonotherinvestmentbanks.327ThehaircutsimposedonLBIsPDCFborrowingwere
largerthanunderLehmansprebankruptcytripartyborrowing.328
In connection with Lehmans preparations to file the LBHI chapter 11 petition,
theFRBNY,actingasalenderoflastresort,advisedLehmanthatitwouldprovideup

325Examiners Interview of Robert Azerad, Apr. 20, 2009, at p. 5; Examiners Interview of Christopher

Burke, July 7, 2009, at p. 3. An experimental allocation by Lehman to the PDCF on Monday morning
showed at least $72 billion of eligible Lehman securities being swept into the PDCF system; see email
fromJohnPalchynsky,Lehman,toCraigL.Jones,Lehman,etal.(Sept.15,2008)[LBEXDOCID076981].
SeealsoLehman,PDCFScheduleofEligibleSecurities(Sept.14,2008)[LBEXDOCID405695].
326Examiners Interview of Robert Azerad, Apr. 20 2009, at p. 5; Examiners Interview of Christopher
Burke, July 7, 2009, at p. 3. According to Azerad, this restriction prevented Lehman from posting the
range of collateral to the PDCF that other firms were allowed to post after September 15, 2008.
Examiners Interview of Robert Azerad, Apr. 20 2009, at p. 5; see also email from Timothy Lyons,
Lehman,toIanT.Lowitt,Lehman(Sept.14,2008)[LBEXDOCID070210](statingthefedislettingthe
othereighteenbrokerdealersfundamuchbroaderrangeofcollateralthanus).
327Examiners Interview of Christopher Burke, July 7, 2009, at p. 3. See also email from Ricardo S.
Chiavenato, JPMorgan, to Christopher D. Carlin, JPMorgan, et al. (Sept. 15, 2008) [JPM2004 0055329].
AccordExaminersInterviewofRobertAzerad,Apr.20,2009,atp.5.AccordingtoAzerad,theFRBNY
imposed the wider haircuts on Lehman because the FRBNY was not willing to take any losses in its
overnightfinancingofLehman.Id.
328SeeemailfromGeorgeV.VanSchaick,Lehman,toJohnFeraca,Lehman,etal.(Sept.15,2008)[LBEX
DOCID077028](discussingthelargerhaircutsimposedbytheFRBNYonLehmansPDCFborrowing);e
mail from Robert Azerad,Lehman, to Susan McLaughlin, Lehman, et al.(Sept.15,2008) [LBEXDOCID
457643] (explaining the PDCF haircuts would result in a $4 billion drain in liquidity . . .). See also
Lehman,PDCFScheduleofEligibleSecurities(Sept.14,2008)[LBEXDOCID405695](detailingthePDCF
haircuts applied to Lehman for the various categories of accepted securities); email from Ricardo S.
Chiavenato,JPMorgan,toChristopherD.Carlin,JPMorgan,etal.(Sept.15,2008)[JPM20040055329].But
see email from Sindy Aprigliano, Lehman, to Paolo R. Tonucci, Lehman, et al. (Sept. 15, 2008) [LBEX
DOCID068353](statingthehaircutimpactfromusingthePDCFwoulddecreaseto$2billion).

57


to two weeks of overnight secured financing through the PDCF329 to allow LBI to
accomplishanorderlyliquidation.330
5.

TheFRBNYDirectedLehmantoFileforBankruptcy

FuldtoldtheExaminerthatonSundayafternoon,ErikR.Sirri,headoftheSECs
CSEprogram,calledFuldandaskedhimtopromise[Sirri]onething,whichwasthat
Lehman would not file for bankruptcy protection.331 Not long after that conversation
withSirri,McDadecalledFuldfromthemeetingattheFRBNYtotellhimthattheFed
has just mandated that we file for bankruptcy.332 At the FRBNY, Baxter said that
Lehmanneededtofilebymidnightthatnight.333MillerrespondedtoBaxtersstatement
by asking why and objecting that the filing could not happen by midnight.334 Miller
said that a Lehman bankruptcy would bring great destabilization in the market,
bring trading to a halt, and result in financial Armageddon.335 The Government
representativesreplywasthattheissuehadbeendecidedandtherewerecarsavailable
totaketheLehmanpeoplebacktotheiroffices.336

329AccordingtoChristopherBurke,thePDCFwascreatedinMarch2008topermitinvestmentbanksto

obtainfinancingfromtheFed:(a)onanovernightbasis;and(b)usingabroaderrangeofcollateralthan
was eligible under Open Market Operations (OMO) and Term Securities Lending Facility (TSLF).
ExaminersInterviewofChristopherBurke,July7,2009,atp.3.
330ExaminersInterviewofShariD.Leventhal,Apr.30,2009,atpp.45.SomeFedemployeesthoughtthe
Fedwasriskingtoomuchexposurewiththetwoweekfundingtimeframe.Id.at5.
331ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.12.
332Id.
333ExaminersInterviewofHarveyR.Miller,Apr.23,2009,atp.7.
334Id.
335Id.
336Id.atp.8.

58


E. LehmanSuggestedaSaleinBankruptcytoBarclays
Atabout6:00p.m.onSunday,September14,ShapirowenttoMcDadesofficeto
make sure [McDade] understood that Lehman could sell itself to Barclays in
bankruptcy.337
Shapiro recommended to McDade that they see whether Barclays would be
willingtopurchaseLehman,inwholeorinpart,throughasaleunderSection363ofthe
Bankruptcy Code.338 McDade called Diamond to discuss the idea.339 Barclays was
interestedandsuggestedthatLehmanhaveateamreadytomeetwithBarclaysteam
earlyMondaymorning.340
F. TheSeptember14,2008BoardMeeting
Lehmans management scheduled a Board meeting for noon on Sunday,
September 14, 2008, but delayed the meeting until 5:00 p.m. in light of the FRBNY
meetings.341TheBoardmeetingreconvenedat7:50p.m.342AstheBoardwasmeeting,

337TranscriptofdepositiontestimonyofMarkJ.Shapiro,InreLehmanBrothersHoldingsInc.,No.0813555

(Bankr. S.D.N.Y., Aug. 7, 2009), at p. 16. Shapiro had not been involved in the previous negotiations
betweenLehmanandBarclays;hehadbeenpreparingforapossiblebankruptcyfiling.Id.atpp.1415.
338Id.atp.18.Section363oftheBankruptcyCode,amongotherthings,authorizesadebtortosellestate
propertyoutsidetheordinarycourseofbusiness.11U.S.C.363(2006).
339TranscriptofdepositiontestimonyofMarkJ.Shapiro,InreLehmanBrothersHoldingsInc.,CaseNo.08
13555 (Bankr. S.D.N.Y., Aug. 7, 2009), at pp. 1617; Transcript of deposition testimony of Herbert H.
McDade,III,InreLehmanBrothersHoldingsInc.,CaseNo.0813555(Bankr.S.D.N.Y.,Sept.2,2009),atp.6;
TranscriptofdepositiontestimonyofRichardRicci,InreLehmanBrothersHoldingsInc.,CaseNo.0813555
(Bankr.S.D.N.Y.,Sept.8,2009),atpp.1819;TranscriptofdepositiontestimonyofJerryDelMissier,Inre
LehmanBrothersHoldingsInc.,CaseNo.0813555(Bankr.S.D.N.Y.,Sept.1,2009),atpp.4243.
340TranscriptofdepositiontestimonyofMarkJ.Shapiro,InreLehmanBrothersHoldingsInc.,CaseNo.08
13555(Bankr.S.D.N.Y.,Aug.7,2009),atp.20.
341ExaminersInterviewofRichardS.Fuld,Jr.,Apr.28,2009,atp.9.

59


Cox, Baxter and other Government representatives called and asked to address the
Board.343 Baxter said the call was arranged at the request of Paulson and Geithner.344
PaulsonsaidheurgedCoxtocallLehmanbecauseCoxwashavingahardtimeactually
communicating the decision by the Government that Lehmans bankruptcy was the
appropriatecourse.345
TheGovernmentrepresentativesonthecallincludedSECgeneralcounselBrian
Cartwright and Allen Beller of Cleary, Gottlieb, who was representing the Treasury
Department.346 According to Baxter, the purpose of the call was to emphasize that a
bankruptcy filing by LBHI made sense but that the ultimate decision was for the
Board.347 Baxter told the Examiner that he made the point that opening on Monday
wasnotanoptionbecauseofthechaosinthemarkets.348
The Boards initial reaction to the Governments call suggesting that Lehman
declare bankruptcy was anger.349 The Board discussed the advantages and

342Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (Sept. 14, 2008), at p. 5

[LBEXAM003932].
343Id.
344ExaminersInterviewofThomasC.Baxter,Jr.,May20,2009,atp.11.
345ExaminersInterviewofHenryM.Paulson,Jr.,June25,2009,atp.21.
346LehmanBrothersHoldingsInc.,MinutesofMeetingofBoardofDirectors(Sept.14,2008)[LBEXAM
003932].
347ExaminersInterviewofThomasC.Baxter,Jr.,May20,2009,atp.11.
348ExaminersInterviewofHenryM.Paulson,Jr.,June25,2009,atp.21.
349Examiners Interview of John F. Akers, Apr. 22, 2009 at p. 13; Examiners Interview of Jerry A.
Grundhofer,Sept.16,2009,atp.16.

60


disadvantages of a bankruptcy filing.350 It also discussed whether a delay in filing
would allow time to plan and prepare Lehman to operate under Chapter 11 and
prepare a more complete filing.351 Miller, who was then Lehmans lead bankruptcy
counsel,toldtheExaminerthathedidnotthinktherushedfilinghadanadverseimpact
on the estate.352 The Board felt at the time that one important consideration was the
anticipated difficulty in meeting payment obligations on Monday.353 The Board
questionedwhetherasubstantial amountofthecollateralpledgedtoJPMorgan could
berecoveredpriortofiling.354TheBoardalsonotedtheGovernmentsclearpreference
thatLehmanfilethatnight,theFRBNYsunwillingnesstoprovidesufficientfinancing
for Lehman and the ultimate inevitability of a bankruptcy filing under the
circumstances.355 Lehman director Henry Kaufman was a proponent of calling the
Governments bluff and opening on Monday,356 but ultimately the Board concluded
thatfilingforbankruptcyimmediatelywastheappropriatecourseofaction.357

350Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (Sept. 14, 2008), at p. 4

[LBEXAM003932].
351Id.
352ExaminersInterviewofHarveyR.Miller,Apr.23,2009,atp.9.
353Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (Sept. 14, 2008), at p. 5
[LBEXAM003932].
354Id.
355Id.
356ExaminersInterviewofHenryKaufman,Sept.2,2009,atp.19.
357Lehman Brothers Holdings Inc., Minutes of Meeting of Board of Directors (Sept. 14, 2008), at p. 5
[LBEXAM003932].

61


XI.

SEPTEMBER15,2008

IntheearlyhoursofMonday,September15,2008,WeilGotshalbeganfilingfor
bankruptcy.358Laterthatmorning,aftersomeconfusion,JPMorganagreedtocontinue
clearing for Lehman.359 During the course of the day, Lehman renewed discussions
withBarclaysregardingaSection363saleinLehmansbankruptcycase.360
A. LehmanFiledforBankruptcyProtection
After discussion, upon a duly made and seconded motion, the Board
unanimously resolved to file for bankruptcy protection under Chapter 11 of the
Bankruptcy Code.361 Weil Gotshal filed around 1:30 a.m. on Monday, September 15,
2008.362
B. JPMorgansClearingActivities
Over Sunday night and into Monday morning, JPMorgan became concerned
aboutLehmansrequestsforJPMorgantoreleaseLehmancollateral.363JPMorganused
theLehmancollateraltosecurenonintradayriskandJPMorgansextensionofintraday

358ExaminersInterviewofHarveyR.Miller,Apr.23,2009,atp.9.
359EmailfromJaneBuyersRusso,JPMorgan,toBarryL.Zubrow,JPMorgan,etal.(Sept.15,2008)[JPM

20040055008].
360TranscriptofdepositiontestimonyofHerbertH.McDade,III,InreLehmanBrothersHoldingsInc.,Case
No. 0813555 (Bankr. S.D.N.Y., Sept. 2, 2009) at p. 16; see also Transcript of deposition testimony of
MichaelKlein,InreLehmanBrothersHoldingsInc.,CaseNo.0813555(Bankr.S.D.N.Y.Sept.12,2009),at
pp.3839.
361LehmanBrothersHoldingsInc.,MinutesofMeetingofBoardofDirectors(Sept.14,2008)[LBEXAM
003936].
362ExaminersInterviewofHarveyR.Miller,Apr.23,2009,atp.9.
363SeeemailfromBarryL.Zubrow,JPMorgan,toHeidiMiller,JPMorgan,etal.(Sept.15,2008)[JPM2004
0029745]. See Section III.C.6 of the Report which discusses JPMorgans confusion over what trades to
settleforLehmanonSeptember15,2008ingreaterdetail.

62


credittoLehman.JPMorganwasunwillingtoreleaseLehmancollateralifsuchaction
would leave JPMorgan undercollateralized. On that Monday morning, however,
JPMorganemailssuggestthatJPMorganheldexcessLehmancollateral,and,according
to those emails, JPMorgan denied to Lehman that JPMorgan held any such excess
Lehman collateral.364 By 8:50 a.m. on Monday morning, Lehmans triparty borrowing
was unwound.365 By midmorning on Monday, the confusion was resolved, and
JPMorganclarifieditspositionthatJPM[would]continuetoactastheoperatingbank
for[LBI]whichinclude[d]beingsettlementbankforthevariousexchangesandthefed
wire....butlimiteditsaggregateexposureto$1billion.366
C. TheFRBNYsLimitationonAcceptableCollateral
OnSeptember15,2008,theFRBNYconfirmedthatassetspricedbyLehmanwere
acceptable for the PDCF.367 Following Lehmans bankruptcy, Lehman relied on the
PDCF for approximately $30 billion in overnight financing it needed to repay its

364SeeemailfromHeidiMiller,JPMorgan,toJamieL.Dimon,JPMorgan,etal.(Sept.15,2008)[JPM2004

005440203](AllweneedtotalkthismorningaboutthecallsLeh[man]hasbeenmakingabouthaving
usreturnaportionofourexcesscollateralto[LBHI].Wehavetakenthepositionthatthe[re]isnoexcess
buttheyhavenotyetacceptedthat.WeshouldmakesureourstatementsareconsistentsinceIamsure
youwillsoongetcalledaswell).
365SeeemailfromEdCorral,JPMorgan,toBarryL.Zubrow,JPMorgan,etal.(Sept.15,2008)[JPM2004
0054618].
366EmailfromJaneBuyersRusso,JPMorgan,toBarryL.Zubrow,JPMorgan,etal.(Sept.15,2008)[JPM
20040055008].
367SeeemailfromJohnN.Palchynsky,Lehman,toGeorgeV.VanSchaick,Lehman,etal.(Sept.15,2008)
[LBEXDOCID 118677] (stating JPMorgan had received oral confirmation from the Fed that Lehman
priced assets were acceptable for the PDCF). See also email from Ed Corral, JPMorgan, to Marco
Brandimarte, JPMorgan (Sept. 15, 2008) [JPM2004 0054468] (stating he believed the Fed had agreed to
permitsellerpricedsecuritiesinthePDCF).

63


clearing banks.368 In addition to Lehmans PDCF borrowing, Lehman also funded its
operations after the bankruptcy filing through two additional FRBNY programs, the
OpenMarketOperations(OMO)andtheTermSecuritiesLendingFacility(TSLF),369
andtripartytermreposthathadnotyetexpired.370TheFRBNYsovernightfinancing
of LBI began Monday evening, September15, with Lehman borrowing approximately
$28 billion via the PDCF,371 and continued through Thursday morning, September 18,
2008.372
D. NegotiationsBetweenLehmanandBarclays
Postbankruptcy negotiations between Barclays and Lehman began with a
telephone call early Monday morning between McDade, McGee and Shafir, Lehmans

368SeeemailfromDavidWeisbrod,JPMorgan,toJamieL.Dimon,JPMorgan,et.al.(Sept.15,2008)[JPM

2004 0080146] (listing Lehmans triparty repo borrowing at $51 billion ($28 billion from the PDCF, $2
billion from Barclays, and $21 billion from other investors) for Monday). Accord Alvarez & Marsal,
Summary of Meeting with James Hraska on 10/08/08 (Oct. 8, 2008), at pp. 14 (listing the FRBNYs
fundingofLehman(viathePDCF,OMO,andTSLF)fortheweekfollowingtheLBHIpetition).
369Examiners Interview of Christopher Burke, July 7, 2009, at p. 4; Alvarez & Marsal, Summary of
MeetingwithJamesW.Hraskaon10/08/08(Oct.8,2008),atpp.14.
370See email from David A. Weisbrod, JPMorgan, to Jamie L. Dimon, JPMorgan, et. al. (Sept. 15, 2008)
[JPM2004 0080146] (listing $21 billion in mainly term repos as part of LBIs triparty borrowing for
September15).
371See email from Ed Corral, JPMorgan, to William Walsh, JPMorgan, et al. (Sept. 15, 2008) [JPM2004
0031195](notifyingtheFedthattheLehmanassetsusedinLBIs$28billionPDCFrepoonMondaynight
satisfied the Friday criterion). Earlier on Monday, Lehman estimated that it would borrow up to $35
billion through the PDCF on Monday night. See email from Sindy Aprigliano, Lehman, to Robert
Azerad,Lehman(Sept.15,2008)[LBEXDOCID1071653](providingFeracasPDCFestimateof$27billion
plus a buffer of $8 billion); email from Robert Azerad, Lehman, to Susan McLaughlin, Lehman, et al.
(Sept.15,2008)[LBEXDOCID071550](estimating$34billionofPDCFborrowing);emailfromPaoloR.
Tonucci,Lehman,toSusanMcLaughlin,Lehman,etal.(Sept.15,2008)[LBEXDOCID071550](estimating
$28.3billionforthecollateralvalueofthePDCFborrowing).
372ExaminersInterviewofRobertAzerad,Apr.20,2009,atp.5.

64


Global Head of Mergers and Acquisitions, for Lehman, and Diamond, Christian del
MessierandMichaelKleinforBarclays.373
Duringthatcall,DiamondexpressedconcernaboutwhetherBarclayswouldbe
buying an intact business, given the media reports about Lehman employees leaving
the headquarters building in droves.374 The Lehman executives responded that they
wereconfidentthat,ifthedealwasdonequicklyenough,theycouldkeepalargepart
ofthebusinesstogetheranddeliverittoBarclays.375.

373TranscriptofdepositiontestimonyofHerbertH.McDade,III,InreLehmanBrothersHoldingsInc.,Case

No. 0813555 (Bankr. S.D.N.Y., Sept. 2, 2009), at p. 16; see also Transcript of deposition testimony of
MichaelKlein,InreLehmanBrothersHoldingsInc.,CaseNo.0813555(Bankr.S.D.N.Y.,Sept.12,2009),at
pp.3839.
374TranscriptofdepositiontestimonyofHerbertH.McDade,III,InreLehmanBrothersHoldingsInc.,Case
No.0813555(Bankr.S.D.N.Y.,Sept.2,2009),atp.17.
375Id.SeeSectionIII.C.6.coftheReport,whichdiscussespostbankruptcynegotiationsingreaterdetail.

65

APPENDIX16:VALUATIONRESIDENTIALWHOLELOANS
Appendix 16 provides Lehmans detailed pricing data regarding residential
whole loans (RWL) and the Intex output used to calculate the Examiners model
pricesforRWLdiscussedintheReportatSectionsIII.A.2.g.Thisanalysiswasprepared
byDuff&Phelps,theExaminersfinancialadvisor.
Minimum,MaximumandWeightedAverageofDeskPricesforLehmansU.S.RWL
PortfolioasofMay31,20081

Type/Category
Performing

FHA/VA

HighLTV

HomeExpress

NegAm

PrimeFixed

PrimeHybridArms

ReverseMortgages

Scratch&Dent

Subprime

Subprime2nds
NonPerforming

FHA/VA

HighLTV

HomeExpress

NegAm

PrimeFixed

PrimeHybridArms

Scratch&Dent

Subprime

Subprime2nds
Total

Numberof
Loans

Balance
(US$million)

Minimum
DeskPrice

Maximum
DeskPrice

Weighted
AverageDesk
Price

1,999
129
12
594
2,532
4,188
4,104
1,724
2,052
15,434

154.0
24.5
1.3
228.5
456.0
1,229.7
618.1
157.7
87.5
656.4

88.4
99.1
0.7
60.1
0.7
0.1
93.7
0.5
1.4
1.4

1,389
2
2
49
215
430
2,361
1,361
6,357
44,934

111.9
0.1
0.2
15.3
38.7
130.5
225.0
77.9
229.0
4,442.3

94.1
100.0
95.4
60.1
59.3
0.1
0.5
27.9
0.6
0.1

102.5
105.5
105.0
95.6
104.1
110.9
104.2
99.9
101.0
106.7

102.6
101.6
100.7
103.2
102.3
105.4
74.4
100.0
94.6
110.9

1Lehman,New053008WLTesting.xls,tabWLTestingSummary[LBEXBARFID0006698].

99.9
100.3
95.7
93.8
84.1
93.3
99.2
44.3
55.4
74.3
98.5
100.7
99.8
75.2
69.1
82.1
42.8
48.4
50.3
76.7


Minimum,MaximumandWeightedAverageofDeskPricesforLehmansRWL
PortfolioasofAugust31,20082
Type/Category

Performing

FHA/VA

HighLTV

HomeExpress

NegAm

PrimeFixed

PrimeHybridArms

ReverseMortgages

Scratch&Dent

Subprime

Subprime2nds

Intl.ResortHome
Lending
NonPerforming

FHA/VA

HighLTV

HomeExpress

NegAm

PrimeFixed

PrimeHybridArms

Scratch&Dent

Subprime

Subprime2nds
Total

Number
ofLoans

Balance
(US$million)

492
77
11
534
1,584
2,098
4,267
1,182
1,880
14,226
28

923
2
2
95
432
1,380
1,680
1,052
5,652
37,597

Minimum
DeskPrice

46.6
15.2
0.9
159.8
253.4
402.2
648.3
90.1
56.6
382.9
7.7

70.8
0.1
0.2
27.9
72.0
261.2
141.3
52.3
114.4
2,804.0

WeightedAverage
DeskPrice

80.7
99.1
0.7
57.4
44.4
46.0
92.6
0.0
1.4
0.0
99.4

102.1
106.7
106.0
92.6
101.9
107.5
104.6
65.2
101.0
64.2
100.6

95.7
101.8
68.6
72.5
69.3
61.4
97.5
40.8
41.0
47.2
99.5

80.7
100.0
94.9
57.4
44.4
46.0
0.0
0.3
0.0
0.0

101.3
101.5
96.7
92.5
103.5
105.5
65.2
100.0
61.8
107.5

98.8
100.6
95.2
70.2
70.3
62.7
40.4
37.5
30.0
60.3

2Lehman,082908WLpopulationtesting.xls[LBEXLL1875677].

Maximum
DeskPrice


DesktoProductControlPriceVariancesinLehmansU.S.RWLPortfolioasof
May31,20083
Performing

Desk MarketValue
Price
Desk($)
99.9
153,964,556
100.3
24,487,002
95.7
1,275,622
93.8
228,541,687
84.1
456,043,313

PC
Price
99.0
89.0
89.0
89.0
89.0

MarketValue
Variance
Variance($)
PC($)
%
152,540,383
(1,424,173)
0.9%
21,720,084
(2,766,917)
11.3%
1,185,935
(89,687)
7.0%
216,775,393 (11,766,294)
5.1%
482,532,457
26,489,144
5.8%

FHA/VA
HighLTV
HomeExpress
NegAm
PRIMEFIXED
PrimeHybrid
Arms
93.3
1,229,652,468
89.0
1,172,384,322 (57,268,146)
Reverse
Mortgages
99.2
618,084,216 100.8
628,328,194
10,243,978
Scratch&Dent
44.3
157,878,116
49.3
175,701,281
17,823,165
Subprime
55.4
87,350,807
65.0
102,526,712
15,175,905
Subprime2nds
74.3
656,402,926
65.0
574,144,389 (82,258,537)
NonPerforming

FHA/VA
98.5
111,916,289
99.0
112,479,608
563,319
HighLTV
100.7
135,053
49.3
66,141
(68,913)
HomeExpress
99.8
230,976
49.3
114,138
(116,838)
NegAm
75.2
15,301,109
49.3
10,034,945
(5,266,164)
PRIMEFIXED
69.1
38,688,490
49.3
27,621,373 (11,067,117)
PrimeHybrid
Arms
82.1
130,492,841
49.3
78,393,892 (52,098,949)
Scratch&Dent
42.9
227,731,674
49.3
261,713,325
33,981,651
Subprime
48.2
75,111,235
49.3
76,803,363
1,692,128
Subprime2nds
50.3
229,009,341
49.3
224,429,685
(4,579,656)
Total

4,442,297,721

4,319,495,620
(122,802,101)

3Lehman,PricingPackageMay08.xls[LBEXBARFID0006591].

4.7%
1.7%
11.3%
17.4%
12.5%

0.5%
51.0%
50.6%
34.4%
28.6%
39.9%
14.9%
2.3%
2.0%
2.8%


DesktoProductControlPriceVariancesinLehmansU.S.RWLPortfolioasof
August31,20084
Performing
FHA/VA
HighLTV
HomeExpress
NegAm
PRIMEFIXED
PrimeHybridArms
ReverseMortgages
Scratch&Dent
Subprime
Subprime2nds
InternationalResort
HomeLending
NonPerforming
FHA/VA
HighLTV
HomeExpress
NegAm
PRIMEFIXED
PrimeHybridArms
Scratch&Dent
Subprime
Subprime2nds
Total

Desk
MarketValue
PC MarketValue
Variance
Variance($)
Price
Desk($)
Price
PC($)
%
95.7
46,571,730 95.7
46,571,730 (0)
0.0%
101.8
15,204,055 66.3
9,900,523 (5,303,531)
34.9%
68.6
859,853 66.3
831,320 (28,533)
3.3%
72.5
159,819,347 66.3
146,180,221 (13,639,126)
8.5%
69.3
253,393,137 66.3
242,443,574 (10,949,564)
4.3%
61.4
402,167,481 66.3
434,037,761 31,870,280
7.9%
97.5
648,314,615 97.5
648,314,615 0
0.0%
40.8
90,142,670 50.3
110,944,103 20,801,433
23.1%
41.0
56,627,784 50.3
69,323,442 12,695,658
22.4%
47.2
382,920,071 50.3
407,452,063 24,531,992
6.4%
99.5

98.8
100.6
95.2
70.2
70.3
62.7
40.4
37.5
30.0

7,689,612

70,835,419
134,795
220,374
27,894,489
71,987,226
261,247,198
141,278,269
52,251,513
114,441,227

80.0

95.7
50.3
50.3
50.3
50.3
50.3
50.3
50.3
30.0

2,804,000,865

6,180,318

68,641,782
67,319
116,337
19,974,080
51,463,603
209,464,944
175,891,345
70,073,927
114,388,799

(1,509,294)

(2,193,637)
(67,475)
(104,036)
(7,920,409)
(20,523,623)
(51,782,254)
34,613,076
17,822,414
(52,428)

19.6%

3.1%
50.1%
47.2%
28.4%
28.5%
19.8%
24.5%
34.1%
0.0%

2,832,261,807 28,260,942

1.0%

4Lehman,PricingPackageAug08.xls,tabWholeLoans[LBEXBARFID0006669].


DesktoExaminerPriceVariancesinLehmansU.S.RWLPortfolioasofMay31,2008
A total of $4.4 billion of U.S. RWL assets were tested by Lehmans Product
ControlgroupandtheExaminersfinancialadvisor.Whilethereweresomesignificant
variances, the Examiners financial advisor found Lehmans valuation to be in
aggregatewithinarangeofreasonableness.Thefollowingtablecontainstheloantypes
wheretheExaminersfinancialadvisorhadasignificantvariancewithLehmanmarks.

LoanType
PrimeHybrid
ARMs
PrimeFixed
Subprime
Subprime2nds
Scratch&Dent
AltA
Total

LEH
mark

Examiners
mark

93.3
84.1
55.4
74.3
44.3
93.8

81.1
80.1
55.4
55.4
55.4
67.6

LEHMTM
($)

Examiner
MTM
($)

Difference
($)

1,229,652,468 1,067,660,105 161,992,363


456,043,313
434,279,212 21,764,102
87,350,807
87,384,305
33,498
656,402,926
489,347,679 167,055,247
157,878,116
197,441,196 39,563,080
228,541,687
164,530,088 64,011,599
2,815,869,318 2,440,642,584 375,226,733

TotalMarketValueoftestedpopulation
TotalVarianceoftestedpopulation

$4.4Billion
$375,226,733


TheExaminersfinancialadvisorsmarksaretheaverageofthepricesforthetwo
respectivedealsfromeachcategoryperthetablebelow:
LOANTYPE
PrimeHybridARMs

PrimeFixed

SubPrime

AltA

REPRESENTATIVEDEALS
SARM200802
SARM200709
Average
LMT200603
LMT200604
Average
SASCO2007BC4
SASCO2007BNC1
Average
LehmanXSTrust0710H
LehmanXSTrust200717H
Average

PRICE
80.0
82.1
81.1
79.0
81.2
80.1
54.7
56.1
55.4
66.5
68.6
67.6

As discussed in the Report at Section III.A.2.g.4.f, the assumptions used in


estimatingthepricesforeachtrancheoftherepresentativedealareasfollows:
Product
Type
Prime
AltA
Subprime

Prepayment
Rate
15%
10%
5%

Default
Rate
5%
10%
15%

LossSeverity
ResultingLosses
(1st/2ndLien)
50%/100%
Highsingledigits
50%/100%
HighteensLow20s
50%/100%
Mid30s

Yield
10%
15%
20%


TheoutputforeachofthedealswasrunthroughIntex,andtheweightingsused
toestimatethepricefromeachdealareprovidedbelow.
PrimeHybridArms(Deal1):SARM200802
Tranche
A1
A21
A22
A31
A32
R
A1X
B1
B2
B3
B4
B5
B6
A2
A3
A4
A5
AP

Cusip
86365BAA1
86365BAC7
86365BAD5
86365BAE3
86365BAF0
86365BAP8
86365BAB9
86365BAL7
86365BAM5
86365BAN3
86365BAQ6
86365BAR4
86365BAS2
86365BAG8
86365BAH6
86365BAJ2
86365BAK9
86365BAT0

Type

Coupon

SEN_SPR_FLT
SEN_SPR_WAC
SEN_SPR_WAC
SEN_SUP_WAC
SEN_SUP_WAC
SEN_WAC
SEN_WAC_IO
JUN_WAC
JUN_WAC
JUN_WAC
JUN_WAC_NO
JUN_WAC_NO
JUN_WAC_NO
SEN_SPR_WAC
SEN_SUP_WAC
SEN_SPR_WAC
SEN_SPR_WAC
JUN_PEN_NO

FloatFormula

Original Current

OriginalRating:

CurrentRating:

Moodys/S&P/Fitch/Dom

Moodys/S&P/Fitch/Dom

4.2219 LIBOR_1MO+1.75 NA/AAA/NA/AAA


6.4217
NA/AAA/NA/AAA
6.4217
NA/AAA/NA/AAA
6.4217
NA/AAA/NA/AAA
6.4217
NA/AAA/NA/AAA
6.4217
NA/AAA/NA/AAA
2.1999
NA/AAA/NA/AAA
6.4217
NA/AA/NA/AA
6.4217
NA/A/NA/A
6.4217
NA/BBB/NA/BBB
6.4217
6.4217
6.4217
6.4217
NA/AAA/NA/AAA
6.4217
NA/AAA/NA/AAA
6.4217
NA/AAA/NA/AAA
6.4217
NA/AAA/NA/AAA
0

Balance Balance
(1000s)

(1000s)

129,668
14,761
4,689
14,058
4,466

129,668
6,668
3,150
2,222
2,131
1,759
1,668
19,450
18,524
28,819
9,155
185,240

120,966
13,456
4,689
12,815
4,466

120,966
6,666
3,149
2,221
2,130
1,758
1,667
18,145
17,281
26,270
9,155
173,983

Weight

Price

70.0%
8.0%
2.5%
7.6%
2.4%
0.0%
0.0%
3.6%
1.7%
1.2%
1.2%
0.9%
0.9%
0.0%
0.0%
0.0%
0.0%
0.0%

87.4
92.2
73.9
92.2
55.2
99.3
2.3
24.6
13.7
8.9
5.3
2.3
0.0
87.8
83.3
92.2
64.8
0.0

FINALPRICE

80.0

PrimeHybridArms(Deal2):SARM200709
Tranche
1A1
1A2
1AX
M1
M2
M3
M4
M5
M6
M7
X
2A1
2A2
2AX
RII
2B1
2B2
2B3
2B4
2B5
2B6
1AP
2AP
C

CUSIP
86364JAA5
86364JAB3
86364JAC1
86364JAG2
86364JAH0
86364JAJ6
86364JAK3
86364JAL1
86364JAM9
86364JAN7
SARVW7PX0
86364JAD9
86364JAE7
86364JAF4
86364JAS6
86364JAP2
86364JAQ0
86364JAR8
86364JAT4
86364JAU1
86364JAV9
86364JAW7
86364JAX5
SARLEKMX0

Type
SEN_SPR_FLT
SEN_SUP_FLT
SEN_FLT_IO
MEZ_WAC
MEZ_WAC
MEZ_WAC
MEZ_WAC
MEZ_WAC
MEZ_WAC
JUN_WAC
JUN_OC_NO
SEN_SPR_WAC
SEN_SUP_WAC
SEN_FLT_IO
SEN_WAC_NO
JUN_WAC
JUN_WAC
JUN_WAC
JUN_WAC_NO
JUN_WAC_NO
JUN_WAC_NO
JUN_PEN_NO
JUN_PEN_NO
NPR_NPR_NO

Coupon
6
6
0.5
6.6435
6.6435
6.6435
6.6435
6.6435
6.6435
6.6435
0
5.9962
6.4928
0.4966
6.4928
6.4928
6.4928
6.4928
6.4928
6.4928
6.4928
0
0
0

OriginalRating:

CurrentRating:

Moodys/S&P/Fitch

Moodys/S&P/Fitch

NA/AAA/AAA
NA/AAA/AAA
NA/AAA/AAA
NA/AA+/AA+
NA/AA+/AA
NA/AA/AA
NA/AA/A
NA/A/A
NA/A/BBB
NA/BBB/BBB

NA/NA/A
NA/NA/BB
NA/NA/AAA
NA/NA/B
NA/NA/B
NA/NA/CCC
NA/NA/CC
NA/NA/CC
NA/NA/CC
NA/NA/C

NA/AAA/AAA
NA/AAA/AAA
NA/AAA/AAA
NA/AAA/AAA
NA/AA/NA
NA/A/NA
NA/BBB/NA

NA/NA/AA
NA/NA/BB
NA/NA/AAA
NA/NA/AAA

NA/NA/AAA
NA/NA/AAA

Original Current
Balance Balance
(1000s)

(1000s)

155,395
17,266
172,661
4,963
2,481
1,432
2,577
955
1,240
1,145
190,891
290,870
32,319
290,870

11,714
2,756
1,378
1,722
1,722
2,070
190,891
344,551

136,370
15,152
151,522
4,963
2,481
1,432
2,577
955
1,240
1,145
169,751
263,562
29,285
263,562

11,682
2,748
1,374
1,717
1,717
1,501
169,751
313,587

Weight
29.2%
3.2%
0.0%
0.9%
0.5%
0.3%
0.5%
0.2%
0.2%
0.2%
0.0%
54.7%
6.1%
0.0%
0.0%
2.2%
0.5%
0.3%
0.3%
0.3%
0.4%
0.0%
0.0%
0.0%

Price
88.4
88.4
1.1
62.9
33.1
25.4
18.9
13.9
11.1
8.3
0.0
87.3
71.1
1.2
0.0
13.0
5.7
3.8
2.4
1.0
0.0
0.0
0.0
0.0

FINALPRICE 82.1

PrimeFixed(Deal1):LMT200603
Tranche
AP
AX
2A1
2A2
R
1A1
1A2
1A3
1A4
1A5
1A6
1A7
1A8
1A9
1A10
1A11
1A12
1A13
3A1
3A2
3A3
M
B1
B2
B3
B4
B5
B6
B7

CUSIP
52520CAU9
52520CAV7
52520CAS4
52520CAT2
52520CBB0
52520CAD7
52520CAE5
52520CAF2
52520CAG0
52520CAH8
52520CAJ4
52520CAK1
52520CAL9
52520CAM7
52520CAN5
52520CAP0
52520CAQ8
52520CAR6
52520CAA3
52520CAB1
52520CAC9
52520CAW5
52520CAX3
52520CAY1
52520CAZ8
52520CBA2
52520CBC8
52520CBD6
52520CBE4

Type

Coupon

SEN_CPT_XRS_PO
SEN_CPT_NTL_IO_WAC_IO
SEN_FLT
SEN_INV_IO
SEN_RES_FIX
SEN_SPR_NAS_FIX
SEN_PAC_FIX
SEN_PAC_FIX
SEN_FIX
SEN_FIX
SEN_TAC_FLT_AD
SEN_INV_IO
SEN_FLT
SEN_INV_IO
SEN_SPR_PAC_FIX
SEN_FIX_Z_CMP
SEN_SPR_PAC_FIX
SEN_SUP_NAS_FIX
SEN_SPR_FLT
SEN_FLT
SEN_FLT_IO
JUN_WAC
JUN_WAC
JUN_WAC
JUN_WAC
JUN_WAC
JUN_WAC_NO
JUN_WAC_NO
JUN_WAC_NO

0
6
2.8219
4.6781
7.5
6
6
6
6
6
3.0719
2.9281
3.0719
2.9281
6
6
6
6
2.8219
2.8219
4.6781
6.6403
6.6403
6.6403
6.6403
6.6403
6.6403
6.6403
6.6403

FloatFormula

LIBOR_1MO+0.35
7.15LIBOR_1MO

LIBOR_1MO+0.60
5.40LIBOR_1MO
LIBOR_1MO+0.60
5.40LIBOR_1MO

LIBOR_1MO+0.35
LIBOR_1MO+0.35
7.15LIBOR_1MO

OriginalRating:

CurrentRating:

Moodys/S&P/Fitch Moodys/S&P/Fitch
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aa1/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aa2/AA+/AA+
NR/NR/AA
NR/NR/A
NR/NR/BBB
NR/NR/BBB

Aaa/NA/A
A1/NA/A
A1/NA/AAA
Aaa/NA/AAA
Aaa/NA/AAA
Aa2/NA/A
Aa2/NA/A
Aa2/NA/A
Aa2/NA/A
Aa2/NA/A
Aa2/NA/AAA
Aa2/NA/A
Aa2/NA/AAA
Aaa/NA/AAA
Aa2/NA/A
Aaa/NA/AAA
Aa3/NA/A
Aaa/NA/AAA
Aa3/NA/A
Aaa/NA/AAA
Ba3/NA/B
NR/NA/CCC
NR/NA/CC
NR/NA/C
NR/NA/C
NR/NA/C
NR/NA/C
NR/NA/NA

Original Current
Balance Balance
(1000s)

(1000s)

343
190
123,201
123,201

26,956
20,000
11,145
92,679
3,862
30,000
30,000
50,000
50,000
24,316
5,930
3,112
4,400
85,000
6,808
91,808
12,573
8,382
4,977
3,929
786
1,834
1,834
1,833

337
146
87,698
87,698

26,956
17,153
6,145
68,357
3,862
22,775
22,775
37,403
37,403
20,152
3,751
3,112
4,400
62,526
5,008
67,534
12,409
8,273
4,912
3,878
776
1,810
1,814
194

Weight

Price

0.1%
0.0%
23.5%
0.0%
0.0%
5.1%
3.8%
2.1%
17.7%
0.7%
5.7%
0.0%
9.5%
0.0%
4.6%
1.1%
0.6%
0.8%
16.2%
1.3%
0.0%
2.4%
1.6%
0.9%
0.7%
0.2%
0.4%
0.4%
0.3%

67.8
18.3
81.8
9.5
0.0
77.2
86.9
93.5
89.6
72.0
83.8
3.6
85.5
3.5
91.0
64.8
75.2
56.6
82.5
72.7
9.4
23.5
12.8
7.0
3.5
1.6
0.7
0.0
0.0

FINALPRICE

79.0

PrimeFixed(Deal2):LMT200604
Tranche
AP1
AX1
AP2
AX2
1A1
1A2
1A3
1A4
2A1
2A2
1B1
1B2
1B3
1B4
1B5
1B6
R
3A1
4A1
5A1
2B1
2B2
2B3
2B4
2B5
2B6
X

CUSIP
52520RAK8
52520RAM4
52520RAL6
52520RAN2
52520RAA0
52520RAB8
52520RAC6
52520RAD4
52520RAE2
52520RAF9
52520RAP7
52520RAQ5
52520RAR3
52520RAW2
52520RAX0
52520RAY8
52520RAV4
52520RAG7
52520RAH5
52520RAJ1
52520RAS1
52520RAT9
52520RAU6
52520RAZ5
52520RBA9
52520RBB7
LMT2EAMC0

Type
SEN_XRS_PO
SEN_WAC_IO
SEN_XRS_PO
SEN_WAC_IO
SEN_NAS_FIX
SEN_FLT
SEN_INV_IO
SEN_FIX
SEN_FLT
SEN_INV_IO
JUN_WAC
JUN_WAC
JUN_WAC
JUN_WAC_NO
JUN_WAC_NO
JUN_WAC_NO
SEN_FIX_RES
SEN_FIX
SEN_FIX
SEN_FIX
JUN_WAC
JUN_WAC
JUN_WAC
JUN_WAC_NO
JUN_WAC_NO
JUN_WAC_NO
JUN_RES_NO

Coupon
0
6
0
6
6
3.0719
2.9281
6
2.8719
4.6281
6.7284
6.7284
6.7284
6.7284
6.7284
6.7284
5
5
6
6.5
5.9556
5.9556
5.9556
5.9556
5.9556
5.9556
0

FloatFormula

LIBOR_1MO+0.60
5.40LIBOR_1MO
LIBOR_1MO+0.40
7.10LIBOR_1MO

OriginalRating:

CurrentRating:

Moodys/S&P/Fitch

Moodys/S&P/Fitch

Aaa/AAA/AAA
Aaa/AAA/AAA
NA/AAA/AAA
NA/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
NA/NA/AA
NA/NA/A
NA/NA/BBB

NA/AAA/AAA
NA/AAA/AAA
NA/AAA/AAA
NA/AAA/AAA
NA/NA/AA
NA/NA/A
NA/NA/BBB

Aaa/NA/A
Aaa/NA/AAA
NR/NA/AA
NR/NA/AAA
Aaa/NA/A
Aaa/NA/A
Aaa/NA/AAA
Aaa/NA/A
Aaa/NA/A
Aaa/NA/AAA
NR/NA/CCC
NR/NA/CC
NR/NA/C
NR/NA/C
NR/NA/C
NR/NA/NA
NR/NA/AAA
NR/NA/AA
NR/NA/AA
NR/NA/AA
NR/NA/B
NR/NA/CCC
NR/NA/CC
NR/NA/C
NR/NA/C
NR/NA/NA

Original Current
Balance Balance
(1000s)

(1000s)

1,390
505
172
600
8,824
50,000
50,000
28,481
88,640
88,640
6,354
1,991
1,517
1,043
759
664

43,050
133,430
66,337
3,872
999
624
499
375
375
50,000

1,246

102
359
8,678
38,411
38,411
22,800
66,009
66,009
6,263
1,962
1,495
1,028
708

31,193
93,738
40,446
3,508
905
565
452
340
211
29,717

Weight

Price

0.3%
0.0%
0.0%
0.0%
2.0%
11.4%
0.0%
6.5%
20.2%
0.0%
1.4%
0.5%
0.3%
0.2%
0.2%
0.2%
0.0%
9.8%
30.4%
15.1%
0.9%
0.2%
0.1%
0.1%
0.1%
0.1%
0.0%

67.4
6.6
73.1
0.0
77.0
84.2
3.6
85.6
81.5
10.2
18.1
7.6
4.2
1.8
0.1
0.0
0.0
83.4
85.9
87.1
10.9
4.9
3.0
1.7
0.7
0.0
0.0

FINALPRICE

81.2

AltA(Deal1):LXS200710H
Tranche

CUSIP

Type

IAIO
IA11
IA12
IA2
IA3
IA41
IA42
IM1
IM2
IM3
IM4
IM5
IM6
IM7
IM8
IM9
IX
IP
IIAIO
IIA1
IIA2
IIA3
IIA4
IIM1
IIM2
IIM3
IIM4
IIM5
IIM6
IIM7
IIM8
IIM9
IIX
IIP
ILTR
IILTR
IR
IIR
IA12_FEE
IA41_FEE
IIA1_FEE

525237AF0
525237BF9
525237BG7
525237AB9
525237AC7
525237BH5
525237BJ1
525237AG8
525237AH6
525237AJ2
525237AK9
525237AL7
525237AM5
525237AN3
525237AP8
525237AQ6
LXSHPCJU0
LXS4J0QT0
525237AV5
525237AR4
525237AS2
525237AT0
525237AU7
525237AW3
525237AX1
525237AY9
525237AZ6
525237BA0
525237BB8
525237BC6
525237BD4
525237BE2
LXSXOP780
LXSJ845G0
LXSU0AD20
LXSFMRAE0
LXS4O3BG0
LXSGSF430
LXSSKP0D0
LXSISE040
LXSHBD460

SEN_INV_IO
SEN_SPR_FLT
SEN_SPR_FLT
SEN_SPR_FLT
SEN_SPR_FLT
SEN_SUP_FLT
SEN_SUP_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
JUN_FLT
JUN_OC_RES_NO
JUN_PEN_NO
SEN_INV_IO
SEN_SPR_FLT
SEN_SPR_FIX_CAP
SEN_SPR_SUP_FLT
SEN_SUP_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
JUN_FLT
JUN_OC_RES_NO
JUN_PEN_NO
NPR_NPR_NO
NPR_NPR_NO
NPR_NPR_NO
NPR_NPR_NO
SEN_FEE
SEN_FEE
SEN_FEE

Coupon
3.7781
2.5919
2.5619
2.6919
2.7519
2.6719
2.7919
2.9219
3.0219
3.2219
3.4719
3.7219
4.2219
4.4719
4.4719
4.4719
0
0
4.5281
2.6319
7.5
2.7719
2.9219
3.1219
3.1719
3.3219
3.3719
3.7219
4.2219
4.2219
4.2219
4.2219
0
0
0
0
0
0
0.07
0.13
0.08

FloatFormula
6.25LIBOR_1MO
LIBOR_1MO+0.12
LIBOR_1MO+0.09
LIBOR_1MO+0.22
LIBOR_1MO+0.28
LIBOR_1MO+0.20
LIBOR_1MO+0.32
LIBOR_1MO+0.45
LIBOR_1MO+0.55
LIBOR_1MO+0.75
LIBOR_1MO+1.00
LIBOR_1MO+1.25
LIBOR_1MO+1.75
LIBOR_1MO+2.00
LIBOR_1MO+2.00
LIBOR_1MO+2.00

Original

Current

Moodys/S&P/Fitch Moodys/S&P/Fitch
Aaa/AAA/NA
Aaa/AAA/NA
Aaa/AAA/NA
Aaa/AAA/NA
Aaa/AAA/NA
Aaa/AAA/NA
Aaa/AAA/NA
Aa1/AA+/NA
Aa2/AA/NA
Aa3/AA/NA
A1/AA/NA
A2/A+/NA
A3/A/NA
Baa1/A/NA
Baa2/BBB+/NA
Baa3/BBB/NA

7.00LIBOR_1MO Aaa/AAA/NA
LIBOR_1MO+0.16 Aaa/AAA/NA
Aaa/AAA/NA
LIBOR_1MO+0.30 Aaa/AAA/NA
LIBOR_1MO+0.45 Aaa/AAA/NA
LIBOR_1MO+0.65 Aa1/AA+/NA
LIBOR_1MO+0.70 Aa2/AA+/NA
LIBOR_1MO+0.85 Aa3/AA+/NA
LIBOR_1MO+0.90 NA/AA/NA
LIBOR_1MO+1.25 NA/AA/NA
LIBOR_1MO+1.75 NA/A/NA
LIBOR_1MO+1.75 NA/A/NA
LIBOR_1MO+1.75 NA/BBB/NA
LIBOR_1MO+1.75 NA/BBB/NA

Baa1/NA/NA
Baa1/NA/NA
Baa1/NA/NA
Baa2/NA/NA
Baa2/NA/NA
Baa1/NA/NA
Caa2/NA/NA
Ca/NA/NA
Ca/NA/NA
C/NA/NA
C/NA/NA
C/NA/NA
C/NA/NA
C/NA/NA
C/NA/NA
C/NA/NA

Aaa/NA/NA
Aaa/NA/NA
Aaa/NA/NA
Aaa/NA/NA
Aa2/NA/NA
Baa1/NA/NA
Ba3/NA/NA
B3/NA/NA
NR/NA/NA
NR/NA/NA
NR/NA/NA
NR/NA/NA
NR/NA/NA
NR/NA/NA

OriginalBalance CurrentBalance
(1000s)

(1000s)

657,339
370,108
10,000
142,759
68,738
56,034
9,700
24,161
13,039
8,053
7,286
7,670
6,136
6,519
4,985
4,985
767,024
767,024
156,082
92,263
34,000
44,811
19,008
5,394
4,820
2,869
7,805
1,951
4,591
1,492
3,443
1,721
229,570
229,570

10,000
56,034
92,263

567,516
291,347
7,872
142,759
68,738
48,419
8,382
24,161
13,039
8,053
7,286
7,670
6,136
6,519
4,985
4,985
664,338
664,338
106,497
62,953
23,199
30,575
12,969
5,394
4,820
2,869
7,805
1,951
4,591
1,492
3,443
1,721
167,707
167,707

7,872
48,419
62,953

Weight

Price

0.0%
38.4%
1.0%
14.8%
7.1%
5.8%
1.0%
2.5%
1.4%
0.8%
0.8%
0.8%
0.6%
0.7%
0.5%
0.5%
0.0%
0.0%
0.0%
9.6%
3.5%
4.6%
2.0%
0.6%
0.5%
0.3%
0.8%
0.2%
0.5%
0.2%
0.4%
0.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

5.3
82.5
82.5
57.6
43.0
70.7
70.8
24.6
16.7
13.4
11.8
10.1
9.2
7.9
6.5
5.4
0.0
0.3
6.9
75.0
82.8
75.3
75.7
48.9
46.6
45.3
38.2
25.4
20.6
15.1
11.3
7.6

FINALPRICE

66.5


AltA(Deal2):LXS200717H
Tranche
A1
AIO
M0
M1
M2
M3
M4
M5
M6
M7
M8
X
LTR
R
P

CUSIP

Type

52525PAA9
52525PAC5
52525PAP6
52525PAD3
52525PAE1
52525PAF8
52525PAG6
52525PAH4
52525PAJ0
52525PAK7
52525PAL5
LXSOPD5O0
LXSJYKLN1
LXSFL0D80
LXSXOXQB0

Coupon

SEN_FLT
SEN_IO
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
JUN_FLT
JUN_OC_NPR_NPR_NO
JUN_RES_NO
JUN_RES_NO
JUN_PEN_NO

3.2719
1.75
3.5719
3.7219
3.9719
4.2219
4.4719
4.4719
4.4719
4.4719
4.4719
0
0
0
0

FloatFormula

OriginalRating:

Original Current

CurrentRating:

Moodys/S&P/Fitch Moodys/S&P/Fitch

LIBOR_1MO+0.80 Aaa/AAA/AAA
Aaa/AAA/AAA
LIBOR_1MO+1.10 NA/AAA/AAA
LIBOR_1MO+1.25 NA/AA+/AA+
LIBOR_1MO+1.50 NA/AA/AA+
LIBOR_1MO+1.75 NA/AA/AA
LIBOR_1MO+2.00 NA/A+/AA
LIBOR_1MO+2.00 NA/A/A+
LIBOR_1MO+2.00 NA/A/A
LIBOR_1MO+2.00 NA/BBB+/A
LIBOR_1MO+2.00 NA/BBB/BBB+

Aa3/NA/AAA
Aaa/NA/AAA
NR/NA/AAA
NR/NA/A
NR/NA/BBB
NR/NA/BB
NR/NA/BB
NR/NA/BB
NR/NA/BB
NR/NA/B
NR/NA/B

Balance Balance
(1000s)

(1000s)

527,987
527,987
45,761
44,703
17,600
6,687
8,095
6,687
5,631
5,631
4,218
703,985
703,985
703,985
703,985

441,178
441,178
45,761
44,703
17,600
6,687
8,095
6,687
5,631
5,631
4,218
616,647
616,647
616,647
616,647

Weight

Price

78.5% 77.5
0.0%
3.3
6.8% 51.1
6.6% 40.7
2.6% 25.4
1.0% 21.6
1.2% 19.7
1.0% 16.9
0.8% 14.6
0.8% 12.7
0.6% 11.0
0.0%
0.0%
0.0%
0.0%

FINALPRICE 68.6

Subprime(Deal1):SASCO2007BC4
Tranche
A1
A2
A3
A4
M1
M2
M3
M4
M5
M6
M7
M8
M9
B1
B2
B3
X
P
R
LTR

Cusip
86365DAA7
86365DAB5
86365DAC3
86365DAD1
86365DAH2
86365DAN9
86365DAP4
86365DAQ2
86365DAR0
86365DAS8
86365DAT6
86365DAU3
86365DAV1
86365DAY5
86365DAZ2
86365DBA6
86365DBL2
86365DBM0
86365DAX7
86365DBN8

Type
SEN_FLT
SEN_FLT
SEN_FLT
SEN_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FIX_CAP
MEZ_FIX_CAP
MEZ_FIX_CAP
MEZ_FIX_CAP
MEZ_FIX_CAP
JUN_FIX_CAP
JUN_OC_NO
JUN_PEN_NO
NPR_NPR_NO
NPR_NPR_NO

Coupon
3.0225
2.8925
2.6425
2.8925
2.8925
2.8925
2.8925
2.8925
2.8925
2.8925
5
5
5
5
5
5
0
0
0
0

FloatFormula
LIBOR_1MO+0.63
LIBOR_1MO+0.50
LIBOR_1MO+0.25
LIBOR_1MO+0.50
LIBOR_1MO+0.50
LIBOR_1MO+0.50
LIBOR_1MO+0.50
LIBOR_1MO+0.50
LIBOR_1MO+0.50
LIBOR_1MO+0.50

OriginalRating:

CurrentRating:

Moodys/S&P/Fitch/Dom Moodys/S&P/Fitch/Dom
Aaa/AAA/NA/AAA
Aaa/NA/NA/NA
NA/AAA/NA/AAA
Aaa/AAA/NA/AAA
Aaa/NA/NA/NA
NA/AAA/NA/AAA
NA/AA+/NA/AA(high)
NA/AA/NA/AA
NA/AA/NA/AA(low)
NA/A+/NA/A(high)
NA/A/NA/A
NA/A/NA/A(low)
NA/BBB+/NA/BBB(high)
NA/BBB/NA/BBB
NA/BBB/NA/BBB(low)
NR/NR/NA/NR
NR/NR/NA/NR
NR/NR/NA/NR

Original

Current

Balance

Balance

(1000s)

(1000s)

427,894
20,765
273,418
210,126
71,255
54,259
25,495
25,495
26,149
21,573
17,650
15,689
15,689
20,919
16,343
36,608
1,307,438
1,307,438

401,951
20,765
249,062
210,126
71,255
54,259
25,495
25,495
26,149
21,573
17,650
15,689
15,689
20,919
16,343
36,608
1,257,139
1,257,139

Weight
33.4%
1.6%
21.4%
16.4%
5.6%
4.2%
2.0%
2.0%
2.0%
1.7%
1.4%
1.2%
1.2%
1.6%
1.3%
2.9%

Price
69.9
36.8
82.3
50.7
31.8
24.6
20.0
17.5
15.1
13.1
12.8
11.6
10.3
8.4
6.7
4.2

FINALPRICE 54.7

10


Subprime(Deal2):SASCO2007BNC1
Tranche
A1
A2
A3
A4
M1
M2
M3
M4
M5
M6
M7
M8
M9
B1
B2
B3
LTR
R
X
P

Cusip
86364XAA4
86364XAB2
86364XAC0
86364XAD8
86364XAE6
86364XAF3
86364XAG1
86364XAH9
86364XAJ5
86364XAK2
86364XAL0
86364XAM8
86364XAN6
86364XAP1
86364XAQ9
86364XAR7
SASJ22TP0
SASXS1LQ0
SASEPCBJ0
SASN5U9M1

Type
SEN_FLT
SEN_FLT
SEN_FLT
SEN_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT_NO
MEZ_FLT_NO
JUN_FLT_NO
NPR_NPR_NO
NPR_NPR_NO
JUN_OC_NO
JUN_PEN_NO

Coupon
2.6125
3.4925
3.8925
3.8925
4.3925
4.3925
4.3925
4.3925
4.3925
4.3925
4.3925
4.3925
4.3925
4.3925
4.3925
3.8925
0
0
0
0

FloatFormula
LIBOR_1MO+0.22
LIBOR_1MO+1.10
LIBOR_1MO+1.50
LIBOR_1MO+1.50
LIBOR_1MO+2.00
LIBOR_1MO+2.00
LIBOR_1MO+2.00
LIBOR_1MO+2.00
LIBOR_1MO+2.00
LIBOR_1MO+2.00
LIBOR_1MO+2.00
LIBOR_1MO+2.00
LIBOR_1MO+2.00
LIBOR_1MO+2.00
LIBOR_1MO+2.00
LIBOR_1MO+1.50

OriginalRating:

CurrentRating:

Moodys/S&P/Fitch Moodys/S&P/Fitch
NA/AAA/AAA
NA/AAA/AAA
NA/AAA/AAA
NA/AAA/AAA
NA/AA+/AA+
NA/AA/AA
NA/AA/AA
NA/A+/A+
NA/A/A
NA/A/A
NA/BBB+/BBB+
NA/BBB/BBB
NA/BBB/BBB

NA/NA/AAA
NA/NA/AAA
NA/NA/AAA
NA/NA/AAA
NA/NA/AA+
NA/NA/AA
NA/NA/AA
NA/NA/A+
NA/NA/A
NA/NA/A
NA/NA/BBB+
NA/NA/BBB
NA/NA/BBB
NA/NA/BB+
NA/NA/BB

Original

Current

Balance

Balance Weight

(1000s)

(1000s)

210,174
275,052
31,948
24,412
18,289
18,289
32,099
11,571
13,064
9,704
7,838
10,078
7,838
10,078
11,197
27,620

746,500
746,500

192,999
258,869
31,948
24,412
18,289
18,289
32,099
11,571
13,064
9,704
7,838
10,078
7,838
10,078
11,197
27,620

713,142
713,142

29.2%
38.2%
4.4%
3.4%
2.5%
2.5%
4.5%
1.6%
1.8%
1.3%
1.1%
1.4%
1.1%
1.4%
1.6%
3.8%
0.0%
0.0%
0.0%
0.0%

70.1
71.3
40.0
40.8
37.2
33.1
27.5
23.3
20.9
18.8
17.2
15.5
13.9
12.3
10.3
6.3

FINALPRICE

56.1

DesktoExaminerPriceVariancesinLehmansU.S.RWLPortfolio
asofAugust31,2008
Atotalof$2.8billionofthirdquarterU.S.RWLassetsweretestedbyLehmans
Product Control group and the Examiners financial advisor. While there were some
significantvariances,theExaminersfinancialadvisoragainfoundLehmansvaluation
to be in aggregate within a range of reasonableness. The following table contains the
loan types where the Examiners financial advisor had a significant variance with
Lehmanmarks.

11

Price

LoanType
PrimeHybrid
ARMs
PrimeFixed
SubPrime
Subprime2nds
Scratch&Dent
AltA
Total

LEH Examiners
mark
mark
61.4
69.3
41.0
47.2
40.8
72.5

81.0
79.9
55.6
55.6
55.6
67.4

LEHMTM
($)

Examiner
MTM($)

Difference
($)

530,192,409

128,024,928

253,393,137
291,948,716
56,627,784
76,704,146
382,920,071
450,832,532
90,142,670
122,756,062
159,819,347
148,472,899
1,345,070,490 1,620,906,764

38,555,579
20,076,363
67,912,460
32,613,393
11,346,449
275,836,274

402,167,481

TotalMarketValueoftestedpopulation
TotalVarianceoftestedpopulation

$2.8Billion
$(275,836,274)

TheExaminersfinancialadvisorsmarksaretheaverageofthepricesforthetwo
respectivedealsfromeachcategoryperthetablebelow:
LOANTYPE
PrimeHybridARMs

PrimeFixed

SubPrime

AltA

REPRESENTATIVEDEALS
SARM200802
SARM200709
Average
LMT200603
LMT200604
Average
SASCO2007BC4
SASCO2007BNC1
Average
LehmanXSTrust0710H
LehmanXSTrust200717H
Average

12

PRICE
80.2
82.0
81.1
78.7
81.2
79.9
55.0
56.2
55.6
65.9
68.8
67.4


As discussed in the Report at Section III.A.2.g.4.f, the following are the
assumptionsusedinestimatingthepricesforeachtrancheoftherepresentativedeal.
Product Prepayment Default LossSeverity
ResultingLosses
Yield
Type
Rate
Rate
(1st/2ndLien)
Prime
15%
5%
50%/100%
Highsingledigits
10%
AltA
10%
10%
50%/100%
HighteensLow20s 15%
Subprime 4%
17%
50%/100%
MidHigh30s
20%

TheoutputforeachofthedealswasrunthroughIntex,andtheweightingsused
toestimatethepricefromeachdealareprovidedbelow.
PrimeHybridArms(Deal1):SARM200802
Tranche
A1
A21
A22
A31
A32
R
A1X
B1
B2
B3
B4
B5
B6
A2
A3
A4
A5
AP

Cusip
86365BAA1
86365BAC7
86365BAD5
86365BAE3
86365BAF0
86365BAP8
86365BAB9
86365BAL7
86365BAM5
86365BAN3
86365BAQ6
86365BAR4
86365BAS2
86365BAG8
86365BAH6
86365BAJ2
86365BAK9
86365BAT0

Type
SEN_SPR_FLT
SEN_SPR_WAC
SEN_SPR_WAC
SEN_SUP_WAC
SEN_SUP_WAC
SEN_WAC
SEN_WAC_IO
JUN_WAC
JUN_WAC
JUN_WAC
JUN_WAC_NO
JUN_WAC_NO
JUN_WAC_NO
SEN_SPR_WAC
SEN_SUP_WAC
SEN_SPR_WAC
SEN_SPR_WAC
JUN_PEN_NO

Coupon

FloatFormula

OriginalRating:

CurrentRating:

Moodys/S&P/Fitch/Dom Moodys/S&P/Fitch/Dom

4.2219 LIBOR_1MO+1.75 NA/AAA/NA/AAA


6.4217
NA/AAA/NA/AAA
6.4217
NA/AAA/NA/AAA
6.4217
NA/AAA/NA/AAA
6.4217
NA/AAA/NA/AAA
6.4217
NA/AAA/NA/AAA
2.1999
NA/AAA/NA/AAA
6.4217
NA/AA/NA/AA
6.4217
NA/A/NA/A
6.4217
NA/BBB/NA/BBB
6.4217
6.4217
6.4217
6.4217
NA/AAA/NA/AAA
6.4217
NA/AAA/NA/AAA
6.4217
NA/AAA/NA/AAA
6.4217
NA/AAA/NA/AAA
0

13

Original Current
Balance Balance Weighting
(1000s)

(1000s)

129,668
14,761
4,689
14,058
4,466

129,668
6,668
3,150
2,222
2,131
1,759
1,668
19,450
18,524
28,819
9,155
185,240

120,966
13,456
4,689
12,815
4,466

120,966
6,666
3,149
2,221
2,130
1,758
1,667
18,145
17,281
26,270
9,155
173,983

Price

70.0%
8.0%
2.5%
7.6%
2.4%
0.0%
0.0%
3.6%
1.7%
1.2%
1.2%
0.9%
0.9%
0.0%
0.0%
0.0%
0.0%
0.0%

86.9
92.4
76.0
92.4
64.4
0.0
2.6
27.7
15.6
10.5
6.8
3.6
1.0
88.2
85.2
92.4
70.3
0.0

FINALPRICE

80.2


PrimeHybridArms(Deal2):SARM200709
Tranche
1A1
1A2
1AX
M1
M2
M3
M4
M5
M6
M7
X
2A1
2A2
2AX
RII
2B1
2B2
2B3
2B4
2B5
2B6
1AP
2AP
C

CUSIP
86364JAA5
86364JAB3
86364JAC1
86364JAG2
86364JAH0
86364JAJ6
86364JAK3
86364JAL1
86364JAM9
86364JAN7
SARVW7PX0
86364JAD9
86364JAE7
86364JAF4
86364JAS6
86364JAP2
86364JAQ0
86364JAR8
86364JAT4
86364JAU1
86364JAV9
86364JAW7
86364JAX5
SARLEKMX0

Type
SEN_SPR_FLT
SEN_SUP_FLT
SEN_FLT_IO
MEZ_WAC
MEZ_WAC
MEZ_WAC
MEZ_WAC
MEZ_WAC
MEZ_WAC
JUN_WAC
JUN_OC_NO
SEN_SPR_WAC
SEN_SUP_WAC
SEN_FLT_IO
SEN_WAC_NO
JUN_WAC
JUN_WAC
JUN_WAC
JUN_WAC_NO
JUN_WAC_NO
JUN_WAC_NO
JUN_PEN_NO
JUN_PEN_NO
NPR_NPR_NO

Coupon
6
6
0.5
6.6435
6.6435
6.6435
6.6435
6.6435
6.6435
6.6435
0
5.9962
6.4928
0.4966
6.4928
6.4928
6.4928
6.4928
6.4928
6.4928
6.4928
0
0
0

OriginalRating:

CurrentRating:

Moodys/S&P/Fitch Moodys/S&P/Fitch
NA/AAA/AAA
NA/AAA/AAA
NA/AAA/AAA
NA/AA+/AA+
NA/AA+/AA
NA/AA/AA
NA/AA/A
NA/A/A
NA/A/BBB
NA/BBB/BBB

NA/NA/A
NA/NA/BB
NA/NA/AAA
NA/NA/B
NA/NA/B
NA/NA/CCC
NA/NA/CC
NA/NA/CC
NA/NA/CC
NA/NA/C

NA/AAA/AAA
NA/AAA/AAA
NA/AAA/AAA
NA/AAA/AAA
NA/AA/NA
NA/A/NA
NA/BBB/NA

NA/NA/AA
NA/NA/BB
NA/NA/AAA
NA/NA/AAA

NA/NA/AAA
NA/NA/AAA

Original Current
Balance Balance Weight
(1000s)

(1000s)

155,395
17,266
172,661
4,963
2,481
1,432
2,577
955
1,240
1,145
190,891
290,870
32,319
290,870

11,714
2,756
1,378
1,722
1,722
2,070
190,891
344,551

136,370
15,152
151,522
4,963
2,481
1,432
2,577
955
1,240
1,145
169,751
263,562
29,285
263,562

11,682
2,748
1,374
1,717
1,717
1,501
169,751
313,587

Price

29.2%
3.2%
0.0%
0.9%
0.5%
0.3%
0.5%
0.2%
0.2%
0.2%
0.0%
54.7%
6.1%
0.0%
0.0%
2.2%
0.5%
0.3%
0.3%
0.3%
0.4%
0.0%
0.0%
0.0%

88.3
88.3
1.1
65.4
34.8
26.5
19.9
14.6
11.7
8.8
0.0
87.1
71.0
1.1
0.0
13.7
6.4
4.5
3.2
1.7
0.4
0.0
0.0
0.0

FINALPRICE

82.0

PrimeFixed(Deal1):LMT200603
Tranche
AP
AX
2A1
2A2
R
1A1
1A2
1A3
1A4
1A5
1A6
1A7
1A8
1A9
1A10
1A11
1A12
1A13
3A1
3A2
3A3
M
B1
B2
B3
B4
B5
B6
B7

CUSIP
52520CAU9
52520CAV7
52520CAS4
52520CAT2
52520CBB0
52520CAD7
52520CAE5
52520CAF2
52520CAG0
52520CAH8
52520CAJ4
52520CAK1
52520CAL9
52520CAM7
52520CAN5
52520CAP0
52520CAQ8
52520CAR6
52520CAA3
52520CAB1
52520CAC9
52520CAW5
52520CAX3
52520CAY1
52520CAZ8
52520CBA2
52520CBC8
52520CBD6
52520CBE4

Type
SEN_CPT_XRS_PO
SEN_CPT_NTL_IO_WAC_IO
SEN_FLT
SEN_INV_IO
SEN_RES_FIX
SEN_SPR_NAS_FIX
SEN_PAC_FIX
SEN_PAC_FIX
SEN_FIX
SEN_FIX
SEN_TAC_FLT_AD
SEN_INV_IO
SEN_FLT
SEN_INV_IO
SEN_SPR_PAC_FIX
SEN_FIX_Z_CMP
SEN_SPR_PAC_FIX
SEN_SUP_NAS_FIX
SEN_SPR_FLT
SEN_FLT
SEN_FLT_IO
JUN_WAC
JUN_WAC
JUN_WAC
JUN_WAC
JUN_WAC
JUN_WAC_NO
JUN_WAC_NO
JUN_WAC_NO

Coupon
0
6
2.8219
4.6781
7.5
6
6
6
6
6
3.0719
2.9281
3.0719
2.9281
6
6
6
6
2.8219
2.8219
4.6781
6.6403
6.6403
6.6403
6.6403
6.6403
6.6403
6.6403
6.6403

OriginalRating:

FloatFormula

CurrentRating:

Moodys/S&P/Fitch Moodys/S&P/Fitch

LIBOR_1MO+0.35
7.15LIBOR_1MO

LIBOR_1MO+0.60
5.40LIBOR_1MO
LIBOR_1MO+0.60
5.40LIBOR_1MO

LIBOR_1MO+0.35
LIBOR_1MO+0.35
7.15LIBOR_1MO

Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aa1/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aa2/AA+/AA+
NR/NR/AA
NR/NR/A
NR/NR/BBB
NR/NR/BBB

14

Aaa/NA/A
A1/NA/A
A1/NA/AAA
Aaa/NA/AAA
Aaa/NA/AAA
Aa2/NA/A
Aa2/NA/A
Aa2/NA/A
Aa2/NA/A
Aa2/NA/A
Aa2/NA/AAA
Aa2/NA/A
Aa2/NA/AAA
Aaa/NA/AAA
Aa2/NA/A
Aaa/NA/AAA
Aa3/NA/A
Aaa/NA/AAA
Aa3/NA/A
Aaa/NA/AAA
Ba3/NA/B
NR/NA/CCC
NR/NA/CC
NR/NA/C
NR/NA/C
NR/NA/C
NR/NA/C
NR/NA/NA

Original Current
Balance Balance Weight
(1000s)

(1000s)

343
190
123,201
123,201

26,956
20,000
11,145
92,679
3,862
30,000
30,000
50,000
50,000
24,316
5,930
3,112
4,400
85,000
6,808
91,808
12,573
8,382
4,977
3,929
786
1,834
1,834
1,833

336
145
85,287
85,287

26,956
16,448
6,102
66,039
3,862
22,382
22,382
36,203
36,203
19,195
3,808
3,112
4,400
60,605
4,854
65,459
12,386
8,257
4,903
3,870
774
1,810
798

Price

0.1%
0.0%
23.5%
0.0%
0.0%
5.1%
3.8%
2.1%
17.7%
0.7%
5.7%
0.0%
9.5%
0.0%
4.6%
1.1%
0.6%
0.8%
16.2%
1.3%
0.0%
2.4%
1.6%
0.9%
0.7%
0.2%
0.4%
0.4%
0.3%

68.4
18.3
81.2
10.0
0.0
77.7
87.2
92.5
89.6
72.2
83.1
4.2
85.1
4.0
91.4
65.1
75.4
57.3
81.9
71.9
10.0
23.7
13.0
7.2
3.7
1.7
1.3
0.0
0.0

FINALPRICE

78.7


PrimeFixed(Deal2):LMT200604
Tranche
AP1
AX1
AP2
AX2
1A1
1A2
1A3
1A4
2A1
2A2
1B1
1B2
1B3
1B4
1B5
1B6
R
3A1
4A1
5A1
2B1
2B2
2B3
2B4
2B5
2B6
X

CUSIP
52520RAK8
52520RAM4
52520RAL6
52520RAN2
52520RAA0
52520RAB8
52520RAC6
52520RAD4
52520RAE2
52520RAF9
52520RAP7
52520RAQ5
52520RAR3
52520RAW2
52520RAX0
52520RAY8
52520RAV4
52520RAG7
52520RAH5
52520RAJ1
52520RAS1
52520RAT9
52520RAU6
52520RAZ5
52520RBA9
52520RBB7
LMT2EAMC0

Type
SEN_XRS_PO
SEN_WAC_IO
SEN_XRS_PO
SEN_WAC_IO
SEN_NAS_FIX
SEN_FLT
SEN_INV_IO
SEN_FIX
SEN_FLT
SEN_INV_IO
JUN_WAC
JUN_WAC
JUN_WAC
JUN_WAC_NO
JUN_WAC_NO
JUN_WAC_NO
SEN_FIX_RES
SEN_FIX
SEN_FIX
SEN_FIX
JUN_WAC
JUN_WAC
JUN_WAC
JUN_WAC_NO
JUN_WAC_NO
JUN_WAC_NO
JUN_RES_NO

Coupon
0
6
0
6
6
3.0719
2.9281
6
2.8719
4.6281
6.7284
6.7284
6.7284
6.7284
6.7284
6.7284
5
5
6
6.5
5.9556
5.9556
5.9556
5.9556
5.9556
5.9556
0

OriginalRating:

FloatFormula

CurrentRating:

Moodys/S&P/Fitch Moodys/S&P/Fitch

LIBOR_1MO+0.60
5.40LIBOR_1MO
LIBOR_1MO+0.40
7.10LIBOR_1MO

Aaa/AAA/AAA
Aaa/AAA/AAA
NA/AAA/AAA
NA/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
Aaa/AAA/AAA
NA/NA/AA
NA/NA/A
NA/NA/BBB

NA/AAA/AAA
NA/AAA/AAA
NA/AAA/AAA
NA/AAA/AAA
NA/NA/AA
NA/NA/A
NA/NA/BBB

Aaa/NA/A
Aaa/NA/AAA
NR/NA/AA
NR/NA/AAA
Aaa/NA/A
Aaa/NA/A
Aaa/NA/AAA
Aaa/NA/A
Aaa/NA/A
Aaa/NA/AAA
NR/NA/CCC
NR/NA/CC
NR/NA/C
NR/NA/C
NR/NA/C
NR/NA/NA
NR/NA/AAA
NR/NA/AA
NR/NA/AA
NR/NA/AA
NR/NA/B
NR/NA/CCC
NR/NA/CC
NR/NA/C
NR/NA/C
NR/NA/NA

Original Current
Balance Balance Weight
(1000s)

(1000s)

1,390
505
172
600
8,824
50,000
50,000
28,481
88,640
88,640
6,354
1,991
1,517
1,043
759
664

43,050
133,430
66,337
3,872
999
624
499
375
375
50,000

1,246

102
359
8,678
38,411
38,411
22,800
66,009
66,009
6,263
1,962
1,495
1,028
708

31,193
93,738
40,446
3,508
905
565
452
340
211
29,717

0.3%
0.0%
0.0%
0.0%
2.0%
11.4%
0.0%
6.5%
20.2%
0.0%
1.4%
0.5%
0.3%
0.2%
0.2%
0.2%
0.0%
9.8%
30.4%
15.1%
0.9%
0.2%
0.1%
0.1%
0.1%
0.1%
0.0%

FINALPRICE

15

Price
68.2
0.0
75.2
0.0
77.3
83.8
4.1
85.6
80.9
10.6
18.2
7.7
4.2
1.9
0.3
0.0
0.0
83.6
86.1
87.3
11.5
5.3
3.4
2.0
1.0
0.5
0.0
81.2


AltA(Deal1):LXS200710H
Tranche
IAIO
IA11
IA12
IA2
IA3
IA41
IA42
IM1
IM2
IM3
IM4
IM5
IM6
IM7
IM8
IM9
IX
IP
IIAIO
IIA1
IIA2
IIA3
IIA4
IIM1
IIM2
IIM3
IIM4
IIM5
IIM6
IIM7
IIM8
IIM9
IIX
IIP
ILTR
IILTR
IR
IIR
IA12_FEE
IA41_FEE
IIA1_FEE

CUSIP

Type

Coupon FloatFormula

525237AF0 SEN_INV_IO
525237BF9 SEN_SPR_FLT
525237BG7 SEN_SPR_FLT
525237AB9 SEN_SPR_FLT
525237AC7 SEN_SPR_FLT
525237BH5 SEN_SUP_FLT
525237BJ1
SEN_SUP_FLT
525237AG8 MEZ_FLT
525237AH6 MEZ_FLT
525237AJ2 MEZ_FLT
525237AK9 MEZ_FLT
525237AL7 MEZ_FLT
525237AM5 MEZ_FLT
525237AN3 MEZ_FLT
525237AP8 MEZ_FLT
525237AQ6 JUN_FLT
LXSHPCJU0 JUN_OC_RES_NO
LXS4J0QT0 JUN_PEN_NO
525237AV5 SEN_INV_IO
525237AR4 SEN_SPR_FLT
525237AS2 SEN_SPR_FIX_CAP
525237AT0 SEN_SPR_SUP_FLT
525237AU7 SEN_SUP_FLT
525237AW3 MEZ_FLT
525237AX1 MEZ_FLT
525237AY9 MEZ_FLT
525237AZ6 MEZ_FLT
525237BA0 MEZ_FLT
525237BB8 MEZ_FLT
525237BC6 MEZ_FLT
525237BD4 MEZ_FLT
525237BE2 JUN_FLT
LXSXOP780 JUN_OC_RES_NO
LXSJ845G0 JUN_PEN_NO
LXSU0AD20 NPR_NPR_NO
LXSFMRAE0 NPR_NPR_NO
LXS4O3BG0 NPR_NPR_NO
LXSGSF430 NPR_NPR_NO
LXSSKP0D0 SEN_FEE
LXSISE040 SEN_FEE
LXSHBD460 SEN_FEE

3.7781
2.5919
2.5619
2.6919
2.7519
2.6719
2.7919
2.9219
3.0219
3.2219
3.4719
3.7219
4.2219
4.4719
4.4719
4.4719
0
0
4.5281
2.6319
7.5
2.7719
2.9219
3.1219
3.1719
3.3219
3.3719
3.7219
4.2219
4.2219
4.2219
4.2219
0
0
0
0
0
0
0.07
0.13
0.08

OriginalRating:

CurrentRating:

Moodys/S&P/Fitch Moodys/S&P/Fitch

6.25LIBOR_1M Aaa/AAA/NA
LIBOR_1MO+0. Aaa/AAA/NA
LIBOR_1MO+0. Aaa/AAA/NA
LIBOR_1MO+0. Aaa/AAA/NA
LIBOR_1MO+0. Aaa/AAA/NA
LIBOR_1MO+0. Aaa/AAA/NA
LIBOR_1MO+0. Aaa/AAA/NA
LIBOR_1MO+0. Aa1/AA+/NA
LIBOR_1MO+0. Aa2/AA/NA
LIBOR_1MO+0. Aa3/AA/NA
LIBOR_1MO+1. A1/AA/NA
LIBOR_1MO+1. A2/A+/NA
LIBOR_1MO+1. A3/A/NA
LIBOR_1MO+2. Baa1/A/NA
LIBOR_1MO+2. Baa2/BBB+/NA
LIBOR_1MO+2. Baa3/BBB/NA

Baa1/NA/NA
Baa1/NA/NA
Baa1/NA/NA
Baa2/NA/NA
Baa2/NA/NA
Baa1/NA/NA
Caa2/NA/NA
Ca/NA/NA
Ca/NA/NA
C/NA/NA
C/NA/NA
C/NA/NA
C/NA/NA
C/NA/NA
C/NA/NA
C/NA/NA

7.00LIBOR_1M Aaa/AAA/NA
LIBOR_1MO+0. Aaa/AAA/NA
Aaa/AAA/NA
LIBOR_1MO+0. Aaa/AAA/NA
LIBOR_1MO+0. Aaa/AAA/NA
LIBOR_1MO+0. Aa1/AA+/NA
LIBOR_1MO+0. Aa2/AA+/NA
LIBOR_1MO+0. Aa3/AA+/NA
LIBOR_1MO+0. NA/AA/NA
LIBOR_1MO+1. NA/AA/NA
LIBOR_1MO+1. NA/A/NA
LIBOR_1MO+1. NA/A/NA
LIBOR_1MO+1. NA/BBB/NA
LIBOR_1MO+1. NA/BBB/NA

Aaa/NA/NA
Aaa/NA/NA
Aaa/NA/NA
Aaa/NA/NA
Aa2/NA/NA
Baa1/NA/NA
Ba3/NA/NA
B3/NA/NA
NR/NA/NA
NR/NA/NA
NR/NA/NA
NR/NA/NA
NR/NA/NA
NR/NA/NA

Original

Current

Balance

Balance

(1000s)

(1000s)

657,339
370,108
10,000
142,759
68,738
56,034
9,700
24,161
13,039
8,053
7,286
7,670
6,136
6,519
4,985
4,985
767,024
767,024
156,082
92,263
34,000
44,811
19,008
5,394
4,820
2,869
7,805
1,951
4,591
1,492
3,443
1,721
229,570
229,570

10,000
56,034
92,263

567,516
291,347
7,872
142,759
68,738
48,419
8,382
24,161
13,039
8,053
7,286
7,670
6,136
6,519
4,985
4,985
664,338
664,338
106,497
62,953
23,199
30,575
12,969
5,394
4,820
2,869
7,805
1,951
4,591
1,492
3,443
1,721
167,707
167,707

7,872
48,419
62,953

Weight
0.0%
38.4%
1.0%
14.8%
7.1%
5.8%
1.0%
2.5%
1.4%
0.8%
0.8%
0.8%
0.6%
0.7%
0.5%
0.5%
0.0%
0.0%
0.0%
9.6%
3.5%
4.6%
2.0%
0.6%
0.5%
0.3%
0.8%
0.2%
0.5%
0.2%
0.4%
0.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%

Price
5.5
82.6
82.5
57.0
41.0
70.2
69.4
20.8
13.2
10.4
8.8
7.5
6.6
5.5
4.2
3.2
0.0
0.2
7.2
74.9
83.0
75.2
75.6
48.6
46.1
44.7
38.0
24.4
19.1
13.4
9.5
5.9

FINALPRICE 65.9

16


AltA(Deal2):LXS200717H
Tranche
A1
AIO
M0
M1
M2
M3
M4
M5
M6
M7
M8
X
LTR
R
P

CUSIP
52525PAA9
52525PAC5
52525PAP6
52525PAD3
52525PAE1
52525PAF8
52525PAG6
52525PAH4
52525PAJ0
52525PAK7
52525PAL5
LXSOPD5O0
LXSJYKLN1
LXSFL0D80
LXSXOXQB0

Type

Coupon

SEN_FLT
SEN_IO
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
JUN_FLT
JUN_OC_NPR_NPR_NO
JUN_RES_NO
JUN_RES_NO
JUN_PEN_NO

3.2719
1.75
3.5719
3.7219
3.9719
4.2219
4.4719
4.4719
4.4719
4.4719
4.4719
0
0
0
0

FloatFormula

OriginalRating:

Original Current

CurrentRating:

Moodys/S&P/Fitch Moodys/S&P/Fitch

LIBOR_1MO+0.80 Aaa/AAA/AAA
Aaa/AAA/AAA
LIBOR_1MO+1.10 NA/AAA/AAA
LIBOR_1MO+1.25 NA/AA+/AA+
LIBOR_1MO+1.50 NA/AA/AA+
LIBOR_1MO+1.75 NA/AA/AA
LIBOR_1MO+2.00 NA/A+/AA
LIBOR_1MO+2.00 NA/A/A+
LIBOR_1MO+2.00 NA/A/A
LIBOR_1MO+2.00 NA/BBB+/A
LIBOR_1MO+2.00 NA/BBB/BBB+

Aa3/NA/AAA
Aaa/NA/AAA
NR/NA/AAA
NR/NA/A
NR/NA/BBB
NR/NA/BB
NR/NA/BB
NR/NA/BB
NR/NA/BB
NR/NA/B
NR/NA/B

Balance Balance Weight


(1000s)

(1000s)

527,987
527,987
45,761
44,703
17,600
6,687
8,095
6,687
5,631
5,631
4,218
703,985
703,985
703,985
703,985

441,178
441,178
45,761
44,703
17,600
6,687
8,095
6,687
5,631
5,631
4,218
616,647
616,647
616,647
616,647

Price

78.5%
0.0%
6.8%
6.6%
2.6%
1.0%
1.2%
1.0%
0.8%
0.8%
0.6%
0.0%
0.0%
0.0%
0.0%

77.6
3.2
51.1
42.0
26.6
22.5
20.5
17.7
15.3
13.3
11.5

FINALPRICE

68.8

Subprime(Deal1):SASCO2007BC4
Tranche
A1
A2
A3
A4
M1
M2
M3
M4
M5
M6
M7
M8
M9
B1
B2
B3
X
P
R
LTR

Cusip
86365DAA7
86365DAB5
86365DAC3
86365DAD1
86365DAH2
86365DAN9
86365DAP4
86365DAQ2
86365DAR0
86365DAS8
86365DAT6
86365DAU3
86365DAV1
86365DAY5
86365DAZ2
86365DBA6
86365DBL2
86365DBM0
86365DAX7
86365DBN8

Type
SEN_FLT
SEN_FLT
SEN_FLT
SEN_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FLT
MEZ_FIX_CAP
MEZ_FIX_CAP
MEZ_FIX_CAP
MEZ_FIX_CAP
MEZ_FIX_CAP
JUN_FIX_CAP
JUN_OC_NO
JUN_PEN_NO
NPR_NPR_NO
NPR_NPR_NO

Coupon
3.1019
2.9719
2.7219
2.9719
2.9719
2.9719
2.9719
2.9719
2.9719
2.9719
5
5
5
5
5
5
0
0
0
0

FloatFormula
LIBOR_1MO+0.63
LIBOR_1MO+0.50
LIBOR_1MO+0.25
LIBOR_1MO+0.50
LIBOR_1MO+0.50
LIBOR_1MO+0.50
LIBOR_1MO+0.50
LIBOR_1MO+0.50
LIBOR_1MO+0.50
LIBOR_1MO+0.50

OriginalRating:

CurrentRating:

Moodys/S&P/Fitch/Dom Moodys/S&P/Fitch/Dom
Aaa/AAA/NA/AAA
NA/AAA/NA/AAA
Aaa/AAA/NA/AAA
NA/AAA/NA/AAA
NA/AA+/NA/AA(high)
NA/AA/NA/AA
NA/AA/NA/AA(low)
NA/A+/NA/A(high)
NA/A/NA/A
NA/A/NA/A(low)
NA/BBB+/NA/BBB(high)
NA/BBB/NA/BBB
NA/BBB/NA/BBB(low)
NR/NR/NA/NR
NR/NR/NA/NR
NR/NR/NA/NR

17

Aaa/NA/NA/NA
NR/NA/NA/NA
Aaa/NA/NA/NA
NR/NA/NA/NA
NR/NA/NA/NA
NR/NA/NA/NA
NR/NA/NA/NA
NR/NA/NA/NA
NR/NA/NA/NA
NR/NA/NA/NA
NR/NA/NA/NA
NR/NA/NA/NA
NR/NA/NA/NA
NR/NA/NA/NA
NR/NA/NA/NA
NR/NA/NA/NA
NR/NA/NA/NA
NR/NA/NA/NA
NR/NA/NA/NA
NR/NA/NA/NA

Original

Current

Balance

Balance

(1000s)

(1000s)

427,894
20,765
273,418
210,126
71,255
54,259
25,495
25,495
26,149
21,573
17,650
15,689
15,689
20,919
16,343
36,608
1,307,438
1,307,438

386,687
20,765
240,227
210,126
71,255
54,259
25,495
25,495
26,149
21,573
17,650
15,689
15,689
20,919
16,343
36,608
1,233,040
1,233,040

Weight

Price

33.4%
1.6%
21.4%
16.4%
5.6%
4.2%
2.0%
2.0%
2.0%
1.7%
1.4%
1.2%
1.2%
1.6%
1.3%
2.9%

70.1
37.1
82.6
50.9
31.9
25.1
20.1
17.5
15.1
12.9
12.9
11.5
10.2
8.6
6.8
4.3

FINALPRICE

55.0

APPENDIX17:REPO105
I.

APPENDIXTOREPO105REPORT ...................................................................................2
A. LehmansRepo105AccountingPolicyManual ........................................................2
B. TypesofSecuritiesUsedinRepo105Transactions...................................................9
C. Repo105Contracts .......................................................................................................16
D. LinklatersLetter............................................................................................................20
1. Section2.4oftheLinklatersLetter......................................................................32
E. LehmanBrothersGlobalConsolidatedBalanceSheets ..........................................36
F. ExpertCurriculumVitae .............................................................................................38


Appendix17totheRepo105Reportprovidesadditionaldetailswithrespectto:
Lehmans internal Repo 105 Accounting Policy, which is reprinted in its entirety; the
types of securities Lehman utilized in Repo 105 transactions; the documentation for
Repo105transactionsandtheintercompanyrepobetweenUnitedStatesbasedLehman
entities and LBIE; the Linklaters true sale opinion letter, which is reprinted in its
entirety;andalistofLBHIConsolidatedBalanceSheetsreportingtheRepo105usage
on a particular date. The Appendix also contains the curriculum vitae of Dr. Gary
Holstrum, whom the Examiner consulted in connection with the Examiners
investigationofErnst&Young.
I.

APPENDIXTOREPO105REPORT
A. LehmansRepo105AccountingPolicyManual
Lehmans Repo 105 and Repo 108 Accounting Policy is set out below in its

entirety:1
Repo105andRepo108
Arepurchaseagreement(arepo)isanagreementunderwhichwesellsecurities
to a counterparty for cash with a simultaneous agreement to repurchase the same or
equivalentsecuritiesataspecificpriceatalaterdate.Areverserepurchaseagreement
(a reverse repo) is an agreement under which we purchase securities from a
counterpartywithcashandsimultaneouslyenterintoanagreementtoresellthesame

1Lehman Brothers Holdings Inc., Accounting Policy Manual for Repo 105 and Repo 108 (Sept. 9, 2006)

[LBEXDOCID3213290].


or equivalent securities at a specific price at a later date. In general, repurchase and
reverserepurchaseagreementsareusedbycounterpartiestoobtainorinvestshortterm
fundsandareconsideredsecuredfinancingtransactions.(Dr.Cash,Cr.RepoLiability)
andareverserepoisrecordedasalending(Dr.ReverseRepoAsset,Cr.Cash).
However,therearecircumstancesunderwhichareposhouldberecharacterized
fromasecuredfinancingtransactiontoasaleofinventoryandaforwardtorepurchase
securities, provided certain criteria in SFAS 140 are met. This policy addresses such
situations. The concepts discussed in this policy also apply to reverse repurchase
agreements recharacterized from investing transactions to inventory repurchase
transactions. However, because we generally do not engage in these transactions, the
remainder of this policy addresses only the accounting for repo transactions re
characterized from secured financing transactions to sales of inventory and forward
agreementstorepurchase.
Overview
Repo105andRepo108transactionsrefertoreposwithacounterpartyinwhich
we sell securities valued at a minimum of 105% (for fixed income securities) or 108%
(forequitysecurities)ofthecashreceived.Thatis,wesellfixedincomesecuritieswitha
fair value of at least $105 in exchange for $100 of cash for Repo 105, and equity
securities with a fair value of at least $108 in exchange for $100 of cash for Repo 108.


(NotethatweallowRepo108tobedoneat$107offairvaluebutwestillrefertothese
transactionsasRepo108.)
Repo 105 and Repo 108 contracts typically are executed by Lehman Brothers
International (Europe) (LBIE) because true sale opinions can be obtained under
Englishlaw.WegenerallycannotobtainatruesaleopinionunderU.S.law.
Forarepotoberecharacterizedfromasecuredfinancingtransactiontoasaleof
inventory,allthefollowingSFAScriteriamustbemet:

Thetransactionisatruesaleatlaw(SFAS140.9a).

The transferee has the ability to pledge or exchange the transferred assets
(SFAS140.9b).and

Thetransferorisconsideredtorelinquishcontrolofthesecuritiestransferred
(SFAS140.9c).

Truesaleopinion
This policy addresses repo transactions executed in the U.K. under a Global
Master Repurchase Agreement (GMRA) provided the counterparty resides in a
jurisdiction covered under English law. Repos generally cannot be treated as sales in
the United States because lawyers cannot provide a true sale opinion under U.S. law.
SeeSecuritizationsadequacyoflegal opinionsinthisAccountingPolicy Manualfor
moreinformationabouttherequirementsforlegalopinions.
The U.K. law firm of Linklaters has issued us truesale opinions covering Repo
105 and Repo 108 transactions documented under a GMRA under English law.
(Linklaters also has issued true sale opinions for securities lending transactions
4


documented under Overseas Securities Lending Agreements, Global Master Securities
LendingAgreements,andMasterGiltEdgedStockLendingAgreements.However,all
ourcurrentRepo105andRepo108transactionsaredocumentedunderaGMRA.)For
Repo 108, voting rights with respect to the transferred equity securities must be
transferred to the repo counterparty for Linklaters to provide us with a true sale
opinion.
Abilitytopledgeorexchangethetransferredassets
Thetransfereemusthavetheabilitytopledgeorexchangethetransferredassets
free of anycontractual conditions imposedbyus and/or operational constraints. This
abilityto pledge orexchangemustbea legalright and anoperational capability. For
transactions involving thirdparty custodians such as in triparty arrangements, the
counterpartysreuseorrehypothecationoptionsinTripartyServicesAgreementmust
be executed to ensure the transferee has the legal right to pledge or exchange the
transferred assets. Practical operational constraints must be removed to enable the
transferee to pledge or exchange the transferred assets. An example of a practical
operationalconstraintisretransferringassetsthatarenotconsideredreadilyobtainable
inthemarketplace.Ifsuchassetsareusedintherepoandthetransfereepledgestoor
exchangestheassetswithathirdparty,thetransfereemaybeunabletoredeliverthe
same (or substantially the same) assets to the transferor because of the difficulty of
obtaining such assets. As a result, the transferee would be operationally constrained


from pledging or exchanging the assets. Ordinarily, for an asset to be readily
obtainable,amarketmustexistwheretheassetsareeithertradedonaformalexchange
or are considered liquid and trade in a market where price quotations either are
publishedorareobtainablethroughanotherverifiablesource.
Relinquishcontrolofthetransferredassets
Recharacterization of a repo from a secured financing transaction to a sale of
inventoryandaforwardtorepurchaseassetsisallowedonlyifwecandemonstratewe
haverelinquishedcontrolofthetransferredassets.Weretaincontroloveratransferred
assetifweareassuredoftheabilitytorepurchaseorredeemthetransferredasset,even
intheeventofdefaultbythetransferee.Ourrighttorepurchasethetransferredassetis
assured only if it is protected by obtaining collateral (i.e., cash) sufficient to fund
substantially all of the cost of purchasing the same or substantially the same
replacementassetsduringthetermofthecontract.Ifwecanfundsubstantiallyallof
the cost of purchasing the same or substantially the same replacement assets, we are
viewedashavingthemeanstoreplacetheassets,evenifthetransfereedefaults,andwe
are considered not to have relinquished control of the assets. For purposes of this
requirement, we have retained control of the transferred assets if a fixed income
security is margined at less than 105% of the cash received or an equity security is
marginedatlessthan107%ofthecashreceived.


Transfersinwhich wetransfer fixedincomesecuritiesvaluedat a minimum of
105% of the cash received and equity securities valued at a minimum of 107% of the
cash received are considered to be sales with a forward agreement to repurchase the
securitiesratherthansecuredfinancingtransactions.Theassetstransferred(i.e.,sold)
shouldbevaluedandmarginedfrequentlyforchangesinthemarketpriceoftheassets
to ensure the assets transferred equal or exceed 105% (or 107%) of the cash received.
Whenboththeforegoingcriteriaaremet,theassetstransferredareremovedfromour
balancesheetandanassetunderaderivativecontractisrecordedtoreflectthatwewill
repurchase,underaforwardcontract,thetransferredassets.
Exampleentries
The following entries are recorded when a repo meets the criteria for re
characterization from a secured financing transaction to a sale of inventory and a
forwardagreementtorepurchaseassets.Assumearepoof$100andwepledge$105of
fixedincomecollateral.


Attheoriginalsaledate,oursystemsassumereposaresecuredfinancingssothe
entrybeforerecharacterizationis:
Dr.Cash

Cr.Repo

Therecharacterizationentryis:
Dr.Repo
Dr.Longinventoryderivative

Cr.Inventory

$100

$100

$5

$100

$105

We have an asset under a derivative contract because we are required to


repurchaseunderaforwardcontract$105worthofsecuritiesforpaymentofonly$100.
At the repurchase date, the following entries are made (assuming frequent
margining,whereXisthevalueofthemargin):
Dr.Inventory

Dr.Cash

Cr.Longinventoryderivative

$105+X

100+X
5


B. TypesofSecuritiesUsedinRepo105Transactions
Lehmans Repo 105 Accounting Policy required that the assets used in a Repo
105 transaction be readily obtainable, meaning that a market must exist where the
assets are either traded on a formal exchange or are considered liquid and trade in a
market where price quotations either are published or are obtainable through another
verifiable source.2 The true sale opinion letter for Repo 105 transactions that
Lehman received from the Linklaters law firm, conditioned its opinion on the
assumptionthatthePurchasedSecuritiesconsistofliquidsecurities,sothattheBuyer
could easily dispose of the Purchased Securities and acquire equivalent securities if it
wished.3
For the vast majority of Repo 105 transactions, Lehman used relatively liquid
securities,buttherewerecertainexceptions.4ThreefieldsofdatalistedintheLehman
GFS balance sheet files are potential indicators of the relative liquidity of securities
LehmanusedinRepo105transactions:(1)securitytype,(2)creditrating,and(3)SFAS
157pricinginputlevel.5TheExamineranalyzeddatafromLehmanGFSbalancesheet

2LehmanBrothersHoldingsInc.,AccountingPolicyManualforRepo105andRepo108(Sept.9,2006),at

p.2[LBEXDOCID3213290].
3LetterfromLinklaters,toLehmanBrothersInternational(Europe),re:RepurchaseTransactionsundera

Global Master Repurchase Agreement (May 31, 2006), at p. 2 [LBEXLBIE 000001]; see also email from
ThomasSiegmund,Lehman,toKaushikAmin,Lehman(May2,2008)[LBEXDOCID601783]([I]nternal
accountingsetrulesonwhatpapercanbe105ed....[I]nthepast,wehadtousethemostliquidpaper..
..[T]hetruesaleopinionislinkedtoliquidityandqualityofpaperthelowerliquidityandquality,the
deeperthediscountwouldhavetobeandconsequentlythemoreexpensivetheexercise.).
4Duff&Phelps,Repo105SecurityLiquidityAnalysis(Oct.21,2009),atp.1.
5Id.at1.


documentsdatedNovember30,2007(fiscalyear2007),February29,2008(firstquarter
2008), and May 30, 2008 (second quarter 2008). The analysis shows that for the most
part,Lehmancompliedwithitspolicyofusingonlyreadilyobtainablesecurities.6
Most securities Lehman used in Repo 105 transactions were governmental in
nature, implying a certain level of liquidity.7 While representing a relatively small
percentageofLehmanstotalRepo105assets/securities,attimesthenominalamountof
nongovernmentalsecuritiesLehmanusedinRepo105transactionswasquitelarge.
Forexample,asofFebruary29,2008(theendofLehmansfirstquarter2008),Lehman
utilized over $1 billion of highly structured securities, i.e., CLOs and CDOs, private
RMBS, CMBS and assetbacked securities, in Repo 105 transactions.8 In the market
environment that existed for Lehman in early 2008, these structured securities were
likelyrelativelyilliquidasindicatedbydeclinesinoriginationvolumes,widerbidoffer
spreads,andhighermarginrequirements.9

6Id.at12.
7This

security type includes, but is not limited to, governments, treasuries, and agencies. Agencies
included Federal Home Loan Mortgage Corporation (Freddie Mac), Federal National Mortgage
Association (Fannie Mae), and Federal Home Loan Bank System securities. See email from Michael
McGarvey,Lehman,toJeffMichaels,Lehman,etal.(May22,2008)[LBEXDOCID482311](transmitting
list [LBEXDOCID 472396] of available collateral for Repo 105 transactions, including Freddie Mac and
FannieMae).Bylatesummer2008,however,FreddieMacwasnolongerusedforRepo105transactions
duetocounterpartydemands.SeeemailfromMarcSilverberg,Lehman,toChazGothard,Lehman,etal.
(Aug.7,2008)[LBHI_SEC07940_1742976](statingthatFreddieMachasbeenremovedfromaRepo105
counterpartyslistbecauseitisnolongeracceptablecollateraltopostfor105).
8Duff&Phelps,Repo105SecurityLiquidityAnalysis(Oct.21,2009),atp.1.
9Id.at4.

10


LehmanusedthefollowingvolumesofnongovernmentsecuritiesinRepo105
transactions:10

November 30, 2007: $4.8 billion (out of a total of $29.9 billion in Repo 105
transactions),or16%ofthetotalRepo105volume;

February 29, 2008: $4.8 billion (out of a total of $41.8 billion in Repo 105
transactions),or11%ofthetotalRepo105volume;and

May 30, 2008: $4.2 billion (out of a total of $44.5 billion in Repo 105
transactions),or9%ofthetotalRepo105volume.

10Id. at 3. Note that the figures listed immediately below and in the succeeding chart report only the

volumesofRepo105transactionsthatLehmanengagedinatquarterendforthereportedperiod.The
figures do not include the volume of Repo 108 transactions that Lehman undertook at the quarterend
periods.

11

Repo105UsagebySecurityType1
($ in Millions, # Actual)
Security Type
Governments

Nov. 30, 2007


Usage

Feb. 29, 2008

% of Use. # of Sec.

Usage

May. 30, 2008

% of Use. # of Sec.

Usage

% of Use. # of Sec.

Usage

Aug. 27, 20082


% of Use. # of Sec.

$ 15,519

52%

447

$ 21,402

51%

421

$ 27,357

61%

372

$ 11,208

63%

212

Treasuries

1,778

6%

18

5,508

13%

62

6,533

15%

84

2,658

15%

44

Agency

7,828

26%

96

10,121

24%

123

6,340

14%

61

38

0%

28

0%

26

65

0%

13

74

0%

19

26

0%

Sovereigns - Eurobonds
Canadian
Total Governmental
Corporate
CMO Agencies 3
Asset Backs 4
Corporate - Non G7
Equity
Money Markets
Private Label5
Convertibles
Lehman Paper

-%

-%

64

0%

70

0%

$ 25,153

84%

587

$ 37,096

89%

619

$ 40,367

91%

539

$ 14,000

78%

267

3,430

11%

449

3,319

8%

384

3,234

7%

383

2,968

17%

386

809

3%

80

937

2%

109

346

1%

25

230

1%

19

76

0%

13

99

0%

240

1%

21

84

0%

109

0%

58

117

0%

53

96

0%

45

25

0%

24

44

0%

57

16

0%

87

0%

156

1%

13

0%

18

0%

54

0%

42

0%

25

0%

24

0%

32

0%

14

0%

157

1%

144

0%

0%

0%

0%

0%

11

0%

Fund Units

-%

0%

0%

0%

Sovereigns - Locals

-%

-%

-%

317

2%

Strips

-%

73

0%

-%

-%

Wholeloan6

-%

-%

-%

-%

1
2

Other6

-%

-%

-%

-%

Blank 7

110

0%

-%

67

0%

-%

$ 29,916

100%

1,264

$ 41,844

100%

1,188

$ 44,536

100%

1,036

$ 17,847

100%

733

Total Repo 105 Usage 8

1.TheGFSbalancesheetfield"AssetCategory1"wasusedtoassignassetcategoriestotheRepo105securities.AcombinationoftheAccountnumber,Productnumberanda
numberofotheridentifierssuchasDivision,AccountNameandBPMLevelswereusedtoidentifytheRepo105securityontheGFSbalancesheet,inordertoascertainan
assetcategoryfromtheGFSbalancesheet.
2.The"BenefitSplit"fieldintheRepo105spreadsheetforAugust27,2008wasfoundtomatchtheAssetCategory1fieldontheGFSbalancesheetforAug29,2008(withthe
exceptionofonesecuritywithaRepo105usageof~$4.6MM).Therefore,weusedtheBenefitSplitfieldtoidentifythesecuritytypeforallRepo105securities,including
onesthatweremissingfromtheAugust29,2008GFSbalancesheet.

ThetotalRepo105UsageforAugust27,2008,of$17.847billiondoesnotagreetotheTotalRepo105Usagepresentedinthesummaryinformationof$22.067billion.Thisis
becausethesummaryinformationcontainsamanualadditionof$4.220billiondollarstotheformulascalculatingtheMTSAmericaandITSAsiaRepo105usage.Thereis
nounderlyingsupportwithinthesecuritydetailRepo105Usagedatafortheseadditions,andwewerethereforeunabletoincludethoseamountsinouranalysis.

3.CMOAgencycategoryincludedsecuritieswhoseBloombergtypeswereCDO,CLO,NonAgencyMBS,CMBSandCreditlinkednotes.Thiscategorizationwasamisnomer.
4.TheAssetBackscategoryincludedsecuritieswhoseBloombergtypeswereCDO,CLO,MBSandotherABS.
5.ThePrivateLabelcategoryincludesPrivateLabelMBSandCMBSsecurities.
6.The"Wholeloan"and"Other"categoriesincludeentriesintheMayandAugustof2008intheRepo105inventory(see#ofSec.columns),howevertheyhada$0Repo
usagelisted.ThiscausesthesebucketstoshowapositivecountdespiteshowingnoRepo105usage.
7.BlankreferstosecuritiesthatdidnothaveanAssetCategory1typeintheGFSbalancesheet.
8.Duetoroundingdifferences,theTotalRepo105Usagemaynotequaltothesumofthecomponentsabove.
Sources:

November30,2007:LBEXDOICD3219746;February29,2008:LBEXDOCID3219760;May30,2008:LBEXDOCID2078195;August27,2008:LBEXDOCID3361504.
GFSbalancesheetsfor:November

The vast majority of securities Lehman utilized in Repo 105 transactions were
investmentgrade,withallbutafewofthesecuritiesfallingwithintheAtoAAArange.
Inaddition,themajorityofLehmansRepo105securitiesfitwithinLevel1underSFAS

12


157sFairValueLevelGAAPrequiredreportingcategories.11OnNovember30,2007,
71% of Lehmans Repo 105 securities were Level 1.12 On February 29, 2008, 82% of
LehmansRepo105securitieswereLevel1.13OnMay30,2008,86%ofLehmansRepo
105 securities were Level 1.14 For any quarterending period, the remainder of assets
Lehman used in Repo 105 transactions consisted primarily of Level 2 securities; the
evidence indicates that Lehman used few Level 3 assets for Repo 105 transactions.
Nevertheless,onMay30,2008,forexample,LehmanusednineteenLevel3securitiesin
$153millionofRepo105transactions.15

11The valuation of Level 1 assets under SFAS 157 requires the use of directly observable inputs, i.e.,

quoted prices in active markets for identical assets or liabilities accessible on the valuation date. The
valuationofLevel2assetsrequirestheuseofdirectlyorindirectlyobservablepricesinactivemarketsfor
similarassetsorliabilities,quotedpricesforidenticalorsimilaritemsinmarketsthatarenotactiveand
inputsotherthanquotedpricessuchasyieldcurves,creditrisks,andvolatilities.Andthevaluationof
Level3assetsrequirestheuseofunobservableinputsthatreflectmanagementsownassumptionsabout
theassumptionsthatmarketparticipantswouldmake.
12Duff&Phelps,Repo105SecurityLiquidityAnalysis(Oct.21,2009),atp.6.
13Id.
14Id.
15Id.

13

Repo105UsagebyCreditRating1
($ in Millions, # Actual)

Nov. 30, 2007

Credit Rating

Usage

AAA
AA
A
Total A-Range
BBB

Feb. 29, 2008

% of Use. # of Sec.

Usage

May. 30, 2008

% of Use. # of Sec.

Usage

% of Use. # of Sec.

Usage

Aug. 27, 20082


% of Use. # of Sec.

$ 18,989

63%

581

$ 30,113

72%

652

$ 31,258

70%

497

$ 10,269

58%

276

5,871

20%

220

6,453

15%

190

5,135

12%

167

2,118

12%

131

3,123

10%

209

2,961

7%

170

4,592

10%

157

3,988

22%

105

$ 27,984

94%

1,010

$ 39,526

94%

1,012

$ 40,985

92%

821

$ 16,375

92%

512

749

3%

121

943

2%

94

586

1%

113

271

2%

77

$ 28,732

96%

1,131

$ 40,470

97%

1,106

$ 41,571

93%

934

$ 16,645

93%

589

BB

77

0%

14

45

0%

11

67

0%

18

48

0%

18

32

0%

0%

50

0%

20

48

0%

23

CCC

-%

-%

47

0%

55

0%

-%

-%

15

0%

-%

NR

0%

0%

70

0%

82

0%

Total Investment Grade

Missing3
Blank 4
Total Repo 105 Usage

-%

-%

-%

140

1%

21

1,073

4%

109

1,328

3%

66

2,717

6%

55

829

5%

70

$ 29,916

100%

1,264

$ 41,844

100%

1,188

$ 44,536

100%

1,036

$ 17,847

100%

733

1.TheGFSbalancesheetfield"StandardandPoorRating"wasusedtoassigncreditratingstotheRepo105securities.AcombinationoftheAccountnumber,Productnumber
andanumberofotheridentifierssuchasDivision,AccountNameandBPMLevelswereusedtoidentifytheRepo105securityontheGFSbalancesheet,inordertoascertaina
creditratingfromtheGFSbalancesheet.
Intermediateratings(e.g.BBB+,BBB,etc.)aregroupedintotheBBBratingcategory.
IfsecuritiesdidnothaveanS&Prating,butdidhaveaMoody'srating,theMoody'sratingwastranslatedintothecorrespondingS&Prating,andwasaggregatedintothedata.
Thiswasthecasefor91securities(totaling$1,016,149,209)asofNovember30,2007;81securities(totaling$1,002,564,495)asofFebruary29,2008;77securities(totaling
$1,368,098,094)asofMay30,200;and59securities(totaling$556,476,516)asofAugust27,2008.NoFitchRatingsinformationwasavailable.
2.AGFSbalancesheetforAugust27,2008wasnotavailable.Asaresult,weusedtheAugust29,2008GFSbalancesheettoinferaCreditRating,assumingthatitwouldnot
havechangedduringthetwodayperiod.Asaresult,thereisahigherpercentageof'Missing'securities,pleaseseefootnote3forfurtherdiscussion.
ThetotalRepo105UsageforAugust27,2008,of$17.847billiondoesnotagreetotheTotalRepo105Usagepresentedinthesummaryinformationof$22.067billion.Thisis
becausethesummaryinformationcontainsamanualadditionof$4.220billiondollarstotheformulascalculatingtheMTSAmericaandITSAsiaRepo105usage.Thereis
nounderlyingsupportwithinthesecuritydetailRepo105Usagedatafortheseadditions,andwewerethereforeunabletoincludethoseamountsinouranalysis.
3."Missing"referstoallentriesthatcouldnotbeidentifiedintheGFSbalancesheet.ThisoccurredonlyasofAugust27,2008becauseofthetwodaygapbetweentheGFS
balancesheetused,andtheRepo105usagedata.WehaveaccessonlytomonthendGFSbalancesheetinformation.
4.BlankreferstosecuritiesthatdidnothaveaCreditRatingentryintheGFSbalancesheet.UponmanualexaminationofthesecuritieswithblankcreditratingsasofMay30,
2008,weidentifiedU.S.TreasuryInflationIndexNotes,JapaneseandGermanTreasuries,andU.S.Agencies.
5.Duetoroundingdifferences,theTotalRepo105Usagemaynotequaltothesumofthecomponentsabove.
Sources:

November30,2007:LBEXDOICD3219746;February29,2008:LBEXDOCID3219760;May30,2008:LBEXDOCID2078195;August27,2008:LBEXDOCID3361504.
GFSbalancesheetsfor:November30,2007,February29,2008,May30,2008,andAugust31,2008

14

Repo105UsagebyFAS157FairValueLevel1
($ in Millions, # Actual)
Fair Value Level

No v. 30, 2007
Usage

Feb. 29, 2008

% of Use. # of Sec.

Usage

Aug. 27, 20082

May. 30, 2008

% of Use. # o f Sec.

Usage

% of Use. # of Se c.

Usage

% o f Use. # of Sec.

$ 21,132

71%

435

$ 34,115

82%

454

$ 38,349

86%

430

$ 12,834

72%

221

8,673

29%

821

8,076

19%

725

5,967

13%

586

4,358

24%

479

0%

0%

153

0%

19

515

3%

12

Mis sing3

-%

-%

-%

140

1%

21

Blank 4
Total Repo 105 Usa ge 5

105

0%

(352)

(1% )

67

0%

-%

$ 29,916

100%

1,264

$ 41,844

100%

1, 188

$ 44,536

100%

1,036

$ 17,847

100%

733

1.ValuationofLevel1assetsrequiretheuseofdirectlyobservable inputs,i.e.quotedpricesinactivemarketsforidenticalassetsorliabilitiesaccessibleonthevaluationdate.
Suchpricesarenotadjustedforanyeffectsofthereportingentityholdi ngalar geshareoftheoverall tradingvolume.
V aluationofLevel2assetsrequiretheuse ofdirectly orindirectlyobservable pricesi nactivemarketsforsimilarassetsorliabilities,quotedpricesforidenticalorsimilaritems
inmarketsthatarenotactive,andinputsotherthanquotedpricessuchasyieldcurves,creditrisksandvolatilities.Suchpricesarenotadjustedforanyeffectsofthe reporting
entityholdingalargeshareoftheoveralltr adingvolume.
V aluationofLevel3assetsrequiretheuse unobservable inputs thatreflect management'sownassumptionsabouttheassumpt ionsthatmarketparticipantswouldmake.
TheGFSbalancesheetfield"FairValue Level"wasusedtoassignFASLevelsto theRepo105sec urities.Acombinationofthe Accountnumber,Productnumberandanumber
ofotheridentifierssuchasDivision, AccountNameandBPMLevelswer eusedtoidentifytheRepo105securityontheGFSbalancesheet,inordertoascertainaFAS157Level
fromtheGFSbalancesheet.
TherewereseveralRepo 105securities whichcontainedmorethanoneentryintheGFS balancesheet ,suchthatoneofthemwouldhaveablankFairValueLevel,withall
otherdescriptionsequal,exceptfor thebalances.WeassumedthatFairValueLevelswouldbeconsistentforthesame products,andassignedtheFairValueLevelofthenon
blankentries.Therewerealsoanimmaterial number ofentr iesofRepo105securitieswhi chcontainedmorethanoneentryintheGFSbalancesheet ,and hadconflictingFAS
levelsforthesameproduct.Inthesecases,weattemptedtofindthe mostappropriateFASlevelbycompar ingthesecuritywith pastandfutureGFSbalancesheets.
2.AGFSbalancesheetforAugust27,2008wasnotavailable.Asaresult,weusedtheAugust29,2008GFSbalancesheettoinferaFAS157level,assumingthatit woul dnot
hav echangedduringthe twodayperiod.Asaresul t,thereisahigherpercentageof'Missing'securi ti es,pleaseseefootnote3forfurtherdiscussion.
ThetotalRepo105UsageforAugust27,2008,of $17.847billiondoesnotagreetotheTotalRepo105Usagepresentedin thesummaryinformationof$22.067billion.Thisis
becausethesummaryinformationcontainsamanualadditionof$4.220 billiondollarstotheformulascalculatingtheMTSAmericaand ITSAsiaRepo105usage.Ther eis
nounderlyingsupportwi thinthesecurity detailRepo105Usage datafortheseadditions,andwewerethereforeunabletoincludethoseamountsinouranalysis.
3."Missing"referstoallentriesthatcouldnot beidentifiedintheGFSbalancesheet.ThisoccurredonlyasofAugust27,2008becauseofthetwo daygapbet weentheGFS
balancesheetused,andtheRepo105usagedata.
4.Blankr eferstosecuritiesthatdidnot haveaFairValueLev elintheGFS balancesheet.AsofFebruary29,2008therewere 6securitieswithatotalRepo105Usageof$0,
whichhadaFairValueLevelof'C',whichwehaveclassifiedinthecountasBlank.
5.Due toroundingdifferences,theTotalRepo105Usagemaynotequaltothesumofthecomponentsabove.
Sources:

November30, 2007:LBEXDOICD3219746;February29,2008:LBEXDOCID3219760;May30,2008:LBEXDOCID2078195;August27,2008:LBEXDOCID3361504.
GFSbalancesheetsfor:November30,2007,February29,2008,May30,2008,andAugust31

15


C. Repo105Contracts
Lehmans internal Accounting Policy for Repo 105 transactions, the Linklaters
letter, and the July 2006 Global Balance Sheet Overview of Repo 105/108 PowerPoint
presentationreferredtotheGlobalMasterRepurchaseAgreement.16Lehmanacquired
legal opinions from Linklaters covering other forms of contracts namely, OSLA
(Overseas Securities Lending Agreement), GESLA (Master Gilt Edged Stock Lending
Agreement) and GMSLA (Global Master Securities Lending Agreement) but these
wereneverused.17
Instead,LehmanundertookallRepo105transactionspursuanttoaGMRAor
Global Master Repurchase Agreement, published by PSA and the International
SecuritiesMarketAssociation,usedforinternationalrepoagreements,andgovernedby
English law (subject to modification by the parties).18 Lehman also engaged in non

16LehmanBrothersHoldingsInc.,AccountingPolicyManual,Repo105andRepo108(Sept.9,2006),atp.

1[LBEXDOCID3213310](ThispolicyaddressesrepotransactionsexecutedintheU.K.underaGlobal
Master Repurchase Agreement (GMRA) provided the counterparty resides in a jurisdiction covered
underEnglishlaw....TheU.K.lawfirmofLinklatershasissuedustruesaleopinionscoveringRepo105
and Repo 108 transactions documented under a GMRA under English law.); Lehman, Global Balance
SheetOverviewofRepo105(FID)/108(Equities)(July2006),atp.1[LBEXWGM748489](Arepounder
aGlobalMasterRepurchaseAgreement[GMRA]isatruesale);id.at3(statinglegalopinioninplace
for GMRA); Letter from Linklaters, to Lehman Brothers International (Europe), re: Repurchase
TransactionsunderaGlobalMasterRepurchaseAgreement(May31,2006),atp.1[LBEXLBIE000001
000009] (You have asked us to review the Global Master Repurchase Agreement (GMRA) that you
intend to use for repos or reverse repos and buy/sell backs of securities and financial instruments
(Securities)withvariouscounterparties.).
17LehmanBrothersHoldingsInc.,AccountingPolicyManual,Repo105andRepo108(Sept.9,2006),atp.
1[LBEXDOCID3213310];Lehman,GlobalBalanceSheetOverviewofRepo105(FID)/108(Equities)(July
2006),atp.3[LBEXWGM748489].
18SeeSecuritiesIndustryandFinancialMarketsAssociation,SupplementalGuidanceNotes(June1997),
at p. 1, available at http://www.sifma.net/agrees/master_repo_supp_gn.pdf (The GMRA has been
developed as the standard agreement for international transactions in nonU.S. markets.). The MRA,

16


Repo105repotransactionspursuanttotheMRAorMasterRepurchaseAgreement,
publishedbytheBondMarketAssociation,usedintheUnitedStatesfordomesticrepo
agreements, and governed by the laws of the State of New York.19 In addition to the
differing choice of law provisions, the MRA and GMRA diverge with respect to: (1)
remedies in the event of default; (2) agency provisions; (3) certain marketbased
provisions; (4) the regulatory status of certain United States counterparties, addressed
by the MRA; and (5) United Kingdom gilt repo market, Australian, and Belgian
AnnexesavailablefortheGMRA.20
Relying upon internal, Lehmangenerated lists of confirmed Repo 105 trades
for certain quarterend periods in 2007 and 2008,21 the Examiner requested the
productionof:(1)anycontractsoragreementscoveringtheintercompanyrepopieceof
Repo105trades(e.g.,atransferofsecuritiesfromUnitedStatesbasedLehmanentities
toLBIE),ifthetradeincludedanintercompanytransferofassets;and(2)thecontracts
or agreements covering LBIEs transfer of the Repo 105 securities to thirdparty
counterparties.

however,makesavailableanAnnexIIIforInternationalTransactions,governedbyNewYorklaw,which
may be an alternative to the GMRA where U.S. counterparties already have an MRA in place between
thembutwouldliketotransactinforeignsecurities.Seeid.
19Id.
20Id.at2.
21Lehman,Repo105CollateralTest(Feb.29,2008)[LBEXDOCID609016](attachedtoemailfromKieran
Higgins,Lehman,toKaushikAmin,Lehman(Apr.8,2008)[LBEXDOCID738567]);Lehman,MTSRepo
Collateral with Counterparty (May 30, 2008) [LBEXDOCID 3237604] (attached to email from YingYi
Chen,Lehman,toMarcSilverberg,Lehman,etal.(Jun6,2008)[LBEXDOCID3234714]).

17


In addition to the contracts between LBIE and third parties, the Examiner also
obtained two repurchase agreements that covered the intercompany repo transactions
between LBI, a United Statesbased Lehman entity involved in Repo 105 transactions,
and LBIE relating to the confirmed Repo 105 trades referenced in the Lehman
produceddocuments.
ThefirstoftheintercompanyrepocontractswasaGMRAbetweenLBIEandLBI,
datedNovember1,1996.22AlthoughtheGMRAstandardformcontractwasgoverned
by and construed in accordance with the laws of England,23 the Annex amended the
controllinglawtoNewYork:
[E]xceptthatallthetermsandphraseswhichareusedinthisAgreement
and which expressly refer to statutory provisions of the United States of
America or any state thereof shall be governed by and construed in
accordancewiththefederallawsoftheUnitedStatesofAmericaandthe
lawsoftheStateofNewYork.24
The Annex also modifies the GMRA to cover U.S. Treasury instruments and
other securities that are cleared primarily through a clearance facility in the United
States.25TheAnnexmemorializestheintentofthepartiesthateachTransactionisa
repurchaseagreementasthat termisdefined in Section 101of Title11 oftheUnited
StatesCode...andasecuritiescontractasthattermisdefinedinSection741ofTitle

22Global Master Repurchase Agreement (Version1 Gross Paying Securities) (Nov. 11, 1996) [LBEXAM

333461].
23Id.17.
24Annex1toGlobalMasterRepurchaseAgreement,Part1,SupplementalTermsorConditions(Nov.1,
1996),4[LBEXAM333461].
25Id.

18


11 of the United States Code, as amended.26 The Annex also provides: It is
understoodthateitherpartysrighttoliquidateSecuritiesdeliveredtoitinconnection
with Transactionshereunderor to exerciseanyotherremediespursuantto Paragraph
10hereof,isacontractualrighttoliquidatesuchTransactionasdescribedinSection555
and559ofTitle11oftheUnitedStatesCode,asamended.27
Thesecondintercompanyrepoagreement,betweenLBIandLBCPIononehand
andLBIEontheother,wasaMRAdatedOctober6,1998andgovernedbyNewYork
law.28

26Id.
27Id.
28MasterRepurchaseAgreement(September1996Version)(Oct.6,1998),at16[LBEXAM333493].

19


D. LinklatersLetter29
OneSilkStreet
LondonEC2Y8HQ
Telephone(4420)74562000
Facsimile(4420)74562222
Group4Fax(4420)73749318
DXBoxNumber10CDE
DirectLine02074563764
DirectFax02074562222
simon.firth@linklaters.com

LehmanBrothersInternational(Europe)
OneBroadgate
LondonEC2M7HA
(LehmanBrothers)

31May2006

DearSirs

RepurchaseTransactionsunderaGlobalMasterRepurchaseAgreement
1 Introduction
1.1

You have asked us to review the Global Master Repurchase Agreement


(GMRA) that you intend to use for repos or reverse repos and buy/sell
backs of securities and financial instruments (Securities) with various
counterparties.ReferencestotheGMRAinthisopinionaretoboththe1995

29LetterfromLinklaters,toLehmanBrothersInternational(Europe),re:RepurchaseTransactionsundera

Global Master Repurchase Agreement (May 31, 2006) [LBEXLBIE 000001]. Lehmans internal Repo
105/108 Accounting Policy and an internal PowerPoint presentation referenced several iterations of the
LinklatersopinionletterandwitnessesstatethatLehmanrefreshedtheLinklatersletteronmorethanone
occasion.SeeLehman,GlobalBalanceSheetOverviewofRepo105(FID)/108(Equities)(July2006),atp.3
[LBEXWGM 748489] (stating that true sale opinion letter for GMRA was first obtained in May 2001,
updated in September 2004, and further updated in May 2006); Lehman Brothers Holdings Inc.,
AccountingPolicyManualRepo105andRepo108(Sept.9,2006),atp.1[LBEXDOCID3213293](stating
thatLinklatershasissuedopinionsunderaGMRA);seealsoExaminersInterviewofAnurajBismal,Sept.
16,2009,atp.8(statingthatEdwardGriebrefreshedtheLinklatersletter).ThoughLehmanrefreshedthe
letterseveraltimes,theExaminerhasbeenabletolocateonlyoneversionoftheLinklatersletter,dated
May31,2006.

20


versionandthe2000versionoftheGMRA:theanalysisinrelationtoeachof
themisthesame.
1.2

Forthepurposesofthisopinion,wehaveexaminedacopyoftheGMRAbut
nootherdocuments.TermsdefinedintheGMRAhavethesamemeaningsin
thisopinion.

1.3

Under the GMRA, the parties thereto may enter into transactions for
Securities (Transactions) in which one party, as Seller, agrees to sell
Securities (the Purchased Securities) to the other party as Buyer, against
thepaymentofaprice(thePurchasePrice)forthePurchasedSecuritiesto
Seller.

1.4

Atthesametime,thepartiesenterintoanagreementunderwhichBuyerwill
sell to Seller Securities equivalent to the Purchased Securities (the
EquivalentSecurities)atacertaindateorondemandagainstpaymentofa
price(theRepurchasePrice)bySellertoBuyer.

1.5

Thepurposeofthisopinionistoadviseyouaboutwhetherthetransferofthe
PurchasedSecuritiestotheBuyerforthePurchasePricemay,underEnglish
law, be classified as a sale involving the disposition of the Sellers entire
proprietaryinterestinthePurchasedSecurities,asopposedtoacharge.

1.6

ThisopinionislimitedtoEnglishlawasappliedbytheEnglishcourtsandis
given on the basis that it will be governed by and construed in accordance
withEnglishlaw.

1.7

Forthepurposeofthisopinionwehaveassumedthat:
(a)

there are no provisions of foreign law which would affect this


opinion;

(b)

the GMRA and each of the Transactions is within the capacity and
powers of each of the parties to it, will be validly executed and
delivered by those parties and is valid, binding and enforceable
underEnglishlaw;

(c)

at the time of each Transaction each of the assets comprising the


Purchased Securities are beneficially owned by Seller at the time of
itstransfertoBuyer;and

(d)

thePurchasedSecuritiesconsistofliquidsecurities,sothattheBuyer
could easily dispose of the Purchased Securities and acquire
equivalentsecuritiesifitwished.

21


2 Reclassificationofthetransaction
2.1

General
Generally speaking, the English courts recognise both the freedom of the
ownerof an assetto transfer hisinterestin that assetto another personand
thefreedomofthepartiestoacontracttodeterminethenatureoftheinterest
thatistobetransferred.Whetheracontractinvolvesthesaleoftheowners
entire interest in the asset or the transfer of some lesser interest, such as a
charge,isprimarilydeterminedbyconstruingthetermsofthecontract.
In determining whether a person has entered into a contract involving the
sale of an asset, the courts will look at the substance of the transaction: the
terminology used by the parties to the transaction is not necessarily
conclusive.Furthermore,ifaseriesoftransactionswithrespecttothesame
asset are entered into at the same time, it is the substance of the overall
arrangementswhichisimportant.Forexample,anarrangementbetweentwo
partiesmaypurporttoinvolveasalebutonitstrueanalysisactuallyamount
toacharge.Whetherthisisthecasewilldependonwhetherthelegalnature
of what has been agreed has the characteristics which the law recognises as
thoseofasaleorthoseofacharge.
In the present case, we understand that the Purchased Securities will be
transferredtoBuyerpursuanttotheGMRA.Usuallythecourtslookonlyto
the documentation pursuant to which assets have been transferred to
determinewhetherthepartiesintendedsuchatransfertobeasale(albeitthat
such documentation may be construed in the light of any relevant
background material). Accordingly, provided that the documentation
recordingthetransferofthePurchasedSecuritiestoBuyerisconsistentwith
the parties intentions that Seller should have disposed of its entire
proprietary interest in the Purchased Securities to the Buyer, that would, in
our opinion, evidence a sale rather than a charge. However, a court would
look at the overall arrangements to determine whether a transfer should be
classifiedas asale oras acharge whereit isalleged eitherthat theterms of
the documentation by which the assets were transferred had been
supplementedormodifiedbyprovisionsinotherdocumentationorelsethat
thesaledocumentationwasasham(seeparagraph2.5below).
Consequently, it is necessary to consider, with respect to any Transaction,
whether the arrangements for Buyer to transfer to Seller or its agent
Equivalent Securities against the payment of the Repurchase Price by Seller
(lessanydividends,interestorotherdistributionsofanykindpaidinrespect
ofthePurchasedSecurities(Income)thenpayableandunpaidbyBuyerto
22


Seller),wouldmeanthatthearrangementspursuanttowhichthePurchased
Securities were transferred to Buyer would be construed as a charge. If so,
Seller would retain a proprietary interest in the Purchased Securities and
would not have effected a sale of them. It is also necessary to consider
whethertheBuyersagreementtotransferanyIncometoSellerindicatesthat
Seller has not disposed of its entire proprietary interest in the Purchased
Securities.
2.2

Thedistinctionbetweenasaleandacharge
Inouropinion,oneoftheessentialcharacteristicsofasaleofanassetisthat
the seller intends to transfer outright to the buyer his entire proprietary
interest in the asset. Conversely, one of the essential characteristics of a
chargeisthat,despiteanytransferofassetsbetweentheparties,theyintend
thepersoncreatingthechargetoretainaproprietaryinterestintheproperty
whichisthesubjectofthecharge,sothatonthedischargeofhisobligations
heisentitledtothereturnofthatpropertyfromthechargee.Inotherwords,
thechargorhasnottransferredoutrighttothechargeehisentireproprietary
interest in the assets transferred but has retained such an interest as allows
himtodemandthereturnofthoseassetsonthedischargeofhisobligations.
Assets may be transferred to a transferee under an arrangement whereby
suchassetswillormaybetransferredbythetransfereeatalaterdatebackto
the transferor. However, if, in such a situation, the transferor is merely
entitledtothedeliveryofequivalentassets(suchassecuritiesofthesameseries
andnominalvalue)ratherthantheveryassetsthatwereoriginallydelivered,
thisis,inouropinion,inconsistentwiththeexistenceofachargebecausethe
transferor does not intend to retain a proprietary interest in the assets
originallydelivered.Theonlyexceptiontothisiswherethetransfereeisto
holdtheassetsonafungiblebasis,togetherwithotherpropertyofthesame
type, and the intention is to return a proportionate share of the pool of
property that is held in this way. In the present case, however, there is no
evidenceofanysuchintentionintheGMRA.Themerefactthatthesecurities
whicharetobedeliveredhavethesameCUSIPnumbersastheonesthatthe
transferee originally received would not prevent them from being regarded
asequivalentassetsratherthantheveryassetsthatwereoriginallydelivered.

23


2.3

TheeffectofthetransferofEquivalentSecurities
2.3.1

Transfer to Seller of equivalent assets and the option of cash


settlementintheeventofredemptionofthePurchasedSecurities
Paragraph 3(f) of the GMRA provides that Buyer shall transfer
EquivalentSecuritiestoSeller(i.e.,Securitieswhichareequivalentto,
and not necessarily the same as, the Securities comprising the
Purchased Securities, or, if and to the extent that the Purchased
Securitieshavebeen redeemed,bypaying acashsumequivalent to
theproceedsoftheredemption).Moreover,Buyerisnotrequiredto
hold the Purchased Securities separately from its own assets and
nothing in the GMRA expressly restricts Buyers right to deal with
thePurchasedSecurities.Thismakesitclearthatthepartiesdonot
intendSellertohavetherighttorequirethereturnoftheparticular
Purchased Securities transferred to Buyer in any Transaction or,
therefore, to retain any proprietary interest in the Purchased
Securities.Inouropinion,therefore,andsubjecttothepointsmade
below, the transfer of Purchased Securities under any Transaction
wouldbeconstruedasasaleratherthanacharge.

2.3.2

Substitution
Paragraph8oftheGMRAstatesthat,ifSellerrequestsandBuyerso
agrees,aTransactionmaybevariedbythetransferbyBuyertoSeller
ofSecuritiesequivalenttothePurchasedSecurities(orofsuchofthe
PurchasedSecuritiesasshallbeagreed)inexchangeforthetransfer
bySellertoBuyerofotherSecuritiesofsuchamountanddescription
asshallbeagreed(NewPurchasedSecurities).
Inouropinion,thevariationofanyTransactionbySellertransferring
the New Purchased Securities to Buyer in return for Securities
equivalent to the Purchased Securities does not affect the analysis
thattheoriginaltransferofPurchasedSecuritieswouldbeconstrued
as involving a sale rather than a charge. Again, Sellers right is to
Equivalent Securities not the Purchased Securities. Likewise,
providedthatSellerstransferofNewPurchasedSecuritiestoBuyer
underparagraph8oftheGMRAis,andisintendedtobe,subjectto
the same arrangements applying to the purchase of the Purchased
SecuritiesundertheGMRA,webelievethatsuchtransferwouldalso
be regarded as involving a sale of the New Purchased Securitiesby
Seller rather than a charge. This is not affected simply because the

24


consideration received by Seller in return for making that transfer
maybeitselfthetransferofEquivalentSecuritiesbyBuyer.
2.3.3

MarginPayments
With respect to any transaction under the GMRA, atany time from
the date of the purchase of the Purchased Securities (the Purchase
Date) to the date of the purchase of the Equivalent Securities (the
Repurchase Date) (or, if later, the date of the delivery of the
Equivalent Securities to Seller or the date of the termination of the
Transaction), each party is entitled to calculate its exposure under
that Transaction (the Transaction Exposure). The Transaction
Exposure is the difference between (i) the Repurchase Price
multiplied by the applicable Margin Ratio (subject to recalculation
where the Transaction relates to Securities of more than one
description to which different Margin Ratios apply) and (ii) the
MarketValueofEquivalentSecuritiesatsuchtime.Buyerwillhave
aTransactionExposureifthevalueof(i)isgreaterthanthevalueof
(ii)andSellerwillhaveaTransactionExposureifthevalueof(ii)is
greaterthanthevalueof(i).
Paragraph4oftheGMRAprovidesthatifatanytimeapartyhasa
NetExposureinrespectoftheotherparty, itmaybynoticerequire
the other party to make a transfer to it of an aggregate amount or
value at least equal to that Net Exposure (a Margin Transfer).
TherewillbeaNetExposureiftheaggregateofallofthefirstpartys
TransactionExposures(plusanyunpaidIncomePaymentsduetoit
but less the amount of Net Margin provided to it) exceeds the
aggregate of all the other partys Transaction Exposures (plus any
unpaidIncomePaymentsduetoitbutlesstheamountofNetMargin
providedtoit).
Subject to paragraph 4(d), when a party has a Net Exposure and
requires the other party to pay a Margin Transfer to it, the Margin
Transfer may be satisfied by the payment (or repayment) of Cash
Margin or the delivery of Margin Securities (or Equivalent Margin
Securities). Because the above arrangements do not give Seller any
righttothePurchasedSecurities,theydonotaffectouropinionthat
thetransferofthePurchasedSecuritiesunderanyTransactionwould
beconstruedasinvolvingasaleratherthanacharge.

25


Paragraph 4 of the GMRA, however, further provides that Net
Exposuremay beeliminated bytherepricingof Transactions orthe
adjustmentofTransactions,oracombinationofthesemethods.
IfaTransactionisrepriced,theOriginalTransactionisterminatedand
the parties enter into a new Transaction (the Repriced
Transaction).PurchasedSecuritiesundertheRepricedTransaction
are Securities equivalent to the Purchased Securities under the
Original Transaction. The obligations of the parties with respect to
thedeliveryofPurchasedSecuritiesandthepaymentofthePurchase
Price under the Repriced Transaction are set off against their
obligationswithrespecttothedeliveryofEquivalentSecuritiesand
thepaymentoftheRepurchasePriceundertheOriginalTransaction
and, accordingly, only a net cash sum is paid by one party to the
other.
If a Transaction is adjusted, the Original Transaction is terminated
and the parties enter into a new Transaction (the Replacement
Transaction), under which the Purchased Securities are Securities
agreed between the parties, the Market Value of which is
substantially equal to the Repurchase Price under the Original
Transaction.TheothertermsoftheReplacementTransactionareas
agreed between the parties. Assuming that under the Replacement
Transaction the parties agree that Buyer shall transfer Equivalent
Securities against payment of the Repurchase Price as per the
provisions of GMRA, we would restate our opinion in paragraph
2.3.1above.
Accordingly, we do not believe that these provisions affect our
conclusion that the transfer of the Purchased Securities under the
Original Transaction would be construed as involving a sale rather
thanacharge.
2.4

TheeffectofthearrangementsregardingIncome
Paragraph5oftheGMRAprovidesthatBuyerwillpaytoSelleranamount
equal to any Income which is paid in respect of the Purchased Securities in
the specified period. In certain circumstances, a transfer of assets coupled
with the retention of the right to receive the income on the assets could be
construedasinvolvingtheretentionofaproprietaryinterestinorrelatingto
the assets, i.e. a transfer of title subject to the reservation that the rights to
income are to be held on trust for the transferor. Alternatively, an

26


undertakingtopayincomeontheassetscouldbeconstruedasinvolvingan
impliedrestrictiononthetransfereesfreedomtodealwiththeassets.
In the present case, however, paragraph 5 of the GMRA makes it clear that
Buyers obligation in this respect is simply an obligation to pay an amount
whichisequivalenttoanyIncomepaidinrespectofthePurchasedSecurities
(there being, under the GMRA, no obligation to hold such Income in a
separateaccountoranyotherindicationthatatrustoveritand/ortherightto
receiveitisintended).
Asaresult,wedonotthinkthatthearrangementsregardingthepaymentof
anyamountsequivalenttoIncometoSellerwouldbeconstruedasinvolving
the retention by Seller of a proprietary interest in the Purchased Securities.
Accordingly, they do not affect the conclusion that, in our opinion, the
transferofthePurchasedSecuritiestoBuyerwouldbeconstruedasinvolving
asaleratherthanacharge.
2.5

Theeffectofthearrangementsregardingvoting
TheGMRAcontainsnoprovisionsregardingvotingrights.Accordingly,any
votingrightsattachedtothePurchasedSecuritiestherecorddateforwhichis
after they are transferred to the Buyer will pass to the Buyer. This is
consistent with our conclusion that the transfer would be construed as
involvingasaleratherthanacharge.
ThepositionisslightlydifferentundertheEquitiesAnnextotheGMRA(2000
version)(theEquitiesAnnex),whichcontainscertainsupplementaryterms
and conditions for transactions in equities. Paragraph 4(b) of the Equities
Annex provides that, where voting rights fall to be exercised in relation to
any Purchased Securities which are equities and in respect of which
Equivalent Securities have not been transferred, the Buyer shall use its best
endeavourstoarrangeforvotingrightsofthatkindtobeexercisedinrelation
to the relevant number of securities of that kind in accordance with the
Sellersinstructions.
If a provision entitling the Seller to direct how the votes attached to the
Purchased Securities must be exercised were construed as imposing an
obligationontheBuyertocontinuetoholdthePurchasedSecurities,sucha
provision might call into question whether the Seller had agreed to transfer
its entire proprietary interest in the Purchased Securities to the Buyer. The
courtsmightconcludethatthesubstanceofthearrangementsinsuchacase
was that the Buyer had agreed to hold the Purchased Securities during the
term of the transaction and, notwithstanding the references to Equivalent

27


Securities,thetrueagreementwasthattheBuyerhadagreedtoredeliverthe
Purchased Securities on the termination of the transaction. This might, in
turn, lead to the conclusion that the arrangements were intended to involve
nomorethanachargegrantedbytheSelleroverthePurchasedSecuritiesin
favour of the Buyer. Alternatively, the GMRA might be construed as
imposingatrustoverthevotingrightsinfavouroftheSeller.
Paragraph 4(b) of the Equities Annex, however, provides that the Sellers
righttogiveinstructionsregardingtheexerciseofvotingrightsappliesonly
iftheBuyerisholdingthePurchasedSecurities.TheEquitiesAnnexcannot,
therefore, be construed as imposing an express or implied obligation on the
BuyertocontinuetoholdthePurchasedSecurities,orasconstitutingatrust
overthevotingrightsinfavouroftheSeller.Accordingly,thisdoesnotaffect
our conclusion that the GMRA involves a sale of the Purchased Securities,
eveniftheyincludeequitiesandtheEquitiesAnnexisused.
2.6

Shamtransactions
In coming to the conclusions set out in this opinion, we have assumed that
the GMRA accurately reflects the agreement between the parties. If it is
merelyasham,i.e.thecommonintentionofthepartiesisnottocreatethe
legalrightsandobligationswhichtheGMRAhastheappearanceofcreating,
thenextrinsicevidencemaybeadducedtoenablethecourtstodiscoverwhat
wasactuallyagreed.Forexample,ifthepartiescommonintentionisthatthe
BuyerwillnottransferEquivalentSecuritiesontheRepurchaseDate,butthis
provisionhasbeenincludedtomakethetransferofthePurchasedSecurities
bySellerlooklikeitinvolvesasale,thecourtswillignoresuchprovisionin
determiningwhetherthetransferactuallydidinvolveasaleornot.
Similarly, if the parties subsequently enter into an agreement (orally, in
writingorbyconduct)whichisinconsistentwiththeGMRA,thecourtsmay
decide that they have agreed to vary the terms of the GMRA. We have
thereforeassumedthatnosuchagreementhasbeenorwillbeenteredinto.

Transferofownership
The steps that are required to be taken to transfer assets from one person to
anotheraredeterminedbyreferencetothelawsofthejurisdictioninwhichthe
assets areregardedin lawasbeingsituated(the lexsitusoftheassets).Hence,
evenif,asamatterofEnglishlaw,Sellerwouldberegardedashavingsoldthe
Purchased Securities to Buyer (i.e. as having agreed to transfer its entire
proprietaryinterestinthePurchasedSecuritiestoBuyer),whetherSellersentire
proprietary interest has in fact been transferred pursuant to the GMRA is a

28


matter for the lex situs of the Purchased Securities. In other words, the mere
entry into of the GMRA (or any Transactions under it) will not be sufficient to
transfertitletothePurchasedSecurities.ThePurchasedSecuritiesmustactually
betransferredpursuanttotheGMRA.Thestepsthatneedtobetakentoachieve
this will be a matter for the lex situs. Where title to the Purchased Securities is
evidenced by entries in a register or account maintained by or on behalf of an
intermediaryandRegulation19oftheFinancialCollateralArrangements(No.2)
Regulations2003applies,thiswillbethelawofthecountryinwhichtheaccount
ismaintained.
Furthermore the nature of Buyers interest in the Purchased Securities will
dependonthenatureoftheassetsconstitutingthePurchasedSecuritiesandthe
wayinwhichsuchareheldbyBuyer.Inotherwords,thatinterestmaynotbea
proprietary interest. For example, if as provided by paragraph 6(a) of the
GMRA, delivery of the Purchased Securities takes place by book entry transfer
throughEuroclear,Clearstreamoranagreedsecuritiesclearingsystem,thismay
not involve the transfer of a proprietary interest in any securities held in such
system but merely an adjustment to the contractual (or other) obligations
between the system (or its operator) and the person through which the
Purchased Securities are held by Buyer in the system (ie the asset in question
couldbecontractualrightsinrespectofthePurchasedSecurities,ratherthanthe
Purchased Securities themselves). However, in each case, provided that Seller
transferstoBuyeralltherightsandinterestsitmayhaveinorinrelationtothe
PurchasedSecurities,retainingnoenforceableinterests,andintendingtotransfer
itsentireproprietaryinterest,theninouropinion,thetransferwouldproperlybe
consideredasaleasopposedtoacharge.
4

Thecreationofafreshproprietaryinterest
Even if the arrangements between Seller and Buyer for the transfer of the
Purchased Securities would be construed as a sale and, hence, an agreement to
transfer Sellers entire proprietary interest in the Purchased Securities, it also
needstobeconsideredwhether,inrespectofanyTransaction,theobligationof
Buyer to transfer Equivalent Securities to Seller on the Repurchase Date gives
SellerafreshproprietaryinterestintheEquivalentSecurities.
4.1

TheeffectoftheobligationtodeliverEquivalentSecurities
UnderEnglishlaw,whereapersonhasacontractualrighttorequirethe
deliveryofanassetandthecourtswouldbepreparedtograntadecreeof
specific performance to enforce the delivery obligation, he is treated as
havingthebeneficialownershipofthatasset.Accordingly,wherethelex
29


situsoftheSecuritiesconstitutingtheEquivalentSecuritiesisEnglishlaw,
thenifSellercouldobtainsuchadecreeinrespectofBuyersobligations
to transfer Equivalent Securities, Seller would be the beneficial owner of
theEquivalentSecuritiesandBuyerwouldholdtheEquivalentSecurities
ontrustforit.
Anorderofspecificperformanceisadiscretionaryremedyandwhetherit
will be given in any case will, therefore, depend on the circumstances.
Generally, the courts will order specific performance where a failure to
performcannotbeadequatelycompensatedforbyanawardofdamages,
butnototherwise.Thecourtshavepreviouslytakentheviewthatwhere
a person owns assets which are not readily available (i.e. where their
equivalentcannotbereadilyobtainedfromanothersource),damagesmay
notbeanadequateremedyforabreachofanobligationhehasaccepted
to transfer them, and this will justify an order of specific performance.
However, a court will not usually order specific performance of an
obligationtotransferanassetwheretheobligeemayfulfillhisobligations
to a counterparty either by transferring the asset or by doing something
else.
WhetherSellerhas,asaresultofBuyersobligationtotransferEquivalent
Securities,aproprietaryinterestintheEquivalentSecurities,willdepend
ontheliquidityoftheSecuritieswhichcomprisetheEquivalentSecurities.
If the Securities are readily available in the market, specific performance
would not, in our opinion, be available and so this obligation of Buyer
would not give Seller a proprietary interest in the Equivalent Securities.
On the other hand, if the Equivalent Securities are very illiquid, so that
there is only a very limited market for them, following the Repurchase
Date, a decree of specific performance probably could be obtained by
Seller to enforce Buyers obligations. At least at that stage, therefore,
Seller probably would have a proprietary interest in the assets. In the
present case we have assumed that, in respect of any transaction, all the
Securities comprising the Equivalent Securities are liquid. The issue
thereforewouldonlyariseifthisweretoceasetobethecasepriortothe
RepurchaseDate.
4.2

The effect of the agreement to pay Income to Seller and vote in


accordancewithitsinstructions
ItmightbearguedthatBuyersagreementinparagraph5oftheGMRAto
pay to Seller any Income which is paid in respect of the Purchased

30


Securities could be construed as involving an assignment of, or a
declarationoftrustover,BuyersrightstothatIncome.Similarly,itmight
be argued that the arrangements in the Equities Annex regarding the
exerciseofvotingrightscouldbeconstruedasinvolvinganassignmentof,
oradeclarationoftrustover,thevotingrightsattachedtothePurchased
Securities. However, for the same reasons that we do not consider that
this agreement would be construed as the reservation of a proprietary
interestinrespectofthePurchasedSecurities(seeparagraphs2.4and2.5
above),wedonotbelievethatitwouldbeconstruedasthecreationofa
fresh proprietary interest over them, whether in respect of Income or
votingrights.
5

Conclusion
Subjecttothequalificationssetoutinthisopinion,inrespectofeachTransaction,
following the transfer by Seller to Buyer of the Purchased Securities, in our
opinion, Seller will have disposed of its entire proprietary interest in the
PurchasedSecuritiesbywayofsale.

Relianceonthisopinion
This opinion is addressed to you solely for your benefit in connection with the
issueoftheNotes.Itisnottobetransmittedtoanyoneelse,norisittoberelied
upon by anyone else or for any other purpose or quoted or referred to in any
publicdocumentorfiledwithanyonewithoutourexpressconsent.However,a
copyofthisopinionmaybeprovidedbyLehmanBrotherstoitsauditorsforthe
purposeofpreparingthefirmsbalancesheets.Weacceptnoresponsibilityor
legalliabilitytoanypersonotherthantheaddresseesspecifiedaboveinrelation
tothecontentsofthisopinion.

Yoursfaithfully

/s/Linklaters

Linklaters

31


1.

Section2.4oftheLinklatersLetter

Repo 105 transactions allowed Lehman to maintain its level of earning assets
whilereducingthesizeofitsbalancesheet.30Theoutrightsaleofsecuritiesinventory
followed by a corresponding payoff of liabilities with the sale proceeds also would
have reduced the size of Lehmans balance sheet. However, in contrast to Repo 105
transactions, an outright sale would have removed the net earnings associated with
those securities sold.31 While Lehman removed the securities inventory used in Repo
105 transactions from its balancesheet for accounting purposes,Lehman continued to
earnincomeonthesecuritiesthroughoutthetermoftheRepo105transaction.32
TheLinklaterslettermadeclearthatinthetransactionscontemplatedunderthe
letter,income(i.e.,couponpayments)receivedduringthetermoftherepobythebuyer
wouldbepaidorotherwisecreditedtoLehmansaccount.33Forsupport,theLinklaters

30Duff&Phelps,Repo105QuestionforExaminersReport(Nov.30,2009),atp.1.
31Id.at2.
32Id.at2.
33LetterfromLinklaters,toLehmanBrothersInternational(Europe),re:RepurchaseTransactionsundera

Global Master Repurchase Agreement (May 31, 2006), 2.4 [LBEXLBIE 000001]. The Linklaters letter
interpretstheGMRAprovisionguaranteeingthattherepoborrowercontinuestoreceivetheincomefrom
the transferred securities as evidence that the repo borrower does not continue to have a proprietary
interestinthesecurities.Id.TheLinklatersletteracknowledgedthecounterargument,namelythatthe
repoborrowerholdsaproprietaryinterestinthetransferredsecurities:

In certain circumstances, a transfer of assets coupled with the retention of the


right to receive the income on the assets could be construed as involving the
retentionofaproprietaryinterestinorrelatingtotheassets.

Id. Linklaters, however, read Paragraph 5s wording that the repo lender is obligated to pay the repo
borrower an amount equal to the amount paid by the issueras only anobligation to pay an amount

32


letter referred to Paragraph 5 of the Global Master Repurchase Agreements Lehman
usedforRepo105transactions.34Specifically,Paragraph5(i)providedthatwherethe
Term of a particular Transaction extends over an Income Payment Date in respect of
anySecuritiessubjecttothatTransaction,Buyer[i.e.,therepolender]shallonthedate
suchIncomeispaidbytheissuertransfertoorcredittotheaccountofSeller[i.e.,the
repoborrower]anamountequalto(andinthesamecurrencyas)theamountpaidby
the issuer.35 Typically, ordinary repo transactions would also have this feature the
abilitytoreceivecouponpaymentsduringthetermoftherepo.36Thisfeaturetherefore
doesnot explainwhy Lehman wouldundertakeaRepo 105transaction,insteadofan
ordinaryrepotransaction.
Thus, for example, assuming Lehman owned a security with a 4.0% yield,
fundedbyaliabilitythatcost2.5%,Lehmansnetearningsonthatpositionwouldhave

equivalenttotheincomeonthesecurities,ratherthantheincomeitself,becausetheGMRAdidnotrequire
thattheincomebeheldinaseparateaccountortrust.Id.
34Securities Industry and Financial Markets Association, Standard Forms, Global Master Repurchase
Agreement(1995)5IncomePayments,[GMRA1995Version],availableat:
http://www.sifma.org/services/stdforms/globalmasterrepurchase.html; Securities Industry and Financial
Markets Association, Standard Forms, Global Master Repurchase Agreement (2000) 5 Income
Payments,[GMRA2000Version],availableat:
http://www.sifma.org/services/stdforms/globalmasterrepurchase.html.
35SeeGMRA1995Version,5IncomePayments;GMRA2000Version,5IncomePayments.
36CompareGMRA1995Version,5IncomePayments;GMRA2000Version,5IncomePaymentswith
Securities Industry and Financial Market Association, Standard Forms, Master Repurchase Agreement
(1996) 5, available at: http://www.sifma.org/services/stdforms/MRA/html. See also Master Repurchase
Agreement(1996version);seealsoMasterRepurchaseAgreementGuidanceNotes(Sept.1996Version),at
p. 4, available at http://www.sifma.org/services/stdforms/pdf/master_repurchase_gn.pdf (As amended,
theParagraphconfirmsthatSellerisentitledtoreceivefromBuyeranamountequaltoallpaymentsor
distributionsofIncomemadeonorinrespectofthePurchasedSecuritiestothefullextentitwouldbeso
entitled if the Purchased Securities had not been sold to Buyer (except insofar as Seller may have
otherwisereceivedthem).).

33


been 1.5%.37 In a Repo 105 transaction, although the securities were removed from
Lehmansbalancesheet,Lehmancontinuedtoearnthe1.5%netspread.38Inanoutright
sale, by contrast, Lehman would have earned $0 (zero) on the securities sold and
wouldhavehadnocostonthecorrespondingliabilityextinguishedovertheperiodin
whichthesecuritiesremainedsold.39Inotherwords,inanoutrightsaleLehmanwould
havelostallthenetearningsassociatedwiththesecuritiesposition.40Assuch,evenif
thecostofRepo105transactionswasgreaterthanthatofordinaryborrowingsitpaid
offwiththeRepo105proceeds,LehmanwouldhavehadanincentivetouseRepo105
transactionsinsteadbecausethebenefittoLehmanwastwofold:reductioninbalance
sheetwhileallowingLehmantoearnincome.41
Totakeanotherexample,ifaborrowingunderaRepo105transactioncost2.65%
(15 basis points more than the borrowing in the previous example), Lehman would
havehadnetearningsof1.35%ontheRepo105securities(4.0%securityyield,minus
2.65%Repo105borrowingcost).42Eventhoughthe1.35%islowerthanthenetearnings
of1.5%(earningsonsecuritiesfundedbycheaperordinaryborrowings)fromearlierin
this example, in contrast to the outright sale of securities, every dollar of net earnings

37Duff&Phelps,Repo105QuestionforExaminersReport(Nov.30,2009),atp.2.
38Id.
39Id.
40Id.
41To

be clear, this twofold incentive for Repo 105 is relative to an outright sale. Like Repo 105
transactions, Lehman typically continued to earn income on securities transferred in ordinary repo
transactions.
42Duff&Phelps,Repo105QuestionforExaminersReport(Nov.30,2009),atp.2.

34


from a Repo 105funded security transaction would have resulted in incremental
incomeforLehman.43
Other potential reasons for Lehmans reliance on Repo 105 transactions as
opposed to outright sales are less compelling. For example, the bid/offer spread may
haveprecludedtheuseofanordinarysalefollowedbyanordinarypurchasetoachieve
the balance sheet reduction at quarterend.44 Over the course of many months and
quarterends, the transaction costs on numerous sales and purchases would erode the
net income earned on these security positions.45 Ed Grieb, Lehmans former Global
Financial Controller, explained that Repo 105 transactions were preferable to outright
salesbecauseitprovidedLehmanwiththeassuranceofgettingthesecuritiesbackin
thefuture...atasetpriceinsteadofhavingtogointhemarketplaceandbuythem.46
However,giventhegenerallyliquidnatureoftheprimarilygovernmentalsecurities
usedinRepo105transactions,bid/offerspreadswouldhavebeenrelativelysmalland
likely not a determining factor in any decision to use, or not use, the sale of these
securitiestomanageLehmansbalancesheet.47

43Id.at1.
44Id.
45Id.
46ExaminersInterviewofEdwardGrieb,Oct.2,2008,at11.
47Duff&Phelps,Repo105QuestionforExaminersReport(Nov.30,2009),atp.1.

35


E. LehmanBrothersGlobalConsolidatedBalanceSheets
TheExaminercollectedarchivedLehmanBrothersGlobalConsolidatedBalance
Sheets (GCBS documents) illustrating the trend of quarterend spikes in Repo 105
usagefollowedbyintraquarterdips.Quarterenddatesarehighlightedinyellow.
Date
Aug31,2007(PressRelease)
Sept28,2007(Draft)
Oct30,2007(Draft)
Oct31,2007(Draft)
Nov29,2007(Final)
Nov30,2007(Final)
Jan29,2008
Feb13,2008
Feb15,2008
Feb19,2008
Feb22,2008
Feb28,2008(PressRelease)
Feb29,2008
(PressRelease)48
Mar12,2008
Mar13,2008
Mar14,2008
Mar27,2008
Mar28,2008
Apr3,2008
Apr4,2008
Apr11,2008
Apr14,2008
Apr18,2008
Apr21,2008
Apr21,2008
Apr25,2008

ProductionNumber
LBEXDOCID3237230
LBEXDOCID2705059
LBEXDOCID2705943
LBEXDOCID2705943
LBEXDOCID4342450
LBEXDOCID3439086
LBEXDOCID3363236
LBEXDOCID1697794
LBEXDOCID3215625
LBEXDOCID3215625
LBEXDOCID3363289
LBEXDOCID4517138
LBEXDOCID579841

TotalRepo105
$36.407billion
$24.406billion
$20.072billion
$29.936billion
$31.512billion
$38.634billion
$28.884billion
$23.602billion
$24.217billion
$25.124billion
$31.029billion
$40.003billion
$49.102billion

LBEXDOCID022302
LBEXDOCID765323
LBEXDOCID3438624
LBEXDOCID3363367
LBEXDOCID3363367
LBEXDOCID3438756
LBEXDOCID3438756
LBEXDOCID766086
LBEXDOCID766086
LBEXDOCID1961054
LBEXDOCID766088
LBEXDOCID1961054
LBEXDOCID3237475

$26.685billion
$26.212billion
$12.750billion
$22.104billion
$24.597billion
$21.835billion
$18.653billion
$20.260billion
$19.546billion
$19.785billion
$21.907billion
$21.907billion
$23.154billion

48Pressreleaseversionappearstoreflectthereportednumbersfornetbalancesheet.Thesewerenot

publiclyreleaseddocuments,however.

36


Apr28,2008
Apr29,2008
Apr30,2008(Draft)
May5,2008
May6,2008
May12,2008
May13,2008
May27,2008
May28,2008
May29,2008
May30,2008(Final)
Jul14,2008
Jul15,2008
Jul21,2008
Jul22,2008
Jul23,2008
Jul28,2008
Jul29,2008
Aug13,2008
Aug14,2008
Aug15,2008
Aug18,2008
Aug19,2008
Aug20,2008
Aug21,2008
Aug22,2008
Aug25,2008
Aug26,2008
Aug27,2008
Aug28,2008
Aug29,2008(Final)

LBEXDOCID766092
LBEXDOCID1337858
LBEXDOCID394333
LBEXDOCID1961083
LBEXDOCID766102
LBEXDOCID766107
LBEXDOCID766107
LBEXDOCID3237577
LBEXDOCID766924
LBEXDOCID766925
LBEXDOCID1427836
LBEXDOCID3363529
LBEXDOCID3363529
LBEXDOCID3363538
LBEXDOCID3363538
LBEXDOCID3363541
LBEXDOCID3363542
LBEXDOCID3363542
LBEXDOCID084891
LBEXDOCID084891
LBEXDOCID1742024
LBEXDOCID2927703
LBEXDOCID861240
LBEXDOCID2927705
LBEXDOCID1742028
LBEXDOCID1742028
LBEXDOCID1742029
LBEXDOCID861234
LBEXDOCID861244
LBEXDOCID1427770
LBEXDOCID2808606

37

$24.077billion
$24.899billion
$24.709billion
$23.141billion
$24.388billion
$25.550billion
$25.282billion
$39.237billion
$43.112billion
$46.820billion
$50.383billion
$17.315billion
$16.828billion
$15.528billion
$17.099billion
$14.786billion
$14.596billion
$14.548billion
$17.405billion
$18.274billion
$19.436billion
$19.712billion
$19.589billion
$19.887billion
$20.819billion
$20.101billion
$22.476billion
$23.971billion
$24.601billion
$26.954billion
$26.383billion


F. ExpertCurriculumVitae

GARYL.HOLSTRUM,Ph.D.,CPA
Consultant:AuditLitigation,AuditCommittees,
andSarbanesOxleyCompliance

VITAE
JUNE2009

PERSONAL:
Address:1BeachDriveSE,St.Petersburg,FL337013954

Phone:7278678751 CellPhone:7272446390

Email:holstrum@tampabay.rr.com

Website:www.garyholstrum.com

Wife:Jan
CURRENT
EMPLOYMENT:
ConsultantonAuditLitigation,AuditCommittees,andSarbanesOxley
Compliance

EMPLOYMENT:
PublicCompanyAccountingOversightBoard
(2003January2009): 1666KStreetNW,Washington,DC20006

*AssociateChiefAuditorandDirectorofResearch(UntilNovember2006)

*Consultant,OfficeofChiefAuditor(2003andNovember2006January2009)

EMPLOYMENT
Professor,SchoolofAccountancy,UniversityofSouthFlorida
(FROM1989TO
4202FowlerAvenue,BSN3403,Tampa,FL336205500
AUGUST2004):
DirectorofSchool(198994)andCoordinatorofAccountingPh.D.Program
(199498)

EDUCATION:

Ph.D.,CollegeofBusiness,UniversityofIowa.Concentration:
Accounting.

SupplementalAreas:OrganizationalBehavior,Economics,andStatistics.

BA,UniversityofIowa.Major:History
PROFESSIONAL
CERTIFICATION:
CPAFlorida

RECENTAWARD:
Received2009DistinguishedServiceinAuditingAwardfromAuditingSection
of

AmericanAccountingAssociation(clickhere)

PROFESSIONALAND
TEACHINGEXPERIENCE:(Mostrecentfirst)

Consultant,OscherConsulting,Tampa,FL(AuditingandFinancialReportingIssues)(2008present)

Board of Directors and Audit Committee for the University of South Florida Physicians Group
(USFPG)oftheUSFCollegeofMedicine,UniversityMedicalServicesAssociation(UMSA),andUSF
MedicalServicesSupportCorporation(MSSC)(CurrentmembersinceJanuary2009)

38

Professor, USF School of Accountancy (19892004), Director (198994), Ph.D. Program Coordinator
(9498)

VisitingProfessor,UniversityofAmsterdam,Netherlands,Fall1998.

KPMGPeatMarwickProfessorofAccounting,UniversityofCentralFlorida(198689)

ProfessorofAccounting,UniversityofSouthernCalifornia(198386)

Partner,AuditingServices,DeloitteHaskins&Sells(NowDeloitte&Touche),NewYork(5years).
Deloitteresponsibilitiesaresummarizedbelow.

AssociateProfessorofAccounting,UniversityofFlorida.

AssistantProfessorofAccounting,UniversityofTexasatAustin.

Graduate Teaching Assistant and Administrative Assistant to the Director of the MBA Program,
UniversityofIowa.

LoanOfficer,BankofAmerica,LosAngeles,andFirstNationalBank,IowaCity,Iowa.

DESCRIPTIONOFWORKATTHEPCAOB(2003toJanuary2009):
Activities related to being PCAOB Associate Chief Auditor and Director of Research included
drafting and reviewing materials related to potential auditing and related professional practice
standards of the PCAOB; identifying and summarizing the implications of existing research for
potentialstandards;reviewingandcommentingonsummariesofresultsofPCAOBinspections;and
presentinganddiscussingprofessional,regulatory,researchandotherissuesrelatedtothepotential
standards with the Board, the PCAOBs Standing Advisory Group, and other external parties.
Significant accomplishments included keeping auditing researchers, educators, and practitioners
informed of PCAOB standardssetting activities through a series of 11PCAOB Updatearticles in
TheAuditorsReport;coordinatingtheplanningandconductoffourPCAOBSymposiumsforleading
auditing professors, PCAOB personnel, and selected other regulators and standardssetters; and
working with leaders of the Auditing Section of the American Accounting Association (AAA) to
establishthePCAOBResearchSynthesisProgram(describedlater).

PCAOBSymposiums
ChairmanofthePlanningGroupforaseriesoffourPCAOBSymposiums(November2004,February
2006, April 2007, and April 2008. Also a member of the Planning Group for the 2009 PCAOB
Symposium).WorkedondevelopingandsecuringapprovalfortheproposalforthefirstSymposium
in 2004 and for each of the next three symposia. At each of the initial four Symposiums,
approximately40auditingresearchersandeducatorsand35representativesfromthePCAOB,along
withrepresentativesoftheSEC,FASB,andGAOparticipatedinpresentationsanddiscussionsofkey
issues of mutual interest to the PCAOB and the academic community. The Symposium Planning
Group consisted of four representatives of the PCAOB and four representatives of the Auditing
SectionoftheAAA.AteachSymposium,theemphasiswasnotonlyondiscussionofkeyissuesbut
alsoondevelopingactionplansforaddressingtheissues.Forexample,discussioninitiatedatthefirst
PCAOBSymposiumin2004ledtoworkingwithAuditingSectionleaderstoestablishtheResearch
SynthesisProgram.

39

AuditingSectionsPCAOBResearchSynthesisProgram
AsPCAOBAssociateChiefAuditorandDirectorofResearch,IworkedwithleadersoftheAuditing
SectionoftheAmericanAccountingAssociationtoestablishnineteamsofresearchersdedicatedto
synthesizingexistingresearchrelatedtoeachofninehighpriorityPCAOBstandardssettingprojects.
AllnineResearchSynthesisTeamscompletedtheirprojects,submittedthemtothePCAOBforinput
relatedtoestablishingnewstandards,andpublishedtheresultsoftheirprojectsinrecognizedpeer
reviewedacademicjournals.Theresearchissuesforeachoftheprojectswerestandardssettingpolicy
issues identified in briefing papers prepared by staff of the PCAOB Office of Chief Auditor for the
Standing Advisory Group and placed on the PCAOB website. The completed research synthesis
reports were used by the Office of Chief Auditor staff and others at the PCAOB in preparing
materials related to each of the standardssetting projects. The nine research synthesis projects
addressedthefollowingPCAOBprojects:
AuditConfirmations
AuditFirmQualityControl
AuditReportingModel
AuditorRiskAssessments
CommunicationswithAuditCommittees
EngagementQualityReview
AuditingFairValueMeasurements
FinancialFraud
RelatedPartyTransactions.
Presentations
PresentationswhileatthePCAOBincludedpresentationsatvariousacademicandauditingpractice
conferencesbetween2003and2008onPCAOBactivities,thesignificanceofresearchinputtoPCAOB
standardssetting,andtheeducationalimplicationsofthemissionofthePCAOB.Theseconferences
includedannualmeetingsoftheAmericanAccountingAssociation,MidYearMeetingsoftheAAA
Auditing Section, university conferences and state society of CPA conferences, PCAOB Small
BusinessForums,andvariousauditingresearchsymposiums.

TEACHINGEMPHASIS:

Contemporary Issues in Auditing, Assurance Services, Financial Reporting, Audit Committees,


CorporateGovernanceandInternationalBusinessReporting

RESEARCHEMPHASIS:

EvaluatingAuditQualityandCompliancewithPCAOBandProfessionalStandards

CorporateGovernance,AuditCommittees,ReliabilityofBusinessReporting

NewTechnologyandtheRoleofAuditing,Attest,andAssuranceServicesinaGlobalMarketplace

Educational Issues Related to Information Technology, International Accounting, Auditing and


Assurance

Audit and Assurance Judgment ProcessesModels and Experiments Regarding Audit/Assurance


Judgments.

Establishing,Interpreting,andImplementingAudit,Attest,AssuranceandEthicalStandards.

DesigningandTestingAudit/AssuranceDecisionAids,DecisionSupportSystems,ExpertSystems

40

PROFESSIONALLEADERSHIPPOSITIONS(Between1996and2006):
Appointed the United States representative to the International Accounting Education Standards
Board(IAESB)[formerlytheInternationalFederationofAccountants(IFAC)EducationCommittee]
(January1998October2003).
IAESBliaisonwiththeInternationalAuditingandAssuranceStandardsBoard(IAASB)
IAESBliaisonwithprofessionalaccountingassociationsinthefollowingcountries:
Japan,Bahamas,Barbados,Jamaica,Trinidad&Tobago
CoChairoftaskforcetodevelopthefirstInternationalStandardonContinuingProfessional
EducationforAccountants(IESNo.7)
CoChair of project on Assuring Quality Control in Internet Education and Distributive
LearninginInternationalAccountingEducation
AICPA PreCertification Education Executive Committee, exofficio member and liaison with the
IAESB(19982003).
MemberoftheConsultativeAdvisoryGroupfortheInternationalAccountingEducationStandards
Board(IAESB)(representingthePCAOBandtheUnitedStates)(200406).
Member, Editorial and Advisory Committee, project on The IMPACT OF GLOBALISATION ON
ACCOUNTANCY EDUCATION (20002003). This was a threeyear research project headed by Mr.
Gert Karreman of the Netherlands, former member of the IFAC Education Committee and head of
education for Royal NIVRA, the Netherlands professional accounting association. It is a study of
similarities and differences in accounting education internationally and of the impact globalization
ontheeducationprocess.StudywascompletedandpresentedattheWorldCongressofAccounting
EducatorsandResearchersinHongKonginNovember2002.Thestudywassubsequentlypublished
anddistributedworldwideinlate2002
Chair, Future Audit, Attestation and Assurance Services Task Force, Auditing Section of the American
AccountingAssociation(AAA)(199497).
Member,FutureAuditServicesSubcommittee,AICPASpecialCommitteeonAssuranceServices(1995
97).
Member,RelationswithEducatorsCommittee,FICPA(19952000).CommitteeChair(199697).
Member,ProgramCommittee,AmericanAccountingAssociationAnnualMeeting(1997).

AUDITINGSTANDARDSBOARDAPPOINTMENTS(Primarilybetween1988and1992):
AppointedtotheAuditingStandardsBoardforfourannualterms(January1988toJanuary1992).The
ASB establishes generally accepted auditing standards (Statements on Auditing StandardsSAS),
attestation standards (Statements on Standards for Attestation EngagementsSSAE), and standards for
accountingfirmqualitycontrol(StatementsonQualityControlStandardsSQCS).
AlsoappointedtothefollowingtaskforcesoftheAuditingStandardsBoard:
*AuditIssuesTaskForcePlannedASBagenda.
*AuditSamplingTaskForce(DevelopedthecurrentAICPAAuditGuideforAuditSampling)
*AuditConfirmationsTaskForce
*UseofWorkofOtherAuditorsTaskForce
*ReportingonInternalControlTaskForce
*AuditingAccountingEstimatesTaskForce
*ASBProjectsTaskForce
*ClientswithConflictingInterestsTaskForce
MemberofPlanningGroupfortheAuditingStandardsBoardExpectationGapRoundtable(1992).Oneof
four coordinators and editors of papers for the Roundtable, which was held in May, 1992, in

41


Charleston,SC.ThepaperspresentedattheRoundtablewerebepublishedbytheAICPAin1993for
useingraduateseminarsinauditing.

OTHERPROFESSIONALLEADERSHIPPOSITIONS(19851996):
MemberoftheFacultyAdvisoryGroupfortheExcellenceinAuditEducationProgramofCoopers
and Lybrand (198695). This was an international program of materials and support for audit
educationfundedbytheCoopersandLybrandFoundation,workingthroughtheAuditingSectionof
the AAA. Coordinator for the initial Auditing Faculty Symposium in May, 1987, to introduce
Programtoauditingprofessorsatmajorschoolsnationallyandinternationally.
AICPACouncil,theseniorpolicyformingbodyoftheAmericanInstituteofCPAs(199295).
BoardofGovernorsoftheFloridaInstituteofCPAs(FICPA)(199395).
Member,CommunicationsTaskForce,FICPA(199496).
ContinuingEducationCommittee,FICPA(199495).
Accounting Accreditation Committee of the American Assembly of Collegiate Schools of Business
(AACSB) for three years (199295). This Committee makes decisions on which undergraduate,
masters,anddoctoralaccountingprogramsintheUnitedStateswillbeaccredited
AuditingStandardsCommittee,AuditingSectionoftheAmericanAccountingAssociation(199194).
Chair,(statewide)CommitteeonAccountingPrinciplesandAuditingStandards,FloridaInstituteofCPAs
for three years (198992). This committee represents the accounting profession in Florida in
providing input to the Financial Accounting Standards Board (FASB) and the Auditing Standards
Board(ASB)andrespondingtoexposuredraftsofproposedaccountingandauditingstandards.
President,AuditingSectionoftheAmericanAccountingAssociation(AAA)(198586).
Member, Committee on Communications in Accounting Curriculum, Federation of Schools of
Accountancy(198990).
Chair,AuditingSectionNominatingCommittee(1987).
StrategicPlanningTaskForce,AuditingSection(198788).
Chair,PeatMarwickSeminarsCommitteeoftheAAA(198687).
AAACouncil,ElectedMember(198587).
ProfessionalAccountingCouncil,UniversityofIowa(198587).
NominatingCommittee,AmericanAccountingAssociation(1986).

EARLIERNATIONALLEADERSHIPPOSITIONS:
AdvisortoamemberoftheAuditingStandardsBoard.
WorkedwiththechairpersonsofotherASBtaskforcestohelpdeveloptheconceptsandportionsof
draftsforthefollowingStatementsonAuditingStandards(SAS):
1.ReportingonInternalAccountingControl,SASNo.30.
2.AuditSampling,SASNo.39.
3.MaterialityandAuditRisk,SASNo.47.
VicePresidentoftheAuditingSectionoftheAmericanAccountingAssociation(AAA)(198485).
WildmanMedalCommittee(AAA),toselectmostsignificantcontributiontoaccountingliterature.
AACSBVisitationTeamforaccreditationofaccountingprogramsatPennsylvaniaStateUniversity.
AdvisoryBoard,RobertM.TruebloodSeminars(3years).RepresentedtheAAAinmeetingswiththe
Touche Ross Foundation to plan a series of seminars for accounting professors. These annual
seminarshaveattractedabout90facultyperyearthroughoutthenationandhavecontinuedtothe
presenttime.
CommitteeonEducation,AAA(3years).
Chair,CommitteeonProfessorialContinuingEducation,AAA.
TaskForceonContinuingEducation,AAA.

42


AICPACurriculumDevelopmentTaskForce.

PROFESSIONALDEVELOPMENTTEACHINGEXPERIENCE:
Development and presentation of seminars on new audit, attest, and assurance service standards,
emerginginformationtechnology,andprofessionalandpoliticaldevelopments.Presentedtovarious
accounting firms (1987present). Development and presentation of numerous staffdevelopment
courses offered for Deloitte staff at various levels (5 years); numerous management development
courses on a variety of accounting, auditing, information systems, and control topics for non
accountant managers; and numerous CPE courses for the Florida Institute of CPAs and various
accountingfirms.

PRIMARYRESPONSIBILITIESASAUDITPARTNERATDELOITTE:
Activities and responsibilities as an auditing services partner for Deloitte included developing and
communicating the firms auditing policies and techniques, working with the Auditing Standards
Boardandothergroupsintheestablishmentofprofessionalstandards,conductingauditingresearch
projects, producing written materials and videotapes for staff development, coordinating the firms
national AuditSCOPE Seminars for educators, and maintaining the firms relations with educators
andresearchers.AlsoworkedintheNewYorkPracticeOfficeasanauditpartneronengagements
forseverallarge,multinationalclients.AlsoworkedinDallasofficeonauditsofsmallandmedium
sizefirms.

EDITORIALEXPERIENCE:
Editorial Board, Auditing: A Journal of Practice and Theory (198794). Continued as an ad hoc
reviewer.
EditorialBoard,AdvancesinAccounting(19841986).
EditorialBoardMember,TheAccountingReview(3years).
ContributingEditor,TheJournalofAccountancy,(3years).
Adhocreviewerofauditingresearchmanuscriptsforseveralotherjournals.
Variousothereditorialreviewcommitteesforarticlesandbooks.
Reviewer for numerous candidates for promotion to Associate and Full Professor at various US
universities.

CONSULTING,EXPERTWITNESSANDOTHERLITIGATIONSUPPORTEXPERIENCE:
Litigation Support (Expert Witness), Board of Accountancy, State of Florida, Office of the Attorney
General,AmericanExpresscase.
LitigationSupport(ExpertWitness),CasesinvolvingFloridaAccountingFirms.
LitigationSupport(ExpertWitness),CaseinvolvingCoopersandLybrandandPharMor.
ConsultantonFinancialReportingandInternalControlforSECreportingcompanyinMiami.
LitigationSupport(ExpertWitness),CaseinvolvingErnst&Young.
LitigationSupport(ExpertWitness),EnforcementDivisionoftheSEC
Consultant,LitigationSupportonauditingandaccountingissuesforOrlandoareafirms.
ExpertWitness,ESMGovernmentSecurities/GrantThorntonLitigation.
Consultant,LitigationSupportre:auditing/accountingissuesforthreeLosAngelesareafirms.
ToucheRoss&Co.,NewYork,ConsultantandPrincipalResearcheronauditingresearchprojectsfor
theauditresearchstaff.
Coopers and Lybrand, New York, Consultant and Principal Researcher on a research project
concerningtheevaluationofmaterialityofinternalaccountingcontrolweaknesses.
Consultanttoseveralsmall&mediumsizeaccountingfirmsonvariousauditingissues.

43

OfficeoftheAttorneyGeneral,StateofFlorida,Consultantonquestionsofauditevidence.
FloridaBoardofAccountancy,AssistedinthedevelopmentoftheContinuingProfessionalEducation
Examination.

MOSTSIGNIFICANTHONORSANDAWARDS:
Distinguished Service in Auditing Award, American Accounting Association Auditing Section
(January2009)
NamedFloridaOutstandingEducatorbytheFloridaInstituteofCPAs(June1991).
Received the American Accounting Associations Innovation in Accounting Education Award
(August1991)forworkwiththeFacultyAdvisoryGroup,ExcellenceinAuditEducationProgram,
sponsoredbyCoopersandLybrand(nowPriceWaterhouseCoopers).

PUBLICATIONS:

PUBLICATIONSUMMARY:Publicationsinclude(1)articlesinrefereedjournalsincludingtheJournalof
AccountingResearch,TheAccountingReview,TheJournalofAccountancy,Auditing:AJournalofPractice
and Theory, Issues in Accounting Education, The Internal Auditor, Management Accounting, Abacus,
AdvancesinAccounting,andvariousotherjournals;(2)articlesinprofessionaljournals;(3)published
research monographs; (4) various published continuing professional education manuals; (5)
published book reviews and discussants comments; (6) research papers published in conference
proceedings; (7) published cases for auditing education, and (8) a series of 13 PCAOB Standards
SettingUpdatearticlespublishedinTheAuditorsReportsince2005.

JOURNALARTICLES

1.
Series of 13 PCAOB Standards Update articles for The Auditors Report, published by the
Auditing Section of the American Accounting Association (published between July 2005 and
February 2009). (with Douglas Carmichael, Chief Auditor until 2005; Tom Ray, Chief Auditor
since 2005; and Greg Scates, Deputy Chief Auditor). (The most recent article and hyperlinks to
earlierarticlesareavailableathttp://aaahq.org/audit/Pubs/Audrep/09winter/item13.htm.)

2.
New Assurance Service Opportunities for Information Systems Auditors, IS Audit & Control
Journal(Vol.IV,June1999)(withJamesHuntonandCynthiaFrownfelterLohrke).

3.
TheInternetandDistanceLearningInAccountingEducation:AHypertextLinkedExploration
of the Topic. Published on the International Accounting Education Standards Board (IAESB)
web site, November 1998. Because this research paper had extensive hyperlinks to numerous
Web sites that are relevant to the topic, the IFAC Education Committee decided to have this
paper,whichdealswithissuesofqualityassessmentandqualityassuranceinInterneteducation,
publishedonitsWebsite.IFACencouragedallaccountingassociationsthatarememberbodies
ofIFACinover100countriesworldwidetomakethepaperknownandusedbyitseducatorsand
practitioners. It has been translated into several languages and was used as the basis for
developmentofofficialinternationalaccountingeducationguidanceonthetopicbytheIAESB.
(withJosephLloydJonesoftheUniversityofOttawa,Canada).

4.
Assessing the Impact of the Internet and Distance Learning in International Accounting
Education,InternationalFederationofAccountants(IFAC)Quarterly,January1999.

44

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

New Forms of Assurance Service for New Forms of Information: The Global Challenge for
AccountingEducators,TheInternationalJournalofAccounting(forthcomingVol.33,No.3,1998)
(withJamesHunton).
TheRoleofInformationSystemsAuditorsinWebTrustSMAssurance,ISAudit&ControlJournal
(Vol.IV,1998)(withJamesHunton).
New Assurance Services: The Global Challenge for Accounting Educators, International
FederationofAccountants(IFAC)Quarterly,January1998.
ControlEnvironmentConditionandtheInteractionBetweenControlRisk,AccountType,and
Managements Assertions (Coauthored with Ron Marden and Sandra Schneider). Auditing: A
JournalofPracticeandTheory(Spring1997).
Information Systems Auditors Play a Critical Role in Shaping Future Assurance Services, IS
Audit&ControlJournal(Vol.III,1997).(withJamesHunton).

UsingProfessionalJudgmentinControlEnvironmentEvaluations:AnInstructionalCase(Co
authoredwithRonMardenandSandraSchneider),IssuesinAccountingEducation,(Fall1996).
ASBApprovesFiveNewStatementsandanExposureDraft,TheAuditorsReport,Winter,1992.
ASBMovesForwardonSeveralProjectsSeeksResearchInputonExpectationsGapIssues,The
AuditorsReport,Fall,1991.
AuditingStandardsBoardWorksonaBroadAgendatoImproveAuditPractice,CPAToday,
November,1991.
The Auditors Responsibility for Fraud and Illegal ActsThe 1991 ASB Agenda, CPA Today,
July,1991.
ASBSeeksGreaterResearchInput,TheAuditorsReport,Summer,1991.
ASBActionsConcerningFraud,TheAuditorsReport,Winter,1991.
NewGuidanceforAssessingInternalControlandUsingtheWorkofInternalAuditors,CPA
Today,July,1990.
ASBTopicsofImportancetoEducatorsandResearchers,TheAuditorsReport,Summer,1990.
Information Systems in the Year 2000, The Internal Auditor, JanuaryFebruary, 1990. (Co
authoredwithTheodoreJ.MockandRobertN.West).
TheImpactoftheControlRiskAuditGuide,CPAToday,January,1990.
InternalControlandInternalAuditIssuesTopASBAgenda,TheAuditorsReport,Winter,1990.

45

22.

23.

24.

25.

26.

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.

37.

38.

TheNewASBPlanningStructureandEmergingStandards,TheAuditorsReport,Fall,1989.
The New Control Risk Audit Guide and Other ASB Guidance, The Auditors Report,Summer,
1989.
The Revised Financial Institution Confirmation Process and the New Standard Bank
ConfirmationForm,CPAToday,July,1989.
AuditingStandardsBoardDeliberations,CPAToday,April,1989.
AuditingStandardsBoardUpdate,TheAuditorsReport,Winter,1989.
CriticalInternalControlIssues:TheirImpactonAuditorsofPrivateandPublicEntities,CPA
Today,Jan.,1989.
ASB Actions on Internal Control, Confirmations, and Expectation Gap Issues, The Auditors
Report,Fall,1988.
ASBinTransition,TheAuditorsReport,Summer,1988.
ASBUpdate,TheAuditorsReport,Winter,1988.
SourcesofErrorandInconsistencyinAuditJudgment,AdvancesinAccounting(1987).
Audit Judgment and Evidence Evaluation, (coauthored with Theodore J. Mock), Auditing: A
JournalofPracticeandTheory(Fall,1985).
LongRangePlanningandControlofGrowth,(coauthoredwithFrankDarocaandW.Thomas
Lin)JournalofAccountancy(December,1984),pp.118134.
AReviewandIntegrationofEmpiricalResearchonMateriality,(coauthoredwithWilliamF.
Messier,Jr.),Auditing:AJournalofPracticeandTheory(Fall,1982),pp.4563.
AuditJudgmentResearch,TheAuditorsReport(Fall,1981).
ReportingonInternalAccountingControl,(coauthoredwithKennethW.Stringer),anarticle
inAnnualAccountingReview(Volume2,1980),HarwoodAcademicPublishers,pp.14356.This
articlefocusesonreportingissues,notstudyorevaluationissues.
Studying, Evaluating and Reporting on Internal Accounting Control, (with Kenneth W.
Stringer),TheAccountingForum(Volume50,No.1,May,1980),pp.113.Thisarticlecenterson
thestudyandevaluationofinternalaccountingcontrol,withonlyabriefdiscussionofreporting
issues.
InternalAccountingControl:TheDeloitteApproach,(coauthoredwithKennethW.Stringer),
Directors Monthly (Jan.Feb., 1980). This article discusses the specific approach developed by
Deloitte,whichemploysanetworkanalysisofinternalcontrolfunctionsbasedondecisiontrees

46


anddecisiontables.Thecoauthorsparticipatedheavilyinthisdevelopment,whichwasdirected
byMr.Stringer.

39.

40.

Internal Audits of Production Control Adaptiveness, (coauthored with William Collins) The
InternalAuditor.
TheEffectofBudgetAdaptivenessandTightnessonManagerialDecisionBehavior,Journalof
AccountingResearch.

PUBLISHEDMONOGRAPHSANDBOOKSANDMATERIALS

1.
Coauthoredthedraftofthefirstinternationalstandardoncontinuingprofessionaldevelopment
for professional accountants, published as International Accounting Education Standard No. 7
(IES7):ContinuingProfessionalDevelopment:AProgramofLifelongLearningandContinuing
Development of Professional Competence (coauthored the draft and cochaired the standard
projectwithSteveGloveroftheCanadianInstituteofCharteredAccountants).(Initiallyissuedin
2003.SubsequentlyrevisedbytheIAESBin2008).

2.
AuditorIndependence:BeyondtheRulestheIndependenceEducationProgram(IEP)(2000
2001). Participated in the authoring and development of written scenarios, a video case, a CD
ROM and awritten Faculty Toolkit on auditor independence. These materials were the basis
forfournationwidewebcasts(atapproximately30locationseach)forpractitionersandaseparate
nationwide webcast for educators. Coanchored all the webcasts with Dan Guy (former VP of
Auditing at the AICPA). All materials were published and distributed to all members of the
AuditingSectionoftheAAAaspartoftheIEPandarenowavailabletoallaccountingeducators
throughtheAAA.Participatedinthedevelopmentofthefollowingmaterials:

AuditorIndependenceScenariosDevelopedaseriesofpublishedscenariosincluding
teachingnoteswithArnieWright(BostonUniversity)andDanGuy.

Beekman Office SupplyAn Auditor Independence Video Case reviewed and


edited the initial story line and subsequent video script for the case on auditor
independencejudgment(initiallydraftedbyRobertSack,formerChiefAccountantofthe
EnforcementDivisionoftheSEC).

Auditor IndependenceCDROM and Faculty Tool Kitworked with a team on the


Independence Education Program (IEP) to develop materials and produce a CDROM
diskforauditingandaccountingeducators.TheCDsweredistributedtoallmembersof
the Auditing Section of the AAA and to other educators and educational groups, with
suggestions and instructions on how the videos, case, scenarios, PowerPoint slides and
other support materials could be used in the classroom or as outside references for
variouscourses.

3.
Quality Issues For Internet and Distributed Learning in Accounting Education. Lead author (with
Joseph LloydJones) for this official IFAC Education Committee Discussion Paper, which was
publishedanddistributedasamonographbytheInternationalFederationofAccountants(IFAC)
toover140memberaccountinginstitutesinover100countriesworldwideinJanuary2000.

47


4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

Dermaceutics Inc.; Risk Assessment and Planning, Author of this chapter in a monograph,
Excellence in Audit Education, published as an American Accounting Association educational
monograph and distributed to all members of the Auditing Section of the AAA for use in
auditingcourses,AAA(1992).Remainingchaptersinthemonographwereprimarilyauthored
byothermembersoftheFacultyAdvisoryGroupfortheExcellenceinAuditEducationProject.
ProvidedinputtotheoverallprojectandmonographasaFacultyAdvisoryGroupmember.
Dermaceutics Inc.; Risk Assessment and Planning (Group Project), (Video Tape, Cases, and
Computer Database), (Participated as a part of the Faculty Advisory Group and Coopers &
Lybrandpersonneltoplanandproducethematerials),Coopers&LybrandFoundation(1990).
The Impact of Technology on Auditing: Moving Into the 21st Century, (with Ted Mock and
Robert N. West) (a research monograph), Institute of Internal Auditors Research Foundation
(1988).
CableCo Chronicles: A Portrait of an Audit (Group Project), (Video Tape and Cases),
(ParticipatedasapartoftheFacultyAdvisoryGroupandCoopers&Lybrandpersonneltoplan
andproducethematerials),Coopers&LybrandFoundation(1988).
CompilationandReviewTools,a manualanda set of integrated computer software programs,
publishedbyShepardsMcGrawHill(1988).
Disclosure Criteria and Segment Reporting, (coedited with Russell M. Barefield), University of
FloridaPress.
Operational Audits of Production Control, (coauthored with William Collins), research
monograph,InstituteofInternalAuditors.
NewAccountingandAuditingPronouncements:AnalysisandCases,(coauthoredwithCharles
McDonald and William Collins), a continuing education manual published by the Florida
InstituteofCPAs.
ReviewofExistingAccountingandAuditingPronouncements:AnalysisandCases,(coauthored
withCharlesMcDonaldandWilliamCollins),acontinuingeducationmanualpublishedbythe
FICPA.
ActivitiesandResourcesofTheGalvestonBay.Aresearchmonographonthesocial,ecological,
and economic benefits of pollution control in the Galveston Bay. Published by the Bureau of
BusinessResearch,TheUniversityofTexas.

PUBLISHEDRESEARCHINPROCEEDINGSOFSCHOLARLYMEETINGS

1.
CommentsonBorthiksAnalysisofDesignfromaCommunityofPracticeDialog:Negotiating
theMeaningofAuditingInformationSystemDevelopment.Discussioncommentspublishedin
theProceedingsoftheUniversityofWaterlooSymposiumonResearchonInformationSystems
Assurance.DiscussioncommentspresentedonOctober31,1999.Proceedingspublishedinearly
2000.

48


2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

Competence and Quality Assurance in Accounting Education: Global Issues from a U.S.
Perspective, in Foundations of Globalization in Higher Education in the Professions, Proceedings of
theAnnualConferenceoftheCenterforQualityAssuranceinInternationalEducation,(1998).
The Need for Professional Guidance on Decision Aids in Auditing, Proceedings of the
UniversityofSouthernCaliforniaAuditJudgmentSymposium,(February,1991).
Innovative Approaches to Integrating Oral and Written Communication into the Accounting
Curriculum, a presentation published in the Proceedings of the 1989 Annual Meeting of the
FederationofSchoolsofAccountancy(publishedin1990).
TheImpactofEmergingInformationTechnologyonAuditEvidence,(withTheodoreJ.Mock
andRobertN.West),AuditingSymposiumVIII,UniversityofKansas(1986).
The FifthYearAuditingCurriculum, Proceedings: Annual Meeting the Federation ofSchools
ofAccountancy(December,1986).
The Auditor Expectations Gap: Research Issues and Opportunities, Proceedings of the
UniversityofAlabamaResearchConvocation(November,1986).
ExpertSystemsinAuditing:ASynopsisofResearchIssues,ProceedingsoftheAuditJudgment
SymposiumonExpertSystems,UniversityofSouthernCalifornia(February,1986).
AUDBASE: The USC Auditing Research Database, Abstracts of the American Accounting
Associations Annual Meeting (August, 1985). This was one of six research papers selected by
referees from over 40 papers submitted through national competition for presentation at the
nationalmeeting.Thepresentationincludedadiscussionofthepaperandalivemicrocomputer
demonstrationofthedatabasedevelopedbytheauthoratUSC.
Megatrends,Microcomputers,andAuditingEducation,MaryBallWashingtonForumSeriesin
AccountingEducation(TheUniversityofWestFlorida,November,1983),pp.3452.
AuditRiskModel:AFrameworkforCurrentPracticeandFutureResearch,(coauthoredwith
JamesL.Kirtland),SymposiumonAuditingResearchV,(1982)UniversityofIllinois.
ImprovingAuditorJudgmentThroughDecisionModelingandComputerAssistance,research
paperabstractedinProceedingsoftheAmericanAccountingAssociationAnnualMeeting(1981).
Reactive Bias in the Measurement of Internal Control Compliance, (coauthored with Bart H.
Ward),ProceedingsoftheSoutheastRegionAAAMeeting.
Suggestions for Behavioral Accounting Research Designs, (coauthored with Lewis F.
Davidson),ProceedingsoftheSouthwestRegionAAAMeeting.
Sources of Error in the Evaluation of Internal Control, (coauthored with Bart H. Ward),
ProceedingsoftheSouthwestRegionAAAMeeting.

49


PUBLISHEDCRITIQUES,BOOKREVIEWS,ETC.

1.
Comments on Analysis of Design from a Community of Practice Dialogue: Negotiating the
Meaning of Auditing Information System Development, published in Journal of Information
Systems,supplement2000.

2.
Discussion of MultiLocation Audits, critique comments on a research paper authored by
Robert Allen and James Loebbecke, presented at the University of Illinois Auditing Research
Symposium, September 1994. Discussion comments included in published conference
proceedings.
3.
Comments on Reports on the Application of Accounting Principles A Review of SAS 50,
ProceedingsoftheUniversityofKansasAuditingSymposium(1988).

4.
CommentsonTheCasefortheStructuredAuditApproach,ProceedingsoftheUniversityof
KansasAuditingSymposium(1984).

5.
Review of Robert Ashtons Human Information Processing in Accounting, Studies in
AccountingResearch#17,Auditing:AJournalofPracticeandTheory(Fall,1983).

6.
CommentsonHumanInformationProcessingResearchinAuditing:AReviewandSynthesis,
ProceedingsoftheUniversityofKansasSymposiumonAuditingProblems(1982),pp.8488.

7.
Comments on Heuristics and Biases: Some Implications for Probabilistic Inference in
Auditing,SymposiumonAuditingResearchIV,(1980)UniversityofIllinois.

PUBLISHEDAUDITINGEDUCATIONCASES:

1.
UsingProfessionalJudgmentinControlEnvironmentEvaluations:AnInstructionalCase(Co
authoredwithRonMardenandSandraSchneider),IssuesinAccountingEducation,(Fall1996).
(alsolistedabove).

2.
Dermaceutics Inc.: Risk Assessment and Planning, (Video, Six Cases, and Computer Database).
(Participated in the development of the cases and other materials in the Excellence in Audit
Education program as a member of the program Faculty Advisory Group. Materials were
sponsored and distributed by the Coopers & Lybrand Foundation and have been used in over
250schoolsintheU.S.andinternationally.

RESEARCHPAPERSANDPRESENTATIONSATVARIOUSRESEARCHCONFERENCES:

1.
DistinguishedServiceinAuditingAwardacceptancespeechatthe2009MidYearMeetingofthe
AmericanAccountingAssociationAuditingSection.

2.
Approximately 30 presentations on PCAOB standards and operations made while Associate
ChiefAuditorandDirectorofResearch(oraconsultant)forthePCAOB(betweenJuly2003and
present)

50


3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

ProposedInternationalEducationStandards:TheImpactonGlobalAccountingEducationand
Development, presented at the AAA International Accounting Section MidYear Meeting,
February2003.
ELearning and Teaching: Lessons Learned & Future Prospects, presented at the World
Congress of Accounting Educators, International Association of Accounting Educators and
Researchers(IAAER),HongKong,November15,2002.
Globalization of Accounting Education: The Changing Global Market and IFAC and AICPA
Initiatives, presented at the Emerging Issues in International Accounting Conference, Niagara
University,NiagaraFalls,NewYork,August3,2001.
Research on Changing the Competencies Required for New Assurance Services, paper
accepted for presentation at the Annual Meeting of the European Accounting Association,
Bordeaux,France,May1999(withProfessorEddyVaassen,UniversityofAmsterdam,andCarol
Schelleman,MastrichtUniversity).
TheDemandforAssuranceonElectronicCommerce,researchpaperacceptedforpresentation
at the Annual Meeting of the European Accounting Association, Bordeaux, France, May 1999
(withProfessorPhilipWallage,UniversityofAmsterdam).
Research Opportunities Related to Assurance Services a paper presented at the Copenhagen
SchoolofBusiness,November1998.
Dimensions of Auditor Judgments: The Relationship Between The Control Environment and
FinancialStatementAssertions.(withS.Schneider,C.Comunale,T.Benford,M.BarnesandR.
Marden).SelectedforpresentationattheSymposiumforResearchonInternalControl,Auditing
andAssuranceServices.UniversityofAmsterdam.November1998.
ResearchOnCompetenciesRequiredForFutureProvidersOfAssuranceForBusinessEntities,
(withE.VaassenandC.Schelleman).SelectedforpresentationattheSymposiumforResearchon
InternalControl,AuditingandAssuranceServices.UniversityofAmsterdam.November1998.
WebAssurance:AStrategicAlliance.(withP.Wallage,A.Noeteberg,J.vanderKloetandA.
Mendendorn).1998.Workingpaper.AntonDreesmannInstituteforInfoPreneurship.University
of Amsterdam. Presented at the Symposium for Research on Internal Control, Auditing and
AssuranceServices.UniversityofAmsterdam.November1998.
The Internet and Distance Learning In Accounting Education: Opportunities and Challenges.
(with J. LloydJones.) Working paper. University of South Florida and the International
Federation of Accountants (IFAC) Education Committee. Presented at the Symposium for
Research on Internal Control, Auditing and Assurance Services. University of Amsterdam.
November1998.
Competence and Quality Assurance in Accounting Education: Global Issues from a U.S.
Perspective,FoundationsofGlobalizationinHigherEducationintheProfessions,AnnualConference
oftheCenterforQualityAssuranceinInternationalEducation,Washington,DC,May1998.

51


14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

The Impact of Financial and Nonfinancial Performance Indicators on Auditors Analytical


Review Judgments. (with Sandra Schneider, Christie Comunale, Tanya Benford, and Monica
Barnes).PresentedattheAnnualMeetingoftheAmericanAccountingAssociation,August1998.
New Forms of Assurance Services for New Forms of Information: The Global Challenge for
Accounting Educators. (with James Hunton), selected for presentation at the Eighth World
CongressofAccountingEducatorsinOctober1997inParis.
Dimensions Of Auditor Judgments Regarding The Relationship Between The Control
EnvironmentAndFinancialStatementAssertions.(withSandra.Schneider,ChristieComunale,
Tanya Benford, Monica Barnes, G. E. Campbell, and R. E. Marden). Presented at the Annual
MeetingoftheAmericanAccountingAssociation,August1997.
Comparing Students and Auditors Judgments about the Control Environment: Bridging The
Experience Gap, presented at the Northeast Regional Meeting of the AAA, New York City,
April20,1996(withS.L.Schneider,R.E.Marden,G.E.Campbell,M.Barnes,andC.Comunale).
Using MultiDimensional Scaling in Analyzing Auditors Evaluations of the Control
Environment, presented at the Annual Meeting of the Society for Judgment and Decision
Making,November1995(withS.L.Schneider,R.E.Marden,G.E.Campbell,M.Barnes,andC.
Comunale).
The Effect Of Experience And Expertise On The Auditors Evaluation Of The Control
Environment: Implications For Education, Training, And The Development Of Decision Aids,
presented at the Southeast Regional Meeting of the AAA, April 1995 (with R. Marden, S.
Schneider,andG.Campbell).
The Effect Of Audit Experience On Professional Skepticism: A Management Fraud Scenario,
presented at the midyear meeting of the Auditing Section of the AAA, January 1995 (with S.
BhattacharyaandK.Hooks).
A Case Demonstration of Framing in an AuditorClient Interview. Presented at the Teaching
ForumoftheAnnualMeetingoftheSocietyforJudgmentandDecisionMaking,St.Louis,Mo.,
November1994(withS.L.Schneider,R.E.MardenandG.E.Campbell).
CORE:AGenericCodingSchemeForAnalyzingTheContentOfExpertInterviews.Presented
at the Annual Meeting of the Society for Judgment and Decision Making, St. Louis, Mo.,
November1994(withS.L.Schneider,R.E.MardenandG.E.Campbell).
TheImpactofTheControlEnvironmentinFinancialInstitutions:LearningFromTheExperts.
Presentedatthe1994AnnualMeetingoftheAmericanAccountingAssociation,August12,1994,
NewYorkCity,NewYork(withS.L.Schneider,R.E.MardenandG.E.Campbell).
Marden,R.,G.Holstrum,andS.Schneider.1994.TheEffectsofFramingonAuditorEvaluation
of the Control Environment, Audit Risk Factors, and Client Assertions. Presented at the
AmericanAccountingAssociationSoutheastRegionalMeetinginLouisville,KY,April,1994.

52


25.

26.

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.

Framing Effects and Audit Decision Making: Control Environment Evaluation. at the annual
meetingoftheSocietyofJudgmentandDecisionMaking(November1993)(withS.L.Schneider
andR.E.Marden).
Methods of Integrating New Research and Standards on Internal Control into the Accounting
Curriculum,atthenationalAuditingEducationConferencecosponsoredbyPriceWaterhouse
and the Auditing Section of the American Accounting Association, in Oxnard, California
(February1994).
FutureDirectionsforAuditingResearchthatwouldInfluenceAuditPractice,apresentationat
theUniversityofSouthernCaliforniaAuditJudgmentSymposium,February,1992.
Excellence in Audit Education Part IIIntroducing the New Video Simulation and
Microcomputer Database Cases for Dermaceutics, Inc. a presentation of new materials at the
NationalSymposiumfortheCoopersandLybrandExcellenceinAuditEducationProgram,New
YorkCity,June2728,1990.(AttendedbyinvitedfacultythroughouttheUSandCanada).Also
made two regional presentations regarding Dermaceutics and this project in April 1991 (in
PhiladelphiaforNortheastUSuniversitiesandinAtlantaforSoutheastUSuniversities).
Using the New Audit Guide on Internal Control in the Auditing Classroom, a threehour
sessionpresentedjointlywithDr.RayWhittington,DirectorofAuditingResearchfortheAICPA,
attheannualmeetingoftheAmericanAccountingAssociation(August1990).
Moderatedapanel,ImplementingtheRecommendationsoftheAccountingEducationChange
Commission,SoutheastRegionalMeetingoftheAmericanAccountingAssociation,April,1990.
Discussion Comments on Paul Caspers Empirical Research on Confirmation of Accounts
Receivable, The Auditing Judgment Symposium, University of Southern California, February
20,1989.
FutureAuditingResearchAgenda:AStandardSettingPerspective,presentedattheUniversity
ofIllinoisAuditingResearchSymposium(October,1988).
AnEmergingTaxonomyofAuditEvidence,coauthoredwithTedMockandpresentedbyDr.
Mock at The University of Queensland, Brisbane, Australia (July, 1988), and The University of
Otago,Dunedin,NewZealand(June,1988).
AuditingintheFirstDecadeofthe21stCentury,coauthoredwithTedMockandpresentedby
Dr.MocktotheNorwegianSocietyofAccountants,Oslo,Norway(November,1987).
Bayesian Dimensions of Expert Systems in Auditing, (with Ted Mock and Paul Watkins)
presentedattheBayesianResearchConference,SocialScienceResearchInstitute,USC(February,
1986).
AnAuditingResearchSystem,apaperpresentedattheWesternRegionAAAMeeting(May,
1985).

53


37.
38.

39.

40.

41.

42.

43.

44.

45.

46.

47.

48.

49.

50.

51.

ComponentsoftheAuditEvidenceEvaluationProcess,attheSymposiumonAuditJudgment
andEvidenceEvaluation,UniversityofSouthernCalifornia(February,1985).
Auditors Make Cascaded InferencesSure They Do, (coauthored and presented jointly with
Theodore J. Mock) at the Bayesian Research Conference, Social Science Research Institute, USC
(February,1985).
AUDBASE: An Auditing Research Microcomputer Database, a paper and microcomputer
demonstrationofthedatabaseofauditingresearchliteraturedevelopedbytheauthor(consisting
ofover1700references),TheAccountingResearchForumatUSC(February,1985).
Sources of Error and Inconsistency in Auditor Judgment, a working paper presented at The
AccountingResearchForumatUSC(October,1984).
Auditor Judgment Training Programs of Big8 Accounting Firms, a paper presented at the
AnnualMeetingoftheAmericanInstituteforDecisionSciences(November,1983).
TheMaterialityConceptinAccountingandAuditing,AccountingResearchWorkshopsatthe
University of Arizona, ArizonaState University, and San DiegoState University (February and
March,1982).
Audit Judgments Under Uncertainty, Accounting Research Workshops at Indiana University
(April,1980)andtheUniversityofSouthernCalifornia(January,1981).
The Design and Implementation of an Auditing Research System, MidAtlantic Region AAA
Meeting(April,1980).
AUDITSCOPE: The Deloitte HaskinsandSells Audit Approach,a paper presentedat several
universities,onenationalAUDITSCOPESeminar,andseveralregionalAUDITSCOPESeminars.
Presented several other papers and talks on various auditing research and practice issues at
differentnationalandregionalAuditSCOPESeminars(198084).
Audit Judgment Research Opportunities and Issues: A Practitioners View, Symposium on
AuditJudgment,UniversityofSouthernCalifornia(February,1983).
The Future Environment for Auditing Education and Research, keynote address, Iowa
ConferenceofAccountingEducators(October,1982).
Discussion Comments on William R. Kinneys paper, Regression Analysis in Auditing: A
Comparison of Alternative Investigation Rules, University of North Carolina Audit Risk
Conference(May,1982).
Audit Judgment Workshop, Creighton University (a oneday workshop for auditing
researchers and practitioners presented jointly with Jack Krogstad, Robert Ashton, and Robert
Hylas)(May,1982).
The Creative Annual Report, Beta Alpha Psi Awards Banquet, San Diego State University
(March,1982).

54

52.

53.

54.

55.

ComputerAssistedAuditJudgments,ResearchSeminarPresentation,UniversityofNebraska
VisitingScholarProgram(April,1981).
Issues and Answers For Reporting on Internal Accounting Control, Western Region AAA
Meeting(May,1980).
BridgingtheGapBetweenAcademicandProfessionalResearchinAuditing,NortheastRegion
AAAMeeting(April,1980).
Recent Developments Concerning Reporting on Internal Control, Southwest Region AAA
Meeting(March,1980).

PRESENTATIONSTOPROFESSIONALORGANIZATIONS:

1.
Made presentations or was an invited participant in various IFAC International Accounting
Seminars between 1998 and 2003 in Paris, France; Istanbul, Turkey; Mumbai, India; Helsinki,
Finland; Amsterdam, Netherlands; London, England; Bahrain; Sydney, Australia; Budapest,
Hungary;NewYorkCity;BeijingandHongKong,China;andCapetown,SouthAfrica.

2.
Responding to the Crisis in Confidence: Top 10 Impacts on Future Auditing and Corporate
Governance,presentedattheUSFBetaAlphaPsiAccountingConference,November22,2002.

3.
Internet, Multimedia and Distance Learning in Accounting Education, presented at the
Seminar for Directors of Education of Member Bodies of IFAC, held in conjunction with the
WorldCongressofAccountingEducators,HongKong,November16,2002.(Seminarwashosted
bytheHongKongOfficeoftheAustralianInstituteofCertifiedPublicAccountantsandattended
byabout50DirectorsofEducationthroughouttheworld.)

4.
New Framework of International Standards for Accounting, Auditing and Accounting
Education: Impact on the U.S., presented at the USF/FICPA Accounting Conference, October
2002.

5.
EnronLessons for the Accounting Profession, presented to the West Coast Chapter of the
FICPA,April25,2002(withProfessorCelinaJozsi).

6.
Auditor Independence: The Challenge for Accounting Educators, at the Southeast AAA
MeetinginTampa,April27,2001(withProfessorKayTatumoftheUniversityofMiami.

7.
Auditor IndependenceNew Rules and Critical Judgments, for the USF/FICPA Accounting
Conference,October19,2001.

8.
Auditor Independence: Lessons Learned After All the Pain, for the Tampa Office of
PriceWaterhouseCoopers,November15,2001.

9.
Independence:JudgmentsBeyondtheRules,twohourCPEsessionfortheWestCoastChapter
oftheFICPA,November14,2000.

55

10.

11.

TheCriticalRoleofAuditorIndependenceCurrentProblemsandProposedSolutions,forthe
USF/BetaAlphaPsiAccountingConference,November17,2000.
CoanchoredaseriesofwebcastsonAuditorIndependenceBeyondtheRules(Coanchored
with Dan Guy, former VP of Auditing of the AICPA) nationwide webcasts of Independence:
Beyond the Rules, produced by the Independence Education Program. Webcasts and related
materials were funded by PriceWaterhouseCoopers and were reviewed and guided by an
advisorycommitteeappointedbytheSEC.

WebcastsforPractitionersFourseparatewebcastsforpractitioners(3hourseach)were
producedinJuneandJulyof2000.

WebcastforEducatorsCoanchoredaseparate3hournationalwebcast(withDanGuy)
coveringmaterialsspecificallyadaptedforuniversityeducators,deliveredonOctober27,
2000.

12.

13.

14.

15.

16.

17.

18.

19.

20.

InternetEducationandDistanceLearning:ParadigmShiftorSeriousThreat,Presentedatthe
NationalAssociationofStateBoardsofAccountancy(NASBA)CPEConferenceinNewOrleans,
February28,2000.
The Proposed NASBA/AICPA Framework for CPE, made presentation as a panelist on the
Forum on the Proposed New CPE Framework, at NASBAs Fifth Annual CPE Conference,
February29,2000.
New Assurance Services: Impact for Accountants in the European Community, Presented at
theDanishProfessionalAccountingConference,jointlysponsoredbytheCopenhagenSchoolof
Business and the Danish Institute of Chartered Accountants, November 1998, Copenhagen,
Denmark.
NewAssuranceServices:WhereWillTheyAllLead?CPEConferenceSponsoredbyGregory,
Sharer&Stuart,June1998.
AssuranceServicesUpdate:MovingIntothe21stCentury,USFAccountingCircleConference,
May1998.
So You Think the Internet Can be Secure! The SunTrust/Fowler White Accounting Education
ExtravaganzaforUniversityAccountingScholarships,May1998.
Continuing Professional Education in Emerging Assurance Services: How Should It Be
EncouragedandRecognizedbytheFloridaBoardofAccountancy?Invitedpresentationtothe
ContinuingProfessionalEducationCommitteeoftheFloridaBoardofAccountancy,April1998.
Internet Security and Electronic Commerce, USF Beta Alpha Psi Accounting Conference,
November21,1997.
WebTrust: A New Assurance Service for Electronic Commerce, FICPA/Florida Gulf Coast
UniversityAccountingConference,November18,1997.

56

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.

AssuranceServicesforElectronicCommerce,USFAccountingCircleConference,May22,1997.

AssuranceServicesinthe21stCentury, USF/FICPAAccountingConference,November1996.
EmergingAuditandAssuranceServices,WestCoastChapter,FICPA,Tampa,October1996.
A Look at Audit and Assurance Services in the 21st Century, Sun Coast Chapter, FICPA,
September 1996New Developments for Future Audit, Attest, and Assurance Services, annual
meetingoftheFICPA,PuertoRico,June1996.
EmergingAssuranceServices,Coopers&LybrandAccountingSeminar,June1996,Tampa.
The Future of Current Audit Services in the Year 2000, Perspectives on Assurance Services
Symposium.Naples,Florida,April1996.
Future Assurance Services, a 3 1/2hour panel presentation, The CPA Journal Symposium on
FutureAssuranceServices.Madepresentationandparticipatedinaninvitedpanelthatincluded
the Chair of the AICPA Special Committee on Assurance Services, the Chief Accountant of the
SEC,theViceChair/ChairElectoftheAICPA,andrepresentativesofotherconstituencies,New
York City, January 5, 1996. Excerpts of speech on new assurance services printed in article,
FutureAssuranceServices,inTheCPAJournal,April1996.
The Retreat of the Traditional Audit and the Emergence of New Assurance Services, Palm
BeachChapter,FICPA,September1995.
BuildingAFrameworkForFutureAssuranceServicesAndNewAuditingStandards,annual
meetingoftheFICPA,SanFrancisco,June1995.
EmergingAuditingandAssuranceServices,USFAccountingCircleConference,May1995.
CriticalFactorsinEvaluatingTheControlEnvironment.USF/FICPAAccountingConference,
December1994(withS.L.Schneider,R.E.MardenandG.E.Campbell).
New Framework for Financial Reporting, Auditing, and Assurance Services, West Coast
Chapter,FICPA,November1994.
TheDescentofTraditionalAuditServicesandtheRiseofNewAssuranceServices,GulfCoast
Chapter,FICPA,October1994.
The Sante Fe Conference Proposals for Revising the Framework for Financial Reporting and
AuditAssuranceServices,USFAccountingCircleConference,May1994.
FinancialStatementsandAuditingintheCourtroom,presentedseminarforcourtroomjudges
inFlorida,programsponsoredbytheAICPA,May1994.
AuditingInaDistressedEconomy,SunCoastchapter,FICPA,January1993.

57


37.

38.

39.

40.

41.

42.

43.

44.

45.

46.

47.

48.

49.

50.

Meeting Expanding User Demands for Audit/Assurance Services, USF Accounting Circle
Conference,June1993.
New Auditing Standards for Expanding User Demands, IMA Accounting Conference, June
1993.
New Information Wave Crashes Over the Auditing Profession, Central Florida Chapter,
FICPA,June1993.
Needed: New Approaches to Auditing and Assurance, West Coast Chapter, FICPA, October
1993.
New Initiatives in Audit, Attest, and Assurance, USF/FICPA Accounting Conference,
December1993.
NewResponsibilitiesforAuditorsforDetectingFraudandIllegalActs,WestCoastChapter,
FICPA,February1992.
Is the Auditing Expectations Gap Narrowing or Widening? Southwest Florida Chapter,
FICPA,April1992.
Controlling Audit Risk in Audits of Small Businesses, Florida Keys Conference, FICPA, May
1992.
DilemmasFacingtheAuditingProfession,SuncoastChapter,FICPA,St.Petersburg,May1992.
Assessing the Future of the Auditing Profession, Annual Meeting, FICPA, Quebec City,
Canada,June1992.
Lessons Auditors Ignore at Their Own Risk, Annual Meeting, FICPA, Quebec City, Canada,
June1992.
EmergingAuditingProblemsandIssues,FICPAAccounting/AuditingConference,Destin,FL,
June1992.
RecentAuditingStandards1992,USFAccountingCircleConference,June1992.
New Standards for Controlling Audit Risk, FICPA Accounting Show, Orlando, September
1992.

51.
AuditinginaDistressedEconomy,USF/FICPAAccountingConference,December1992.

RESEARCHAPPOINTMENTS,PROJECTS,GRANTSANDCOORDINATIONEFFORTS:

IndependenceEducationProject(IEP)(Seedescriptionabove)
FundedbyPriceWaterhouseCoopersGuidedbyanadvisorycommitteeappointedbytheSEC.

NationalScienceFoundationGrant

58


Auditor Judgments about the Control Environment of Financial Institutions, (coresearcher
with Dr. Sandra Schneider, Professor of Cognitive Psychology at USF, and assisted by Ron
Marden, Christi Comunale, and Tanya Benford, doctoral students in Accounting and two
doctoralstudentsincognitivepsychologyatUSF).Initialthreeyearprojectconcerningauditor
cognitive processes and judgments about the internal control environment of financial
institutions;extendedforafourthyear(199397)

InstituteofInternalAuditorsResearchFoundationGrant
The Impact of Technology on AuditingMoving into the 21st Century, (coresearcher with
TheodoreJ.Mock).PhaseIoftheresearchprojectonAuditEvidenceintheYear2000(198485)
wasfundedbytheInstituteofInternalAuditorsandcompletedinAugust,1985.Anadditional
grantwasreceivedfromtheInstituteofInternalAuditorsResearchFoundationtofundPhaseII,
whichwascompletedintheSpringof1987andpublishedin1988.Thisresearchwasdesigned
(1) to predictthrough a Delphi study of information technology expertsthe most important
developments in information technology in the next fifteen years, (2) to analyze the impact of
these developments on future audit evidence, and (3) to develop alternative scenarios of the
nature of the audit process and alternative strategies for auditors to adapt to the predicted
changes.
PeatMarwickFoundationResearchOpportunitiesinAuditingGrant
Auditing Research Database. Director and principal researcher for a project to develop a
microcomputer database of recent auditing research. Funding provided by the Research
OpportunitiesinAuditingprogramofthePeat,Marwick,MitchellFoundation,includingagrant
totheresearcherfortheinitialdevelopmentofthedatabasebytheresearcherplusathreeyear
continuinggranttotheSchoolofAccountingatUSCtomaintainandupdatethedatabase(1984
87).
USCAuditJudgmentSymposiaGrant
Worked with Professor Ted Mock in developing proposals to secure four separate grants from
theDeloitteHaskinsandSellsFoundationtofundthefirstfourUSCAuditJudgmentSymposia
(198386)andinplanningandconductingtheinternationalSymposiaprograms.TheseSymposia
were presented jointly by the Center for Accounting Research and the Social Science Research
Institute, both of USC. The USC Audit Judgment Symposium was merged with the Maastricht
AuditResearchSymposiumtoformtheInternationalSymposiumonAuditingResearch,whichis
nowcohostedbyUSC,theUniversityofLimburg,theNanyangTechnologicalUniversity,and
theUniversityofNewSouthWales.
InstituteofInternalAuditorsResearchFoundationGrant
Operational Audits of Production Control, (Coresearcher with Dr. William Collins). A
research project and monograph funded and published by the Institute of Internal Auditors
ResearchFoundation.

TexasWaterQualityBoardGrant
ValuingtheResourcesoftheGalvestonBay.ProjectDirectorandPrincipalResearcherfora
studyoftheEconomicandSocietalResourcesoftheGalvestonBay.Researchstudywasfunded
by the Texas Water Quality Board and the research report monograph was published by the
BureauofBusinessResearch,UniversityofTexas,Austin.

59


COORDINATIONOFPROFESSIONALAND
RESEARCHCONFERENCES:

Coordinator and CoEditor, Auditing Standards Board Expectations Gap Roundtable, in May 1992 in
Charleston,SC.ThisRoundtableconferencewasjointlysponsoredbytheBigSixAccountingFirms
and included discussion papers based on joint research by leading auditing researchers and
practitionersontheimpactoftheexpectationgapSASsandcontinuingexpectationgapissues.The
Roundtable included a variety of individuals who have a major influence on establishing auditing
standards and overseeing their proper implementation. Conference proceedings, The Auditing
ExpectationsGap:IssuesandOpportunities,waspublishedin1993.

AsChairmanoftheAccountingPrinciplesandAuditingStandardsCommitteeoftheFICPA,helped
coordinatetheFICPAAccountingandAuditingConference,Destin,Florida(1992).

HelpedplantheUSFAccountingCircleConferences(199298).

Cochairman, Symposium on Audit Judgment and Expert Systems in Auditing, University of


Southern California, (Feb., 1986) and Symposium on Audit Judgment and Evidence Evaluation,
UniversityofSouthernCalifornia(Feb.,1985).

AUDITSCOPE SEMINARSProgram Coordinator and presenter for four international and four
regionalseminars.TheAUDITSCOPESeminarsweresponsoredbyDeloitteforauditingresearchers
and faculty nationally and internationally. Topics varied from seminar to seminar to reflect new
audit approaches developed by Deloitte to meet changes in statistical methodology, information
technology,andauditingstandards.

CURRENTPROFESSIONALMEMBERSHIPS:

AmericanAccountingAssociation(AAA),includingthefollowingsections
Auditing
International
InformationSystems
AmericanInstituteofCPAs(AICPA)
FloridaInstituteofCPAs(FICPA)

LEISUREACTIVITIES:

Distancebicycling,running,&rollerblading
Boating

60

APPENDIX18:SUMMARYOFLEHMAN
COLLATERALATJPMORGAN

Appendix 18 summarizes collateral posted by Lehman at JPMorgan from June


2008 through September 2008 in response to JPMorgans margin requirements and
collateralrequests,whicharediscussedindetailatReportSectionIII.A.5.b.Thechart
neither lists every collateral movement nor tracks every individual security, but
summarizessignificantcollateral posts,transfers andreturns.Collateraltransfersand
returnsareindicatedbyitalicizedtext.
Date
June19,2008

July2,2008

July25,2008

Collateral
SASCO
Freedom
Spruce
Pine
Fenway

Kingfisher
HDSupply

Verano

Summary
Lehmanpostedtheseassetswithafacevalue
ofapproximately$5.7billiontoLCD,anLBI
clearanceaccount,1basedonLehmans
agreementtopost$5billionatJPMorganto
addressJPMorgansnewmarginrequirement.

Lehmanpostedtheseassetswithafacevalue
ofapproximately$1.44billiontoLCD,anLBI
clearanceaccount.

Lehmanpostedthisassetwithafacevalueof
roughly$1.35billiontoLCD,anLBIclearance
account.

AccordingtoJPMorgan,LCDisanLBIaccount.JPMorganFirstWrittenResponses,atp.7;JPMorgan
SecondWrittenResponses,atp.5;seealsoSpreadsheet[JPMEXAMINER00006151](spreadsheetshowing
LCD as part of DG92, an LBI dealer group). Alvarez & Marsal, however, underst[ood] JPMorgan
referredtotheLCDaccountinawaythatsuggestsitwasaLCPIaccount.Alvarez&Marsal,Responses
toQuestionsforAlvarez&Marsal/Weil,Gotshal&Manges(Dec.7,2009),atp.1.
1

Date
July2008

July2,2008
August8,2008

August8,2008

Collateral
GoldenGate
LoanFNG
DeltaTopco
CaymanPartners
RiopelleBroadway

Freedom
Pine
Spruce
Verano
SASCO
HDSupply
Fenway

Spruce
Freedom
Pine
Kingfisher
Verano

August11,2008 Fenway

August15,2008 Freedom
Fenway

Summary
LehmanpostedtheseassetsinLCP,anLCPI
clearanceaccount.

LehmanpostedtheseassetstoLCD,anLBI
clearanceaccount.Inmanyinstances,
however,oneCUSIPofthesamesecuritywas
beingremovedfromLCDonoraboutthe
samedateasthenewCUSIPwasbeing
deposited.

LehmanmovedtheseassetswithaLehmanstated
valueofroughly$5.9billionfromLCD,anLBI
clearanceaccount,toLCE,anLBHIclearance
account.Aroundthistime,GiffordFongpriced
Freedom,PineandSpruceatapproximately$2
billiontotal,approximately$1.5billionlessthan
Lehmansstatedvalue.

Lehmanmovedthisassetwithafacevalueof
roughly$2billionfromLCD,anLBIclearance
account,toLCE,anLBHIclearanceaccount.

LehmanremovedFreedom(Lehmanstatedvalueof
roughly$1.42billion)fromLCE.Lehman
increasedthefacevalueofitsFenwaypledge
to$3billion.

Date
September2,
2008

September9,
2008

September9,
2008

September10,
2008

September10,
2008

September11,
2008
September11,
2008

Collateral

Summary

Kingfisher

Lehmantransferredthisassetwithafacevalueof
roughly$960millionfromLCE,anLBHI
clearanceaccount,toLCD,anLBIclearance
account.Aroundthistime,GiffordFongpriced
theCLOsthatremainedinLCE(Spruce,Pine,
andVerano)atapproximately$1.75billion,
comparedtoLehmansstatedvalueof
approximately$3.25billion.

Cash
Lehmanposted$1billioncashinresponseto
JPMorgansSeptember9collateralrequestfor
$5billion(ofwhichLehmanagreedtopost$3
billionimmediately).

MoneyMarketFunds Lehmanpostedapproximately$1.7billionin

moneymarketfundsinresponseto
JPMorgansSeptember9collateralrequest.

Cash
Lehmanposted$300millioncashinresponse
toJPMorgansSeptember9collateralrequest
for$5billion(ofwhichLehmanagreedtopost
$3billionimmediately).

Corporatebonds
LehmanprovidedJPMorgancorporatebonds
withaLehmanstatedvalueofapproximately
$1.6billiontovalueandpossiblytosubstitute
forsomeofthecashcollateralLehmanposted
inresponsetoJPMorgansSeptember9
collateralrequest.

Cash
Lehmanposted$600millioncashrelatedto
JPMorgansSeptember9collateralrequest.

Corporatebonds
JPMorganreturnedapproximately$500millionof

corporatebondspostedbyLehman.

Date

Collateral

September12,
2008

Cash

September12,
2008

Corporatebonds

September12,
2008

Pine

Summary
Lehmanposted$5billioncashinresponseto
JPMorgansSeptember11collateralrequest
for$5billioncash.

JPMorganreturnedtheremainingcorporatebonds
(approximately$1billion)toLehman.

JPMorganreleased$1billion(Lehmanstated
value)ofPineCLOtoLehman.

APPENDIX19:LEHMANSDEALINGSWITHBANKOF
AMERICA
This appendix discusses the current litigation between Lehman and Bank of
America(BofA).Atthetimeofthiswriting,LehmanandBofAarebeforetheCourt
in an adversary proceeding. The pending dispute stems from BofAs November 10,
2008 setoff of approximately $509 million from various LBHI accounts.1 Specifically,
BofA set off the funds against debts it claims Lehman Brothers Special Financing
incurredthroughderivativeandswapagreementswithBofA.2
OutofdeferencetotheCourtandtoavoidinterferingwithactivelitigation,the
Examiner has limited his investigation of this claim and does not reach conclusions
abouttherelativemeritsofthepartiespositions.However,the$500millioncollateral
deposit and the related negotiations of the threeday notice provision in the 2008
Security Agreement are significant to the Examiners investigation of Lehmans
liquiditypool,discussedinmoredetailintheLiquidityPoolSection(SectionIII.A.5.i)of
thisReport.

1JointStipulationofUndisputedFacts,at44,DocketNo.74,BankofAm.,N.A.v.LehmanBros.Holdings,

Inc.(InreLehmanBros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Dec.7,2009).
2Id.at45.


I.

LEHMANFAILEDTOSETTLEA$650MILLIONOVERDRAFT;BOFA
DEMANDEDINTRADAYPROTECTION
At the time of the bankruptcy, BofA had provided clearing and other financial

servicestoLehmanforatleast16years.3Inconnectionwithitsclearingservices,BofA
provided unsecured, intraday credit to cover overdrafts.4 In this vein, BofA required
thatLehmanclearanyoverdraftsbytheendofeachbusinessdaytopreventintraday
creditfromripeningintoovernightcredit.5
AccordingtoBofA,deterioratingmarketconditionsinearly2008promptedBofA
to reevaluate its business relationships with brokerdealers and other financial
institutionsthatusedsubstantialoverdraftcredit.6BofAbegantomonitorformallyor,
in some instances, to require cash deposits from certain clients after many incurred
largeoverdraftsattheendofthesecondquarterof2008.7
OnJuly25,2008,Lehmanfailedtosettlea$650millionoverdraftbeforetheend
oftheday(asrequired).8AccordingtoLehman,thefailurearosefromapaymenterror

3Id.at7.
4Id.at78.
5Id.at8.
6Rule 70561(b) Statement of Undisputed Material Facts in Support of Bank of Americas Motion for

SummaryJudgment,at39,DocketNo.50,BankofAm.,N.A.v.LehmanBros.Holdings,Inc.(InreLehman
Bros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Sept.14,2009).
7Id.at43;seealsoTranscriptofdepositiontestimonyofMarisaHarney,BankofAm.,N.A.v.LehmanBros.
Holdings,Inc.(InreLehmanBros.Holdings,Inc.),No.0801753,Bankr.S.D.N.Y.,July.14,2009,atpp.5053
(discussingeffortsinthesummerof2008toreduceintradayexposuretobrokerdealersbecauseoflarge
overdrafts).
8JointStipulationofUndisputedFacts,at9,DocketNo.74,BankofAm.,N.A.v.LehmanBros.Holdings,
Inc.(InreLehmanBros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Dec.7,2009).


byoneofitsclients.9AccordingtoBofA,Lehmancouldnotsettletheoverdraftbecause
it arose from a segregated client account, which precluded Lehman from clearing the
overdraft with its own funds.10 The overdraft ripened into overnight credit, which
LehmansettledonJuly28,2008,thenextbusinessday.11
OnAugust14,2008,BofAinformedLehmanthatLehmanwouldneedtoplacea
$650 million deposit with BofA soon, to retain its overdraft credit.12 James Dever,
BofAsrelationshipmanagerforLehman,andDeversboss,WilliamWhite,relayedthis
informationonbehalfofBofAtoTonucci.13
OnAugust20,2008,DevercontactedTonucciagainandinformedhimthatBofA
wouldreduceLehmansintradaycreditlimittozeroifLehmandidnot placeaneven
larger deposit $1 billion with BofA by August 25, 2008.14 The greater figure

9StatementofUndisputedMaterialFactsinSupportofDefendantsLehmanBrothersHoldingsInc.and

LehmanBrothersSpecialFinancingandCounterclaimPlaintiffLehmanBrothersHoldingsInc.sMotion
for Summary Judgment, at 7, Docket No. 52, Bank of Am., N.A. v. Lehman Bros. Holdings, Inc. (In re
LehmanBros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Sept.14,2009).
10Rule 70561(b) Statement of Undisputed Material Facts in Support of Bank of Americas Motion for
SummaryJudgment,at47,DocketNo.50,BankofAm.,N.A.v.LehmanBros.Holdings,Inc.(InreLehman
Bros. Holdings, Inc.), No. 0801753 (Bankr. S.D.N.Y. Sept. 14, 2009). Lehman does not dispute that it
informedBofAitcouldnotcomminglefundsandattributesthistoitsunderstandingofFSAregulations.
ResponsetoBankofAmericasStatementofUndisputedMaterialFacts,at47,DocketNo.61,Bankof
Am.,N.A.v.LehmanBros.Holdings,Inc.(InreLehmanBros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.
Oct.14,2009).
11JointStipulationofUndisputedFacts,at11,DocketNo.74,BankofAm.,N.A.v.LehmanBros.Holdings,
Inc.(InreLehmanBros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Dec.7,2009).
12Id.at13.
13Id.
14Id.at14.


represented BofAs decision to require a deposit sufficient to cover Lehmans largest
dailyoverdraftlimits.15
II.

LEHMANANDBOFANEGOTIATEDTHETERMSOFASECURITY
AGREEMENT
On the evening of August 21, 2008, BofA sent Lehman a document titled

Security Agreement and a document titled Customer Agreement.16 These


agreements provided for BofAs right to set off against the deposit sought by BofA to
collateralizetheintradaycreditprovidedtoLehman.LehmanandBofAexchangedsix
drafts before executing the Security Agreement on August 25. The parties Joint
StipulationofUndisputedFactsprovidesadraftbydraftexpositionofthenegotiations
over the terms of the agreements.17 These negotiations are the subject of ongoing
litigation.
However, one of the terms arising from these negotiations has broader
significance for this Report. During the course of negotiations, BofA proposed a
provisionthatallowedLehmantoremoveassetsfromthedepositaccountwithadvance
noticeofthreebusinessdays.18

15Bank

of Americas Local Bankruptcy Rule 70561(c) Response to Lehman Brothers Statement of


Undisputed Facts and Counterstatement of Facts in Opposition to Lehman Brothers Motion for
SummaryJudgment,atp.17,DocketNo.60,BankofAm.,N.A.v.LehmanBros.Holdings,Inc.(InreLehman
Bros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Oct.19,2009).
16JointStipulationofUndisputedFacts,at15,DocketNo.74,BankofAm.,N.A.v.LehmanBros.Holdings,
Inc.(InreLehmanBros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Dec.7,2009).
17Id.at1533.
18Id.at24.


III.

THEMINIMUMCOLLATERALVALUEANDTHETHREEDAY
PROVISION
BofAs initial draft of the Security Agreement set the minimum required

collateralvalueat$1billion.19TheagreementprovidedthatifBofAeverdetermined
that the value of the assets in the deposit account had fallen below $1 billion, BofA
coulddemandthatLehmanimmediatelydepositthedifference.20UnlessLehmanwas
in default, BofA would release any funds in excess of $1 billion to Lehman upon
request21(the$1billionfigurewasreducedto$500millioninsubsequentdrafts).22
OnAugust22,inLehmansinitialreply,Lehmanstruckoutmostofthecollateral
provision,includingtheamountoftheminimumrequireddeposit.23Lehmancounter
proposed that it place collateral with BofA which Lehman could remove at any time
withoutBofAsconsent,butleftthevalueamountofthecollateralblank.24
On August 22, in BofAs second draft, BofA reinserted the requirement that
Lehman provide collateral of $1 billion in a deposit account, but BofA also inserted a
provisionthatallowedLehmantoremoveassetsfromthedepositaccountwithadvance
noticeofthreebusinessdays.25

19Id.at16.
20Id.
21Id.
22Seeid.at34.
23Id.at22.
24Id.
25Id.at24.


IV.

THEDEPOSITANDSETOFF
Uponexecutionofthe SecurityAgreementon August25,Lehman immediately

wired $500 million to the designated account (the 465 Account).26 As planned, the
funds were transferred to a Eurodollar account in the Cayman Islands the next day.27
The Eurodollar account was a time deposit that matured on September 25, 2008.28
InterestontheEurodollaraccountwasdepositedintothe465Accountuponmaturity.29
According to BofA, these two accounts composed the Deposit Account referenced in
andsecuredbytheSecurityAgreement.30
AfterSeptember25,theEurodollardepositmatureddailyandwasrenewedeach
dayuntilfurthernotice.31LehmandidnotattempttoaccesstheEurodollardepositor
theinterestaccount.32
AccordingtoLehman,BofAplacedapermanentholdon[the465]accountat
itsinceptiontheequivalentofanadministrativefreezemeaningthatfundscould
not be taken out of the account without special authorization and [BofAs] manual

26JointStipulationofUndisputedFacts,at35,DocketNo.74,BankofAm.,N.A.v.LehmanBros.Holdings,

Inc.(InreLehmanBros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Dec.7,2009).
27Id.at36.
28Id.at37.
29Id.at39.
30Bank of Americas Local Bankruptcy Rule 70561(c) Response to Lehman Brothers Statement of
Undisputed Facts and Counterstatement of Facts in Opposition to Lehman Brothers Motion for
SummaryJudgment,atp.49,DocketNo.60,BankofAm.,N.A.v.LehmanBros.Holdings,Inc.(InreLehman
Bros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Oct.19,2009).
31JointStipulationofUndisputedFacts,at40,DocketNo.74,BankofAm.,N.A.v.LehmanBros.Holdings,
Inc.(InreLehmanBros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Dec.7,2009).
32Id.at42.


overrideofthehold.33AccordingtoLehman,thepurposeofthepermanentholdwas
toensurethatLehmanwouldnothaveunfetteredaccesstothefunds.34
BofA denies Lehmans assertion that Bank of America placed a permanent
holdonthe465AccounttopreventLehmansremovalofthecashdepositatinception
andmaintains thatLehman retainedaccessto thecashdeposit,subjecttothethree
daynoticeprovisiondescribedabove.35
BofAandLehmanagreethatLBHIhadmerelynegligibleoverdrafts,ifanyat
all, on September 15 when LBHI declared bankruptcy.36 On November 10, BofA
notifiedLBHIthatBofAclaimedarighttosetoff$1.9billionagainstLBHIaccounts.37
Specifically, BofA claimed Lehman Brothers Special Financing owed BofA the $1.9
billion under an ISDA agreement, which included a guarantee by LBHI.38 That same
day, BofA set off against approximately $509.3 million in various LBHI accounts,

33StatementofUndisputedMaterialFactsinSupportofDefendantsLehmanBrothersHoldingsInc.and

LehmanBrothersSpecialFinancingandCounterclaimPlaintiffLehmanBrothersHoldingsInc.sMotion
for Summary Judgment, at 47, Docket No. 52, Bank of Am., N.A. v. Lehman Bros. Holdings, Inc. (In re
LehmanBros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Sept.14,2009).
34Id. (quoting Transcript of deposition testimony of Evelyn Alpert, Bank of Am., N.A. v. Lehman Bros.
Holdings,Inc.(InreLehmanBros.Holdings,Inc.),No.0801753,Bankr.S.D.N.Y.,June12,2009,atp.28).
35Bank of Americas Local Bankruptcy Rule 70561(c) Response to Lehman Brothers Statement of
Undisputed Facts and Counterstatement of Facts in Opposition to Lehman Brothers Motion for
SummaryJudgment,atp.45,DocketNo.60,BankofAm.,N.A.v.LehmanBros.Holdings,Inc.(InreLehman
Bros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Oct.19,2009).
36JointStipulationofUndisputedFacts,at43,DocketNo.74,BankofAm.,N.A.v.LehmanBros.Holdings,
Inc.(InreLehmanBros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Dec.7,2009).
37Id.at44.
38Id.


including theentiretyofthefundsinthe Eurodollar and465 accounts(approximately
$501.8million).39
BofAdidnotseekrelieffromtheautomaticstay.40Lehmandidnotconsenttothe
setoff.41OnNovember21,2008,Lehmandemandedthereturnofthefunds,protesting
thatthesetoffviolatedtheautomaticstayandthetermsoftheSecurityAgreement.42
On November 26, BofA commenced an adversary proceeding, seeking
declaratoryreliefestablishingthatthesetoffwasproperunderthetermsoftheSecurity
Agreement, and that it either did not require relief from the automatic stay or,
alternatively,thatBofAwasentitledtoreliefinordertoeffectthesetoff.43OnJanuary2,
2009, Lehman filed an answer and counterclaim, asserting breach of contract and
violationoftheautomaticstayandseekingreturnofthefunds,plusinterest,costs,and
fees.44

39Id.at45.
40Id.
41Id.
42Id.at46.
43Adversary Complaint, at p. 2, Docket No. 1, Bank of Am., N.A. v. Lehman Bros. Holdings, Inc. (In re

LehmanBros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Nov.26,2008).
44Answer and Affirmative Defenses of Lehman Brothers Holdings Inc. and Lehman Brothers Special
FinancingInc.andCounterclaimsandThirdPartyComplaintofLehmanBrothersHoldingsInc.,atpp.
2631,DocketNo.6,BankofAm.,N.A.v.LehmanBros.Holdings,Inc.(InreLehmanBros.Holdings,Inc.),No.
0801753 (Bankr. S.D.N.Y. Jan. 2, 2009) (also asserting claims for declaratory judgment that BofA must
returnthefunds,toestablishaconstructivetrust,andforturnoverofproperty).


V.

THESIGNIFICANCEOFTHECLAIMSTOTHELIQUIDITYSECTIONOF
THISREPORT
Someoftheargumentsmadeduringthecourseoftheadversaryproceedingare

relevant to the Liquidity Pool Section (Section III.A.5.i) of this Report. This appendix
does not analyze the merits of the parties claims in the adversarial proceeding, nor
should this appendix be read to take a position on any facts in dispute between the
parties.
Lehman and BofA dispute the nature of the Deposit Account holding the $500
million.45LehmanarguesthatBofAdidnothaveacommonlawrighttosetoffbecause
the Deposit Account was a special purpose account, characterized by, among other
things,restrictionsonthepledgorsaccess.46AccordingtoLehman,thethreedaynotice
provisiongaveBofAsubstantialcontroloverthecollateral,whichwassubstantially
fettered.47
In contrast, BofA argues that the Deposit Account was a general account,
accessible to Lehman with only minor and administrative restrictions, and, thus,

45See,e.g.,BankofAmericasLocalBankruptcyRule70561(c)ResponsetoLehmanBrothersStatement

of Undisputed Facts and Counterstatement of Facts in Opposition to Lehman Brothers Motion for
Summary Judgment, at pp. 4850, Docket No. 60, Bank of Am., N.A. v. Lehman Bros. Holdings, Inc. (In re
Lehman Bros. Holdings, Inc.), No. 0801753 (Bankr. S.D.N.Y. Oct. 19, 2009) (quoting and disputing
LehmansclaimsthattheEurodollaraccountwasnotabankaccountatallorwasatleastnotageneral
depositaccount).
46Defendants Lehman Brothers Holdings Inc. and Lehman Brothers Special Financing And
CounterclaimPlaintiff Lehman Brothers Holdings Inc.s Opposition to Bank of Americas Motion for
Summary Judgment, at pp. 3738, Docket No. 63, Bank of Am., N.A. v. Lehman Bros. Holdings, Inc. (In re
LehmanBros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Oct.19,2009).
47Id.atp.38(internalquotationsomitted).


subjecttosetoffabsentanexpresswaiver.48BofAclaimstohavedevisedthethreeday
proposal for Lehmans benefit and refers to the provision as a creative solution that
alloweditsclienttoavoidalossofliquidity.49
Elsewhere, Lehman personnel have relied on the threeday provision for the
proposition that similar deposits placed with JPMorgan were properly included in
Lehmansliquiditypool.50Indeed,theprovisionwasincludedintheagreementswith
JPMorganatLehmansbehest.51
AsdiscussedinmoredetailintheLiquidityPoolSection(SectionIII.A.5.i)ofthis
Report, Lehmans access to the funds at JPMorgan and BofA subject to the threeday

48Memorandum of Law in Support of Bank of Americas Motion for Summary Judgment, at pp. 4248,

DocketNo.48,BankofAm.,N.A.v.LehmanBros.Holdings,Inc.(InreLehmanBros.Holdings,Inc.),No.08
01753(Bankr.S.D.N.Y.Sept.14,2009);seealsoMemorandumofLawinOppositiontoLehmanBrothers
Motion for Summary Judgment and in Further Support of Bank of Americas Motion for Summary
Judgment,atpp.17,5152,DocketNo.58,BankofAm.,N.A.v.LehmanBros.Holdings,Inc.(InreLehman
Bros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Oct.19,2009).
49Memorandum of Law in Opposition to Lehman Brothers Motion for Summary Judgment and in
FurtherSupportofBankofAmericasMotionforSummaryJudgment,atp.6,DocketNo.58,BankofAm.,
N.A.v.LehmanBros.Holdings,Inc.(InreLehmanBros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Oct.19,
2009); see also Defendants Lehman Brothers Holdings Inc. and Lehman Brothers Special Financing and
CounterclaimPlaintiff Lehman Brothers Holdings Inc.s Memorandum of Law in Reply to Bank of
AmericasOppositiontoLehmansMotionforSummaryJudgment,atpp.2930&n.24,DocketNo.71,
Bank of Am., N.A. v. Lehman Bros. Holdings, Inc. (In re Lehman Bros. Holdings, Inc.), No. 0801753 (Bankr.
S.D.N.Y.Nov.9,2009)(arguingthatBofAplacedsignificantpracticallimitationsonLehmansabilityto
withdraw the collateral by conditioning access to overdraft credit on keeping the deposit at BofAand
thatbothpartiesbelievedthatthewithdrawalrestrictionsweresignificant).
50See email from Mark G. Doctoroff, JPMorgan, to Jane BuyersRusso, JPMorgan, et al. (Sept.9, 2008)
[JPM2004 0032520] (discussing Flemings desire to include a similar threeday provision in the
September 9 Guaranty and Security Agreement to avoid the public issue of [Lehmans] liquidity pool
having to drop); see also Guaranty (Sept. 9, 2008), at p. 2 [JPM2004 0005813] (including threeday
provisioninSeptember9GuarantywithJPMorgan);SecurityAgreement(Sept.9,2008),atp.3[JPM2004
0005873](includingthreedayprovisioninSeptember9SecurityAgreementwithJPMorgan).
51ExaminersInterviewofDonnaDellosso,Oct.6,2009,atp.8;ExaminersInterviewofPaulW.Hespel,
Apr. 23, 2009, at pp. 56; Examiners Interview of Paolo R. Tonucci, Sept. 16, 2009, at p. 14 n.7. But see
Examiners Interview of Andrew Yeung, Mar. 13, 2009, at p. 5 (claiming that JPMorgan proposed the
threedayprovision);ExaminersInterviewofAndrewYeung,May14,2009,atp.7(same).

10


provision is material to the propriety of Lehmans inclusion of those funds in its
reported liquidity pool. Tonucci stated that Lehman included the BofA deposit in
Lehmans liquidity pool because the cash was accessible with threedays notice, and
Lehman had internally defined available liquidity to mean liquid assets available
withinfivedays.52
Nevertheless, Lehman argues in the adversary proceeding that there were
practical restrictions on Lehmans ability to access the deposit, in addition to the
restrictions imposed by the notice itself. Specifically, Lehman could not simply
withdraw the funds upon which overdraft protection was conditioned or at least
couldnotdosoforaslongas[BofA]remainedoneofLehmanskeyclearingbanks,a
roleithadoccupiedforatleastsixteenyears.53Lehmanneededtomaintaindaylight
overdraftprotection,orelsethesystemwouldgrindtoahalt.54
Finally,BofAmayhavecountedthe$500milliondepositinitsownliquiditypool
concurrent with Lehman counting the same deposit in its pool. In the course of a

52TranscriptofdepositiontestimonyofPaoloR.Tonucci,BankofAm.,N.A.v.LehmanBros.Holdings,Inc.

(InreLehmanBros.Holdings,Inc.),No.0801753,Bankr.S.D.N.Y.,July16,2009,atpp.1819.However,as
describedinmoredetailintheBankofNewYorkMellonSectionofthisReport,LehmansInternational
Treasurer, Carlo Pellerani, was unaware of the significance of the threeday provision, and told the
ExaminerthatdidnotknowofaLehmanpolicythatdefinedavailableliquiditytomeanliquidassets
availablewithinfivedays.SeeSectionIII.A.5.fofthisReport.
53DefendantsLehmanBrothersHoldingsInc.andLehmanBrothersSpecialFinancingandCounterclaim
Plaintiff Lehman Brothers Holdings Inc.s Memorandum of Law in Reply to Bank of Americas
OppositiontoLehmansMotionforSummaryJudgment,atpp.2930,DocketNo.71,BankofAm.,N.A.v.
LehmanBros.Holdings,Inc.(InreLehmanBros.Holdings,Inc.),No.0801753(Bankr.S.D.N.Y.Nov.9,2009).
54Id. at p. 30 (quoting Transcript of deposition testimony of Bernadette Mazzella, Bank of Am., N.A. v.
LehmanBros.Holdings,Inc.(InreLehmanBros.Holdings,Inc.),No.0801753,Bankr.S.D.N.Y.,July15,2009,
atpp.3942).

11


deposition, Lehmans counsel asked Evelyn Alpert, a senior vice president at BofA,
whetherthe$500millionwasincludedinBofAsliquidityonceLehmandepositedit.
Alpertresponded:Everydepositthatwehaveisincludedinourliquidity.55

55TranscriptofdepositiontestimonyofEvelynAlpert,BankofAm.,N.A.v.LehmanBros.Holdings,Inc.(In

reLehmanBros.Holdings,Inc.),No.0801753,Bankr.S.D.N.Y.,June12,2009,atpp.24:2425:11.

12

APPENDIX20:KNOWLEDGEOFSENIORLEHMAN
EXECUTIVESREGARDINGTHEINCLUSIONOF
CLEARINGBANKCOLLATERALINTHELIQUIDITYPOOL
Appendix20describeswhatmembersofLehmansseniormanagementtoldthe
Examiner they knew, or did not know, about Lehmans inclusion of clearingbank
collateralinthefirmsliquiditypool.
A. RichardS.Fuld,Jr.
According to Fuld, it was onlyafter September15, 2008,through conversations
with CFO Ian Lowitt, that he understood the impact of JPMorgans collateral calls on
Lehmansliquidity.1Still,Fuldopinedthatcollateralpledgedonanintradaybasiswas
properlycountedinLehmansliquiditydisclosures.2Therewasnoliquidityissuein
Fulds view because, according to Fuld, the collateral was returned daily.3 Following
the bankruptcy, Fuld said he had a conversation with Lowitt, who advised him that
collateralpledgedintradaydefinitelycountedtowardliquidity.4
B. ChristopherM.OMeara
OMeara was CRO at the time of LBHIs bankruptcy filing on September 15,
2008. OMeara said that Lehmans liquidity pool consisted of shortterm investments

1ExaminersInterviewofRichardS.Fuld,Jr.,May6,2009,atp.12.
2Id.atp.15;ExaminersInterviewofRichardS.Fuld,Jr.,Dec.9,2009,atp.5(Fuldopinedthatcollateral

pledgedintradaywasproperlyincludedinLehmansliquiditypool).
3ExaminersInterviewofRichardS.Fuld,Jr.,May6,2009,atp.12.
4Id.atp.15.


that could be converted to cash.5 He did not appear to be aware that Lehman was
including clearingbank collateral in its liquidity pool prior to LBHIs bankruptcy:
whenaskedwhethercertaincollateralcouldhavebeenincludedinLehmansliquidity
pool,OMearasaidhewouldhavetohuddlewiththeteamtounderstandthatbetter.6
He then argued for the propriety of including pledged collateral in the liquidity pool,
statingthatifthecollateralwereonlytiedupintraday,itsstilloursattheendofthe
day.7
ThusOMeara,likeFuld,saidhewasnotawarethatLehmanwasnotentitledto
allcollateralincludedintheliquiditypoolattheendoftheday.Hefurtherstatedthat
he was not aware that, due to the JPMorganLehman Clearance Agreement and
associated security documentation, Lehman accounts at JPMorgan were encumbered
andthatthecollateralinthoseaccountswassimultaneouslyincludedinthepool.
C. PaoloR.Tonucci
AsGlobalTreasurer,Tonucciwasfamiliarwiththecompositionanddefinitionof
Lehmansliquiditypool.Hestatedthatcollateraleligibleforinclusioninthepoolwas
that which was high grade, investment quality, which could be monetized within
five days.8 Tonucci stated that this was an internal Lehman policy, predating his
tenure as Global Treasurer, although he could not point to a specific document

5ExaminersInterviewofChristopherM.OMeara,Aug.14,2009,atp.27.
6Id.
7Id.
8ExaminersInterviewofPaoloR.Tonucci,Sept.16,2009,atp.16.


supportingthisstatement.9Tonuccifurtherstatedthathedidnotknowhowformal
thefivedaystandardwas,orhowformalstandardsforincludingassetsintheliquidity
pool were generally.10 Tonucci noted that liquidity was not governed by anything as
specific as a GAAP standard. Ultimately, Tonucci said, the CFO [Lowitt] is
responsible for determining what assets belong and do not belong [in the liquidity
pool].11
Tonucci listed other assets suitable for inclusion in the liquidity pool:
government securities, majorlisted equities, money funds with same or nextday
liquidity, and reverse repurchase agreements (reverse repos).12 Tonucci said that
reverse repos were the gold standard for liquid assets eligible for inclusion in
Lehmansliquidityreserves.13
TheExamineraskedTonucciwhethercollateraltransferredtoLehmansclearing
banks was properly included in Lehmans liquidity pool, highlighting the fact that
fundstransferredtoclearingbankstocoverintradayrisksuchastheJune12,2008$2
billion Citi deposit would not be available for Lehmans liquidity needs during that
intradayperiod.Tonuccirespondedthathedidntthinkaboutitthatwayatthetime

9Id.
10Id.
11Id.NotethatIanLowittsaidjusttheopposite,namely,thatTonucciwasprimarilyresponsibleforthe

compositionoftheliquiditypool.ExaminersInterviewofIanT.Lowitt,Oct.28,2009,atp.24.
12In a reverse repo, the repo lender (Lehman) agrees to provide cash to its counterparty (the repo
borrower)inexchangeforasecurity,wheretherepoborroweragreestobuysthesecuritybackfrom
thelenderataslightlyhigherpriceinthefuture(therepurchaseobligation).
13ExaminersInterviewofPaoloR.Tonucci,Sept.16,2009,atp.16.


that Lehman transferred the $2 billion to Citi.14 Tonucci elaborated: Lehman did not
design its pool to cover arbitrary demands made by its clearing banks; rather, the
liquidity pool was defined to satisfy maturing obligations over a certain period of
time.15Whilecollateraldemandsmayhavebeenforeseeableinhindsight,theliquidity
poolwasnotdesignedto,orrepresentedto,coverclearingbankdemands.16
TonucciexplainedthatLehmanbelieveditcouldincludeclearingbankcollateral
intheliquiditypoolgiventhat,inthecaseofCitiandJPMorgan,untilearlySeptember,
that collateral was only transferred to secure intraday exposures, and was allegedly
releasedattheendofeachday.17BecauseLehmanonlycalculateditsliquidityafterthe
close of business, the supposedly released collateral could be counted as liquid.
Tonucci emphasized that no firm calculates liquidity intraday, on account of the
complexityofsuchatask.18

14Id.atp.18.
15Id.
16Id. Lehman described its liquidity pool as primarily intended to cover expected cash outflows for

twelvemonthsinastressedliquidityenvironment,wherethoseoutflowsconsistedof,forthemostpart,
maturing, longterm, unsecured debt coming current, and repayment of commercial paper and bank
loans.LehmanBrothersHoldingsInc.,QuarterlyReportasofMay31,2008(Form10Q)(filedonJuly10,
2008), at p. 80. Lehman further described its pool as available to fund illiquid asset classes, and cover
outflowsassociatedwithcertainliquiditystressscenarios.Id.atpp.8082,84.Lehmanneverdisclosed
thatitsliquiditypoolcontainedencumberedassets.WhenFRBNYanalystsArtAnguloandJanVoigts
inferredforthemselvesthatLehmanwasincludingclearingbankcollateralinitsliquiditypool,Angulo
concluded, [it] doesnt feel quite right to view [the collateral] as unencumbered, to which Voigts
replied, [a]greed. Email from Jan H. Voigts, FRBNY, to Arthur G. Angulo, FRBNY (Aug. 21, 2008)
[FRBNYtoExam.033297].
17ExaminersInterviewofPaoloR.Tonucci,Sept.16,2009,atp.18.
18Id.WhileLehmandidnotknowalltheinflowsandoutflowsthatwouldultimatelytranspireintraday
untilafterthefact,LehmandidknowthatperitsunderstandingwithCitiandJPMorgan,ithadtoplacea
setamountofcollateralwiththoseinstitutionseveryday.


Tonucci provided another rationale for the inclusion of clearingbank collateral
in the pool: Lehman believed it could get the collateral back from the banks if it so
requested.19TheExamineris,infact,awareoftwooccasionsinwhichCitiandHSBC
returnedcashtoLehman;onbothoccasions,however,Lehmanpromptlyreplacedthe
funds.20AskedifLehmanhadevertesteditsabilitytogetclearingbankcollateralback
from JPMorgan in the summer of 2008, Tonucci replied that Lehman had not.21
Nevertheless,TonuccistatedthatLehman couldeffectthereturnofintradayclearing
bankcollateral.TheCiti$2billioncashdeposit,Tonuccicontinued,wasmerelyplaced
with Citi to demonstrate good faith, and that there were no restrictions on
[Lehmans] ability to get it back.22 Further, Tonucci said he was confident that

19Id.
20See email from Michael Mauerstein, Citigroup, to Christopher M. Foskett, Citigroup (June 30, 2008)

[CITILBHIEXAM 00074989] (explaining that Lehman will replace the $200 million of the Citibank
depositthenextmorning);emailfromCarloPellerani,Lehman,toIanT.Lowitt,Lehman,etal.(Aug.28,
2008) [LBEXAM 008853] (evidencing return of the HSBC deposit following the weekend); email from
IanT.Lowitt,Lehman,toJeremyIsaacs,Lehman(Aug.28,2008)[LBEXAM008940].
21ExaminersInterviewofPaoloR.Tonucci,Sept.16,2009,atp.18.TheExaminerisaware,howeverthat
collateral moved out of the accounts at certain points. For example, on September 10, 2008, JPMorgan
returned the Pine securities collateral upon Lehmans request. See supra Section III.A.5.b.1.m of this
Report, which discusses Lehmans dealings with JPMorgan; see also email from Edward J. Corral,
JPMorgan, to Michael A. Mego, JPMorgan, et al. (Sept. 12, 2008) [JPMEXAMINER00005961] (Let the
CLO go.); email from Michael A. Mego, JPMorgan, to Mark G. Doctoroff, JPMorgan, et al. (Sept.12,
2008)[JPMEXAMINER00005936](LehmanBrothersislookingtoRelease$1billionfromthe$6.2billion
heldontheirLCEaccount.).
22ExaminersInterviewofPaoloR.Tonucci,Sept.16,2009,atp.18.TherewererestrictionsonLehmans
abilitytoaccessthesefunds.CitidocumentsandwitnessstatementsshowthatwhileCitiwouldlikely
havereturnedthe$2billiontoLehmanifrequested,Citisriskdeskhadtobenotifiedinadvanceof,and
approve any release of the deposit. After release of the deposit Citi would reassess whether it would
continue doing business as usual with Lehman. Examiners Interview of Thomas Fontana, Aug. 19,
2008,atp.5.Further,withinCitiitwasunderstoodthatLehmansaskingforthedepositbackdoeshave
distinct impacts on clearing capacity. Email from Jerry Olivo, Citigroup, to Michael Mauerstein,
Citigroup,etal.(Aug.29,2008)[CITILBHIEXAM00076678].


Lehman could trade with Citi without the $2 billion, but that it would be more
difficult without the deposit.23 Lehman was always beholden to an extent on the
good will of its clearing banks, Tonucci said, but he factored in Lehmans long and
deephistorywiththoseclearingbanks(whichhadnotaskedpreviouslyforintraday
collateral)informinghisjudgmentthatthebankswouldhavereturnedthecollateral.24
WhileTonucciassumedatthetimeofthecollateralpledgesthatLehmanwould
beabletocallbackthepledges,itbecameapparenttohimonoraroundSeptember10,
2008,thatthebankswouldnotreturnthecollateral.25TonuccisaidthatwithinLehman,
there were no discussions about the propriety, impropriety or difficulties related to
Lehmansinclusionoftheclearingbankcollateralinthepool.26
In addition to the JPMorgan and Citi collateral, Tonucci recalled that collateral
transfers to HSBC and Bank of America (BofA) were also included in the liquidity
pool.TonuccidefendedtheinclusionoftheBofAcollateralonthegroundsthatBofA
was very peripheral to Lehmans funding operations and that Lehman could have
moveditsbusinesstoCiti.27
Intotal,TonucciconfirmedthatthefollowingassetswereincludedinLehmans
liquidity pool: the $2 billion Citi deposit; $3 billion JPMorgan collateral pledged on

23ExaminersInterviewofPaoloR.Tonucci,Sept.16,2009,atp.18.
24Id.
25Id.
26Id.atp.19.
27Id.


September 9 and 10, 2008;28 the $5 billion cash collateral pledged to JPMorgan on
September 12; at least some of the securities transferred to JPMorgan over the
summertomitigatetheeffectsofJPMorgansmarginrequirements;theapproximately
$1 billion transferred to and that remained at HSBC on September 1, 2008; and $500
millioncollateralplacedwithBofAonAugust25,2008.29Tonuccisaidthathedidnot
recognize that these pledges materially reduced Lehmans ability to monetize the
pooluntilSeptember12,2008.30
D. RobertAzerad
AzeradwastheheadofLehmansAssetandLiabilityManagementdivision,and
hadanactiveroleinmanagingLBHIsliquiditypool.Azeradstatedthattheliquidity
pool wascomposed ofunencumberedassets that could be readily monetized.31 Yet,
when asked about Lehmans inclusion ofintraday collateral in its liquidity pool, he
defendeddoingsobaseduponthefactthatliquiditywascalculatedattheendofeach
day.32
Whenasked whatwouldhappenif Lehmandecided to sellorpledge cash and
other assets that were committed to the clearing banks on an intraday basis, Azerad
acknowledgedthatthiswouldamounttoopenbattlewithJPMorgan,whichAzerad

28Tonucciwasnotaskedaboutthe$600millioncashpledgedtoJPMorganonSeptember11.Seeid.atp.

21.
29Id.atp.19.
30Id.
31ExaminersInterviewofRobertAzerad,Sept.23,2009,atp.4.
32Id.


thoughtcouldforceLehmanintobankruptcy.33Still,hedisagreedwithalteringhisend
ofdayconceptionofliquidityreportingtotakethispracticalrealityintoaccount.34But
Azerad did acknowledge that, in a sense, collateral pledged on an intraday basis was
nottrulyunencumbered.35Azeradfurtherstatedthattheinclusionofclearingbank
collateralwasnotablackandwhiteissueforhim,andthatLehmanwasnottryingto
hideencumbrances,butrathersticktoaconsistentmethodologyofonlycalculating
liquidityattheendoftheday.36
Azerad stated that he developed the various ability to monetize tables37
describing the relative liquidity of different portions of the liquidity pool only in the
week prior to the chapter 11 filing by LBHI.38 He said that assets assigned a high
ability to monetize could be liquidated in one day, assets assigned a mid ability to
monetize could be liquidated within five days, and assets with a low ability to
monetize were monetizable within one to two weeks.39 A table showing Lehmans
abilitytomonetizetheliquiditypoolasofSeptember10,2008assignsalowability
tomonetize$27billionofthe$37billionpool.40

33Id.atp.9.
34Id.
35Id.
36Id.
37See,e.g.,RobertAzerad,Lehman,LiquidityPoolSummary(Sept.9,2008)[LBHI_SEC07940_557815].
38ExaminersInterviewofRobertAzerad,Sept.23,2009,atp.8.
39Id.
40Lehman,LiquidityUpdate(Sept.10,2008),atp.4[LBEXWGM725919].


E. DanielJ.Fleming
InhissecondinterviewwiththeExaminer,onSeptember24,2009,LehmanCash
and Collateral Management head Dan Fleming said he knew Lehman wanted to
structurecollateraldepositswithitsclearingbankstomaintainitsabilitytoincludethe
collateralintheliquiditypool.41Flemingrecountedhisknowledgeofthe$2billionCiti
depositinparticular:IfLehmanowednoobligationstoCitiattheendoftheday,the
deposit was freely returnable to Lehman, and could therefore be included in the
liquidity pool.42 Fleming also recounted his understanding of the pledge of securities
collateral to JPMorgan in the summer of 2008 to mitigate the effects of JPMorgans
marginrequirements:whilethecollateralcountedtowardJPMorgansNFEcalculation,
Lehman could theoretically take a portion of the collateral back so long as NFE
remained positive.43 Fleming acknowledged that Lehman included collateral in its
liquiditypool,despitethefactthattherewouldbeclearingconsequencesifLehmandid
notreturnthecollateraltotheclearingbankseachmorning;44Flemingsviewwasthatit
was appropriate to include the assets because Lehman was legally entitled to them.45
Healsonotedthatdisclosuresconcerningthepoolwerenothisresponsibility.46

41ExaminersInterviewofDanielJ.Fleming,Sept.24,2009,atp.4.
42Id.atp.8.
43Id.atpp.45.
44Id.atpp.4,8.
45Id.atp.8.
46Id.


F. CarloPellerani
Pellerani served as Lehmans International Treasurer.47 Pellerani recalled that
clearing banks began demanding collateral towards the end, and further recalled
attemptingtofindilliquidcollateraltopledgeinordertosatisfythosebanksintraday
risk concerns.48 Pellerani did not recall any discussions about satisfying those banks
requestsbyusingcollateralfromtheliquiditypool.49Pelleraniwasnotawarewhether
Lehmanincludedclearingbankcollateralinitsliquiditypool,orstructuredthetermsof
its deposits or pledges in order to justify doing so.50 Nor was Pellerani aware of any
Lehman policy or standard to the effect that an asset was liquid and suitable for
inclusionintheliquiditypoolifitcouldbemonetizedwithinfivedays.51
Pellerani rejected the distinction between clearingbank deposits and
pledgesofferedbyTonucciandotherLehmanwitnesses.TheExaminerquestioned
Pellerani about an email exchange between himself and Cornejo in which Cornejo
arguedthata$200milliondepositplacedwithBankofNewYork(BNYM)inorderto
coverexposuretoLehman,overwhichBNYMwouldhavearighttosetoffwouldnot
be a formal pledge and therefore would not affect the liquidity pool.52 Pellerani
saidhedidnotseethedistinctionbetweensuchadepositandapledgeandfurther

47ExaminersInterviewofCarloPellerani,Jan.13,2010,atp.3.
48Id.atp.4.
49Id.
50Id.
51Id.
52Id.atpp.45.

10


statedthatadepositsuchasthatdescribedintheemailwasnotavailableliquidity
andthuswasnotsomethingthatshouldhavebeenincludedintheliquiditypool.53If
[BNYM] is requiring a deposit in order to perform services, it cant be used in
liquidity,Pelleranisaid.54
Presented with a hypothetical fact pattern (tracking the terms of the $2 billion
Citi deposit) where Lehman placed a deposit with a clearing bank during the day to
coverriskexposuresthatwasreturnedtoLehmanattheendoftheday,Pelleranistated
that he would find it very, very hard to become comfortable including that
[hypotheticaldeposit]intheliquiditypool.55
G. StevenJ.Engel
Engel was a Senior Vice President and Global Head of Funding for Lehmans
Treasurydepartment.Inthatcapacity,hemanagedtheinvestmentofassetsinLBHIs
liquidity pool.56Engelstatedthatitwas not appropriateto count assets in a liquidity
poolthatweredepositedorpledgedintradaywithclearingbanks,evenifthoseassets
were lienfree at night.57 This was because the assets were required for daytoday
operations, and Engel could not think of a way the assets could be monetized

53Id.atp.5.
54Id.
55Id.
56ExaminersInterviewofStevenJ.Engel,Oct.30,2009,atp.8.
57Id.atpp.1011.

11


overnight.58 Engel believed it would be inappropriate for Lehman to include in its
liquidity pool amounts deposited or pledged to BofA, JPMorgan, Citi, and HSBC.59
Engel said it was not reasonable for Lehman to represent that it had greater than $40
billioninitsliquiditypoolonSeptember10,2008iftheclearingbankswouldnotreturn
collateralcountedintheliquiditypool.60Engelfurtherexplainedthatitwasnotclear
thatLehmanwouldhavegonetothePDCFtofundsomeofthesecurities.61

58Id.atp.10.
59Id.
60Idatp.13.
61Id.

12

APPENDIX21:LBHISOLVENCYANALYSIS
This Appendix 21 was prepared by Duff & Phelps and accompanies the
ExaminersanalysisofLBHIssolvencypriortothepetitiondate,discussedinSection
III.B.3.boftheReport.ThisAppendixalsodiscussestheexistenceofoptionvalueina
firms equity price, and describes the methodology utilized in the marketbased
valuationapproachfordeterminingsolvency.


APPENDIX21
To:

TheExaminer

From:

Duff&Phelps,LLC

Subject:

LBHISolvencyAnalysisAppendix

Date:

February1,2010

I.

OptionalityValuationMethodology

Itisimportanttoconsidertheconceptofoptionalityandtheexistenceofoptionvaluein
a firms equity price when evaluating what the market prices indicate relative to firm
solvency. Quite frequently there are insolvent firms with positive market value of
equity.Thisoccurrenceisdetailedbelow.
OptionalityOverview
Thevalueofastockoptionconsistsoftwocomponents:intrinsicvalueandtimevalue.
Intrinsicvalueisthedifferencebetweenstockpriceandstrikeprice.Timevaluereflects
the probability that a stock price will exceed the strike price at some point prior to
expiration.
Whenthestockpriceislessthanthestrikeprice,anoptionisconsideredtobeoutof
the money. Out of the money options have zero intrinsic value. While out of the
money options may appear worthless because there is no intrinsic value, they often
tradeatpositivevalues.Thisisbecauseoftimevalue,whichisthepossibilitythatthe
stock price will become greater than the strike price before the option expires. As an
out of the money call option approaches maturity, the time value of the option
decreases.
Onekeydeterminantofhowmuchtimevalueanoptionhasisvolatility.Allelsebeing
equal,greatervolatilityinastockleadstohigheroptionvalue.
EquityasanOption
Equity in a troubled firm, where the market value of the assets is less than the face
value of the debt owed, has characteristics similar to an out of the money call option.
Thetwoprimarysimilaritiesareexercisabilityandlimitedliability.Justasthevalueof
anoptionisimpactedbyintrinsicvalue,timevalueandvolatility,sotooisthevalueof
afirmsequity.
2


Exercisability
Equity holders in a firm are residual claim holders. That is, they have claims on the
cashflowsofafirmafterotherfinancialclaimholdersarepaid.Ifthevalueofafirms
assets exceeds the value of debt owed by the firm to other financial claim holders,
shareholdersreceivetheresidualvalueofthefirm.Equityholdersalsohavetheoption
toliquidateafirmatanytimeandpayoffthedebtholders.Therefore,payofftoequity
holders(E)atanytimeisgivenby,
E=AD,

ifA>D

(Or)
0,

ifA<=D

WhereA=MarketValueofAssets&D=ParValueofDebt
Equityholderswillonlyexercisetheirrighttoliquidatethefirmwhenthemarketvalue
ofthefirmsassetsisgreaterthantheparvalueofitsdebt.Assuch,thefirmsparvalue
ofdebtcanbeviewedasthestrikepricefortheequityholdersoption.Similarly,the
firmsmarketvalueofassetsissimilartothepriceofthestockuponwhichtheoptionis
relying(commonlyreferredtoastheunderlyingstockprice).Thus,thefirmsmarket
valueofequityissimilartothemarketvalueofacalloption.
LimitedLiability
Themaximumlossfortheownerofastockoptionistheamountthathepaysforthat
option.Iftheoptionexpiresandtheunderlyingstockpriceislessthanthestrikeprice
oftheoption,theoptionisworthzero,regardlessofhowfarbelowthestrikepricethe
stock is. Similarly, if a firms assets are worth less than its debt, the most an equity
holderinthefirmcanloseistheamountthathepaidforhisequity.
IntrinsicValue
Asdiscussedabove,thevalueofafirmsequity,uponliquidation(exercise)isequalto
the difference between the market value of the firms assets and the face value of its
debt.Inaninsolventfirm,wherethevalueofthefirmsassetsislessthanthefacevalue
ofdebt,thereiszerointrinsicvalue(justasastockoptionwheretheunderlyingpriceis
lessthanthestrikepricehasnointrinsicvalue).Justasoutofthemoneyoptionsoften
havepositivevalue,insolventfirmsoftenhavepositivemarketvalueofequity.Thisis
becauseoftimevalue.


TimeValue
The value of a firms assets is changing all of the time. Internal and external factors
which influence the value of the firms assets are constantly changing. Even when a
firms assets are worth less than the face value of its debt there is the possibility that
those assets will gain enough value so that they are worth more than the firms debt.
Thispossibilityisthereasonthatinvestorsareoftenwillingtopaypositivevaluesfor
equityinaninsolventcompany.Theamountthattheseinvestorsarewillingtopayis
influencedby boththe amount oftime that theyfeel thecompany will survive before
having to file for bankruptcy and the likelihood that the asset value will grow before
thattimehasexpired.Allelsebeingequal,thelongertheperiodpriortobankruptcy,
themoreaninvestorwillbewillingtopayforthefirmsequity(similartoaninvestor
being willing to pay more for a stock option with a longer duration than the same
option withshorterduration).Further, themore volatilea firmsassetsare,themore
likelyitisthattheywillbecomeworthmorethanthefirmsdebtpriortobankruptcy.
Volatility
Justasthevolatilityoftheunderlyingstockisakeydeterminantofthetimevalueofan
option,thevolatilityofafirmsassetsisakeydeterminantofthetimevalueembedded
in a firms equity. All else being equal, greater asset volatility leads to higher stock
value.
Even as the market capitalization of Lehman Brothers gradually fell, starting several
monthspriortoChapter11bankruptcy,therewasveryhighvolatilityinbothitsstock
price and bond prices. This volatility was the result of both considerable uncertainty
surrounding the broader market and Lehman specific issues including liquidity
concerns,uncertaintyaboutthemarketvaluesofLehmansassets,andseveralrumored
potential transactions. The high volatility in Lehmans stock price is depicted in the
following charts. The first chart depicts Lehmans stock volatility in absolute terms,
measured by implied volatility of Lehman options. The last three charts display the
volatility of Lehmans stock in relative terms, exhibited by daily stock changes for
Lehmananditspeers.
It is clear from both sets of charts that Lehmans stock was very volatile as the firm
approached its bankruptcy. The stock volatility is indicative of high volatility of
Lehmansassetswhichisthereasonthatthefirmsequitycontinuedtotradeatpositive
valuesrightuptoitsbankruptcyfiling.

LehmanBrothers ImpliedVolatility
450

400

350

300

250

200

150

100

50

0
01/02/08

01/24/08

02/14/08

03/07/08

03/31/08

04/21/08

05/12/08

06/03/08

06/24/08

07/16/08

08/06/08

08/27/08

DailyPriceChangeinJuly2008
30.0%
25.0%

DailyChange
(asa%)

20.0%
15.0%
10.0%
5.0%
0.0%
(5.0%)
(10.0%)
(15.0%)
(20.0%)

MerrillLynch

MorganStanley

LehmanBrothers

GoldmanSachs

iBankingIndex

S&P500

DailyPriceChangeinAugust2008
15.0%

10.0%

DailyChange
(asa%)

5.0%

0.0%

(5.0%)

(10.0%)

(15.0%)

MerrillLynch

MorganStanley

LehmanBrothers

GoldmanSachs

iBankingIndex

S&P500

DailyPriceChangeinSeptember2008
10.0%

0.0%

DailyChange
(asa%)

(10.0%)

(20.0%)

(30.0%)

(40.0%)

(50.0%)
2Sep

3Sep
MerrillLynch

II.

4Sep
MorganStanley

5Sep

8Sep

LehmanBrothers

GoldmanSachs

9Sep

10Sep

iBankingIndex

S&P500

11Sep

12Sep

MarketSolvencyCalculations

AsdescribedintheReport,solvencyisdeterminedbycomparingthemarketvalueof
assetstothefacevalueofthedebt.Whileaccountingguidelinesrequirecompaniesto
report the face value of debt (and in Lehmans case, marktomarket asset values) in
6


quarterly increments, firms are not required to report on a monthly or daily basis.
Therewas,however,afluidpublicmarketforbothLehmansequityanditsdebt.Duff
& Phelps (D&P) evaluated the public values of both Lehmans equity and debt to
deduceanimpliedmarketvalueofassetsoneachtradingdayfromJune1toSeptember
15,2008.D&PthencomparedthatvaluetothefacevalueofallofLehmansliabilities
todeterminesolvencyoneachdate.
MarketValueofAssets
AsdiscussedintheReport,thisanalysisbeganwiththeformula,AssetsLiabilities=
EquityandrearrangeditsothatAssets=Equity+Liabilities.ThisallowedD&Ptouse
observablemarketvaluesforLehmansequityanditsdebttocalculatethefairmarket
valueofitsassets.ThemarketvalueofbothEquityandLiabilitiesareavailablethrough
aseriesofcalculations.Forthepurposesofthisexercise,theextendedformulaislaid
outas:
MarketValueofEquity+Adj.BookValueofPreferredEquity*PreferredEquityPrice)
+
(TotalLiabilitiesBookValueofST/LTDebt+MarketValueofST/LTDebt1)
=
MarketValueofAssets
1.

MarketValueofEquity

The market value of equity was determined by calculating the product of the total
sharesoutstandingperLehmansSECfilingsandtheclosingstockpriceasofthatdate.
2.

MarketValueofPreferredEquity

Themarketvalueofpreferredequitywasdeterminedbycalculatingtheproductofthe
bookvalueofpreferredequity,adjustedforadditionalissuancesperSECfilings,2and
the current market price of preferred equity. The current market price was based on

1LehmansTotalLiabilitiesincludedmorethanjustShortTerm/LongTermdebt.Thisanalysisassumed

that the market value for this debt is equal to the par value. By subtracting the book value of Short
Term/Long Term debt from and adding the market value of Short Term/Long Term debt to total
liabilities, this analysis adjusted for the difference between the market and face values of those
instruments.
2Preferred equity adjusted based on $4.0 billion preferred equity issuance on April 4, 2008 and a
subsequent$2.0billionplacementonJune6,2008perLehmansSECfilings.


LehmanspreferredstockissuedinFebruary20083asithadhighliquidityonthedates
inquestionandwasanaccurateindicatorofpriceoneachdate.
3.

TotalLiabilities

Total Liabilities were taken from Lehmans SEC filings and encompassed all
outstandingliabilitiesonLehmansbalancesheet.
4.

BookValueofShortTermDebtandBookValueofLongTermDebt

The book value of shortterm debt, current portions of longterm debt and remaining
longtermdebtweretakenfromLehmansSECfilingsasoftheparticulardate.
5.

MarketValueofLongTermDebt

The market value of long term debt was approximated by using a sample of five
publicly traded Lehman bonds, which represented various durations of Lehman debt,
asaproxy.AproxyforthemarketpriceofallLehmanlongtermdebtwasdetermined
by calculating the weighted average (by duration) price of the five publicly traded
Lehmanbonds.ThismarketpricewasthenmultipliedbythebookvalueofLehmans
longtermdebttoarriveatamarketpriceforLehmanslongtermdebt.Thefollowing
tabledepictsthebondsusedandtheirweighting.

Weighting
1 - 3 year Bonds

29.4%

3 - 5 year Bonds

24.7%

Bond CUSIP
Average of
CUSIP 524908CF5
and
CUSIP 52517PSC6
CUSIP 52517PSC6

5+ Senior Bonds

30.8%

CUSIP 52517PF63

4/4/2016

5.5%

15.0%

Average of
CUSIP 524908UB4
and
CUSIP 524908R36

1/3/2017
and
7/19/2017

5.57%
and
6.5%

5+ Subordinate Bonds

Maturity Date Coupon


11/01/2009
and
1/18/2012

7.875%
and
6.625%

1/18/2012

6.625%

3See Lehman Brothers Holdings Inc., Free Writing Prospectus, Accession No. 110465988130 (filed on

Feb.7,2008)(CUSIP52520W317PerpetualPreferredofferingwith7.95%coupon).


The Lehman debt maturity distribution from SEC filings was then matched with a
mixtureofLehmanbondsinthemarketofvaryingmaturitiesthathavehighliquidity
(determined both by issuance size and by availability of prices through Bloomberg).
Alsofactoredinwasthefractionofoutstandingdebtthatwassubordinatedratherthan
seniorinchoosingthefivepublicbonds.
TheweightingforthelongtermdebtwascalculatedbasedonLehmanslongtermdebt
as of August 31, 20084 as shown in the following table. Debt maturing beyond five
yearswasbrokenintoseniorandsubordinatedebt.

Maturity
Date
11/30/2009
2/28/2010
5/31/2010
8/31/2010
11/30/2010
2/28/2011
5/31/2011
8/31/2011
11/30/2011
2/29/2012
5/31/2012
Total

6.

Amount
(USD millions)
$
5,849
3,304
6,402
3,645
2,058
3,056
6,249
3,192
1,459
4,657
3,519

Maturity
Amount
Date
(USD millions)
8/31/2012 $
5,767
11/30/2012
3,312
2/28/2013
5,136
5/31/2013
1,852
8/31/2013
2,617
11/30/2013
1,091
2/28/2014
4,189
5/31/2014
1,498
8/31/2014
1,439
Beyond
$

44,349
114,640

MarketValueofShortTermDebt

ThemarketvalueofLehmansshorttermdebtwascalculatedbasedontheaverageof
par and the daily price of Lehmans publicly traded debt with a March 13, 2009
maturitydate.5ParisthevaluefordebtwithzerotimetomaturityandtheMarch13,
2009 maturity date was an appropriate price for debt maturing in six to nine months.
Taking the average of the two approximates value through linear interpolation
approximationoveramaturationperiodofzerotoninemonths.Thisdeterminedprice
wasthenmultipliedbyLehmansbookvalueofshorttermdebtandcurrentportionsof
long term debt from its SEC filings to arrive at a daily fair market value of the short
termdebt.

4Lehman,FundingLehmanBrothers(Sept.11,2008)[LBEXDOCID008482].
5See Lehman Brothers Holdings Inc., Prospectus (Form 424B2), Accession No. 104746945120 (filed on

Feb.20,2004)(CUSIP52517PVU2).


SolvencyParValueofDebt
When reporting debt amounts in its interim and annual financial statements, Lehman
reportedcertainhybridfinancialinstrumentsatfairvalueasopposedtoparvalue.In
order to performasolvencyanalysis,D&PadjustedLehmans reported debt numbers
to include the full par value of these instruments. The adjusted book value was
determined by adding (1) the aggregate amount that the hybrid financial instruments
exceed their fair value by6 to (2) the total liabilities held on Lehmans balance sheet.
Using Lehmans SEC filings, the following table shows how much the face value of
Lehmanshybridfinancialinstrumentsexceededfairvalue.

Hybrid Financial Instruments


Amount by which Par exceeds Fair Value (USD billions)
Short
Long
Cumulative
Date
Term
Term
Total
May 31, 2008 $ 0.60 $ 4.80 $
5.40
February 29, 2008
0.51
3.90
4.41
November 30, 2007
0.15
2.10
2.25
August 31, 2007
1.55
1.55

6Adjusting

hybrid instruments by the amount they exceed their fair value calculation brings the
instrumentstoParvalue.

10

APPENDIX22:PREFERENCESAGAINSTLBHIAND
OTHERLEHMANENTITIES
This Appendix 22 was prepared by Duff & Phelps and details potential
preferences against LBHI and other Lehman entities, which are discussed in Sections
III.B.3.eandIII.B.3.foftheReport.


APPENDIX22
To:

TheExaminer

From:

Duff&Phelps,LLC

Subject:

InsiderPreferencesAgainstLBHIandOtherLehmanEntities

Date:

February1,2010
PreferencesAgainstLBHI1
[BulletThreeofExaminerOrder]

I.

METHODOLOGY
BulletthreeoftheExaminerOrderdirectstheExaminertoinvestigatepotential

preferencepaymentsthatweremadebyLBHIAffiliatestoLBHI.Summarizedbelowis
themethodologyundertakenbyDuff&Phelps,LLC(Duff&Phelps)toidentifysuch
potentialpreferences.ItisnotthepurposeofthisAppendixtoaddressthemeritsofthe
legal issues pertaining to preferences and the defenses thereto. Nevertheless, such
issueshaveplayedasignificantroleinthemethodologiesutilized,assumptionsmade,
modelsconstructed,andtheoverallscopeoftheworkperformed.

1 The following are the Lehman systems (along with Lehmans description of these systems) that were

relieduponintheanalysisherein:DBSGlobalGeneralLedger(DBS)(seeDBSGlobalGeneralLedger
Overviewpowerpointpresentation[LBEXLL766023]);MainframeTradingSystem(MTS)(seeLehman
LivedescriptionofMTS[LBEXLL3396037]);AccountsPositionsandBalances(APB)(seeLehmanLive
descriptionofAPB[LBEXLL3396042]);TreasuryWorkstation(TWS)(seeLehmanLivedescriptionof
TWS [LBEXLL 2228241]); Global SmartSteam Reconciliation (GSSR) (see Lehman Live description of
GSSR[LBEXLL3396041]);andGlobalCashandCollateralManagementsystem(GCCM)(seeLehman
LivedescriptionofGCCM[LBEXLL3356455]).


A. RelevantEntitiesandRelationships
Thereisafinitepopulationofpotentialintercompanyrelationshipsfromwhich
potential preferences may be found there are sixteen LBHILBHI Affiliate
relationships.2Asitisarequirementunderanypreferenceanalysisthatthedebtorbe
insolventwhenatransferismade,3theprimaryfocuswasonthoseLBHIAffiliatesthat
werefoundtobeinsolventornearlyinsolventasofMay31,2008.Asdiscussedinother
sections of the Report, this subset of LBHI Affiliates consists of: Lehman Brothers
Commodity Services Inc. (LBCS); Lehman Brothers Special Financing Inc. (LBSF);
LehmanCommercialPaperInc.(LCPI);andtheaviationentitiesCESAviationLLC,
CESAviationVLLC,andCESAviationIXLLC.Theaviationentitiesweredisregarded
because they were relatively insignificant when compared to the other potentially
insolventLBHIAffiliates.

2 LBHI Affiliate is defined in the Examiner Order as LBCC or any other entity that currently is an

LBHIchapter11debtorsubsidiaryoraffiliate.ExaminerOrder,atp.3(bulletone).ThesixteenLBHI
Affiliatesare:LB745LLC;PAMIStatlerArmsLLC;LehmanBrothersCommodityServicesInc.;Lehman
Brothers Special Financing Inc.; Lehman Brothers OTC Derivatives Inc.; Lehman Brothers Derivative
Products Inc.; Lehman Commercial Paper Inc.; Lehman Brothers Commercial Corporation; Lehman
BrothersFinancialProductsInc.;LehmanScottishFinanceL.P.;CESAviationLLC;CESAviationVLLC;
CESAviationIXLLC;EastDoverLimited;LuxembourgResidentialPropertiesLoanFinanceS.a.r.l.;and
BNCMortgageLLC.SixdebtorentitiesLBRoseRanchLLC,StructuredAssetSecuritiesCorporation,
LB 2080 Kalakaua Owners LLC, Merit LLC, LB Somerset LLC, and LB Preferred Somerset LLC are
excludedbecausetheirpetitiondatescameafterJanuary16,2009,thedateoftheExaminerOrder.Two
otherdebtorentities,FundodeInvestimentoMultimercadoCreditoPrivadoNavigatorInvestimentoNo
ExteriorandLehmanBrothersFinanceSA,areexcludedbecausetheirchapter11casesweredismissed.
Order Dismissing the Bankruptcy Case of Fundo de Investimento Multimercado Credito Privado
Navigator Investimento No Exterior, Docket No. 2918, In re Lehman Bros. Holdings, Inc., No. 0813555
(Bankr.S.D.N.Y.Feb.24,2009);andOrderDismissingChapter11CaseofLehmanbrothersFinanceAG
a/k/a Lehman Brothers Finance SA (Case No. 0813887 (JMP)) and Granting Related Relief, Docket No.
3076,InreLehmanBros.Holdings,Inc.,No.0813555(Bankr.S.D.N.Y.Mar.12,2009).
311U.S.C.547(b).


B. RelevantTimePeriod
Duff & Phelps recognizes that the relevant preference period for intercompany
transfers,asisthecasewithanypreferentialtransferstoinsiders,extendsbackoneyear
fromtheLBHIAffiliatesbankruptcyfiling.Nonetheless,May31,2008wasselectedas
the cutoff date for identification because of the significant cost of interrogating
Lehmanscomplexsourcesystems.
The time period analyzed for each of the relevant LBHI Affiliates therefore
consists of the approximate fourmonth period from June 1, 2008 through each LBHI
Affiliatesbankruptcyfiling.LBCSandLBSFfiledforbankruptcyonOctober3,2008;
LCPIfiledonOctober5,2008.4ThisperiodoftimebetweenJune1,2008andthedates
oftherespectiveentitiesbankruptcyfilingsisreferredtothroughoutthisAppendixas
theDefinedPreferencePeriod.
In the preference analyses discussed below, only data through September 30,
2008hasbeenreviewedandincorporated.MinimalactivityinGCCM,andnojournal
entriesatall,wereobservedinthefirstthreedaysinOctoberleadinguptoLBCSsand
LBSFs bankruptcy filings (or five days in the case of LCPI, although, as discussed
below,no potential preferences or new value are calculated for LCPI). Additionally,
Duff&Phelpshasobservedthatnofundingactivitywhich,asdiscussedbelow,is

4 LBCS Voluntary Petition, Docket No. 1, In re Lehman Brothers Commodity Services Inc., No. 0813885

(Bankr. S.D.N.Y. Oct. 3, 2008); LBSF Voluntary Petition, Docket No. 1, In re Lehman Brothers Special
FinancingInc.,No.0813888(Bankr.S.D.N.Y.Oct.3,2008);LCPIVoluntaryPetition,DocketNo.1,Inre
LehmanCommercialPaperInc.,No.0813900(Bankr.S.D.N.Y.Oct.5,2008).


the primarysourcefor identifying preferences wasrecordedin GCCM after
September12,2008.Forthatreason,notincorporatingdataassociatedwiththesethree
daysshouldnotmateriallyimpactthepreferenceanalysisdiscussedherein.
C. IntercompanyAccounts
For each relevant entity, the methodology of identifying potential preferences
firstfocusedonidentifyingallintercompanyaccountsbetweenLBHIandtherelevant
LBHIAffiliate.Forthesepurposes,intercompanyaccountliabilitieswereconsideredto
bedebtandnotequityinvestments.
EachLehmanentityusedanidenticalintercompanyaccountnumberingscheme
to represent specific types of accounts. Although the account number alone is not
indicativeoftheentityholdingthataccount,itisindicative,fromthelastfourdigits,of
the Lehman counterparty. For example, each affiliate has an intercompany account
bearing the number 1262000099. The last four digits (0099) indicate that this is an
accountwithLBHI,becausethatisLBHIslegalentitycode.EachLehmanentityhadits
own legal entity code. Branches of Lehman entities also had their own legal entity
codes. LBCS, LBSF and LCPI each had multiple accounts with LBHI, each ending in
0099, as well as additional accounts with LBHI (UK), LBHIs London branch, which
endedin0911.


The table below lists the intercompany account prefixes, along with their
descriptions as set forth in Ernst & Young workpapers, which have been identified in
connectionwithsomeorallofthethreeLBHIAffiliatesatissue:5
Account Prefix
12620
11084/21084
11520/21020
12520
21335
12480/26050

Description
Intercompany
Intercompany Derivatives
Repos/Reverse Repos I/C
Intercompany Securities Related
Loan v. Cash - Intercompany
Interest Receivable/Payable Intercompany

The 1262000099 account is the intercompany account through which all of the
affiliates funding for LBCS, LBSF and LCPI with LBHI flowed.6 In all cases, this
account is by far the most active intercompany account. The other intercompany
accountswithLBHIappeartohavebeenestablishedforotherspecificpurposes.Some
of the purposes are described in the table above. The activity reflected in the general
ledgerintheseotheraccountstendstoberelativelyminor,oftenreflectingaccounting
entriesononlythefirstandlastdayofeachmonth.
Alloftheseintercompanyaccountsatissuebeginwitheithera1ora2.This
methodologyisconsistentwithcommonaccountingpracticeofusingaccountnumbers
beginning with 1 for asset accounts and account numbers beginning with 2 for
liabilities.7 Lehman entities would use a single account number to represent a certain

5Ernst&YoungWalkthroughTemplate,Nov.30,2007,pp.67[EYSECLBHICORPGAMX07033383].
6ExaminersInterviewofAdaShek,Nov.24,2009,atp.8.
7E.g,,DBSGlobalGeneralLedgerOverviewpowerpointpresentation,Slide14[LBEXLL766023].


typeofobligationbetweentheentities,whethertheaccountcarriedadebitoracredit
balance.Thus,theaccountusingthe12620prefix,whileanassetaccount,wouldoften
carry a credit balance, which, in substance, is a liability. The debit or credit balance
would simply reflect whether LBHI was indebted to its affiliate or vice versa, but the
same account number may be used in either instance. This was always the case with
the12620intercompanyaccountforLBCS,LBSFandLCPI.
D. BranchAccounts
LBHIhadaLondonbranch,oftenreferredtoinLehmanscomputersystemsas
LBHI(UK),whichhadaLegalEntityCodeof0911.Manyaffiliateshadoneormultiple
accounts ending in 0911. LBHI (UK) maintained its own set of accounts, but LBHI
consolidatedthesebranchaccountsinwhatappearstobeanautomaticcomputerscript
ateachmonthendforpurposesofreporting.
Someaffiliateshadtheirownbranches.SuchwasthecasewithLCPI,whichhad
a London branch, and LBCS, which had a European branch and a Canadian branch.
Like LBHI, these affiliates consolidated their own branch accounts into their own
accounts bearing the same number at each monthend for reporting purposes.
However,LBSF,LBCSandLCPIdidnotconsolidatetheirownseparateintercompany
accounts with LBHI and LBHI (UK). In other words, if the main entity and its own
brancheachcarriedanintercompanyaccount1262000099,thesewouldbeconsolidated
at month end. If, however, the main entity (or its branch) carried separate but


comparable accounts with both LBHI (e.g., 1262000099) and LBHI (UK) (e.g.,
1262000911),theseaccountswouldnotbeconsolidated.
From June through September 2008, the value of each intercompany account
betweeneachofthethreerelevantLBHIAffiliates,ontheonehand,andLBHI,onthe
other hand, including those held by the branches of each entity, is set forth in the
attached Exhibit 1 (LBCS), Exhibit 2 (LBSF) and Exhibit 3 (LCPI).8 As the monthend
accountdataforeachentityconsolidatesthecomparableaccountsheldbyitsbranches,
the branch accounts at each month end were effectively unconsolidated, and each
accountwassetforthseparately.Ontherightsideofthetablearethebalancesreported
byLBCS,LBSF,LCPIandLBHIintheirmostcurrentbankruptcyschedules.
E. LehmansCashManagementSystem
Lehmanscashmanagementsystemwasinastateoftransitionoverseveralyears
prior to the bankruptcy filings.9 Prior to that time, Lehmans infrastructure for cash
management was decentralized and fragmented, with many systems and bank
accounts, causing difficulty in managing cash and liquidity.10 Lehman then began to
create a better system to manage realworld cash and funding activity.11 Lehmans
GlobalCashandCollateralManagementsystem(GCCM)wastheembodimentofthis

8 These Exhibits were compiled from data extracted from DBS. See Debtor entity balance sheets.xlsx

[LBEXLL3638796toLBEXLL3638799];andselectedBranchs091F091J0929branchaccountdetail.xlsx
[LBEXLL3642894toLBEXLL3643132].
9ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.3.
10Id.
11Id.


revampedsystem.12Thebenefitssoughtwiththissystemincludedringfencingactivity
(which permitted the Treasury Group to isolate and/or categorize certain activity by
businessgrouporproductline),streamlinedreconciliations,lowercosts,andincreased
efficiency and optimization.13 In GCCM, data was reported instantaneously, and the
TreasuryGroupwasthusabletomonitorcashonarealtimebasis.14
Lehmans goal with its revamped system was to achieve an inhouse banking
system similar to the Federal Reserve, where the various affiliates would transact
businessthroughbankaccountsheldbyaparententity,suchasLBHI,withalltransfers
betweenandamongthembeingmerelyvirtual,involvinginhouseaccounts.15Lehman
created funding trees for this purpose, whereby affiliates were grouped within the
bankingstructure.16Transfersorsettlementsamongentitieswithinthesametreewould
notinvolvethemovementofrealworldcashbutratherdebitsorcreditstotheentities
inhouse accounts, which eventually flowed up to the general ledger.17 If the entities
werewithinthesametree,thetransferofrealworldcashwasunnecessary,becauseall
ofthemoneywouldwashintothesamelocation.18Onlytransfersamongentitiesin

12Id.
13Id.at4.
14Id.
15Id.at34.
16Id.at3.
17Id.at4.
18Id.


different trees would involve a movement of realworld cash.19 Lehman had four
fundingtreespercurrency.20
Ifthissystemhadbeenimplementedperfectly,therewouldhavebeenonereal
world bankaccount per currency,per tree.21Inpractice,however, there were various
operational difficulties associated with closing some accounts, prompting Lehman to
maintain multiple realworld bank accounts.22 In particular, some highvolume bank
accounts were kept intact to alleviate the concerns associated with customers being
accustomedtopayingintotheseaccountsandthenhavingtoswitchtoanewmeansof
payment.23 In some instances, virtual accounts were designed to avoid having to
change payment instructions for these numerous clients, and these realworld bank
accounts were converted to nocredit accounts.24 If money was paid to a nocredit
account,thebankautomaticallymovedthemoneytoadifferentbankaccount.25
GCCMwasneverfullydeployed.26WhileitwasfullyimplementedinEurope,in
the United States it was still in the process of being deployed on a systembysystem
basis(notalegalentitybasis)atthetimeofthebankruptcyfilings.27Lehmanwasstill

19Id.
20Id.at3.
21Id.at4.
22Id.
23Id.
24Id.
25Id.
26Id.
27Id.

10


several years away from achieving its goal of having a fullyintegrated cash
managementsystemintheUnitedStates.28GCCMwasneverdeployedinAsia.29
The Treasury Groups function regarding Lehmans cash was to centralize all
cashattheparentlevelandinvestthesefundsovernight.30Accordingly,Lehmanaimed
to sweep all of the cash from the various realworld bank accounts, leaving the
accountswithazerobalanceattheendofeachday.31
F. IdentificationofPotentialPreferences
1.

CategoriesofPotentialPreferences

Identifyingpotentialpreferencespresentedmanychallenges,particularlydueto
difficulties in understanding the cash flows between LBHI and its affiliates. Lehman
used many different computer systems for many different purposes. Duff & Phelps
was granted access to only some of these systems, and this access was often limited.
Someofthecomputersystems,particularlyGCCM,citetovarioussourcesforthedata
presented. Despite extensive efforts to adequately understand these source systems,
obtaining sufficient detail behind particular transactions in order to gain a complete
understandingofhowandwhytheyimpactedintercompanyaccountswasachallenge.
Nevertheless, following are the categories of potential preference payments
madebyLBHIAffiliatestoLBHIthatDuff&Phelpshasidentified:

28Id.
29Id.
30Id.at2.
31Id.

11


a) FundingTransactionsinGCCM
The transfers that have been specifically identified as potential preferences are
thoseidentifiedasfundingtransactions.Thesefundingtransactionsreflectedeither
1) funds that were remitted from LBHI to the affiliates for use in their operations, for
exampletosettletradeswiththeirowncustomers,or2)excessfundsattheendofthe
daythatwerethensweptbyLBHIforcentralizedbanking,whichcouldbeusedfor
otherpurposes.32
ThesefundingtransactionscanbetrackedinGCCM,butnotallLehmanentities
were funded through this system. In GCCM, these cash transactions were manually
recordedwiththedesignationofFUNDINGintheSourcefield,althoughthiswas
actuallynotasourcebutratherafunctionenteredbyTreasurypersonnel.33ForLBCS
andLBSF,GCCMwasthemeansofidentifyingfundingtransactions,althoughforLCPI
it was not. Funding transactions involving cash sweeps from the affiliates tended to
occur towards the end of the day. Sometimes, there were no funding transactions in
any given business day, but in most days LBCS and LBSF had at least one funding
transactionperday.34
Consistent with Lehmans goal to remove the need to move cash, many
transactionsrecordedinGCCMmerelyaffectvirtual,orinhouse,accounts.Funding

32Id.
33E.g.,MemofromErinFairweather,Duff&Phelps,toFilere:DiscussionwithJayChan,Lehman,Dec.

11,2009,atp.3.
34SeeExhibits4&13.

12


transactions,ontheotherhand,involvethemovementofrealworldcash.Thesecash
movementscanbe verifiedthroughGSSR,the meansby whichLehmanreconciled its
recordedcashtransactionswithbankstatements.35GSSR,alsoknownasSmartStream,
was an automatic reconciliation of accounts relating to Cash, Securities and
transactions.36
FundingisaclearconceptinLehmanscashmanagementsystem.However,
LehmansotherGCCMrelatedactivitythatimpactedtheintercompanyaccountsmight
alsobeconsideredavariantoffunding.37If,forexample,LBHIsettledtradingactivity
for an affiliate, rather than remitting the cash to the affiliate in question, LBHI may
simplyretainthecash,andtheaffiliatewouldsimplyreduceitsintercompanyaccount
with LBHI.38 This is tantamount to the affiliate receiving the funds into its own bank
accountandthenhavingLBHIsweepitattheendoftheday,whichwouldclearlybe
enteredintoGCCMasafundingtransaction.39Similarly,ifoneaffiliatesettlesatrade

35GSSRGCCMcomparisonDatabase20091104v1.xlsb[LBEXAM340340toLBEXAM345848].
36LehmanLivedescriptionofGSSR[LBEXLL3396041].

Duff & Phelps obtained from Barclays a custom GCCM intercompany database containing many
fieldsthatarenotobservablethroughnormalfrontenduserinterfaceinGCCM.Thiscustomdatabase
allowed Duff & Phelps to observe more information regarding each transaction and thus potential
preferences.ThisdatabaseislimitedtoMarch1,2008throughSeptember15,2008,andisfurtherlimited
to transactions identified as Intercompany transactions in the Journal Type field. See GCCM
Intercompany Reports [LBEXLL 2415581 to LBEXLL 2603022]. Duff & Phelps was informed that
acquiringacompletebackendGCCMdatabasewithouttheIntercompanylimitationwouldresultin
an enormous database that would be burdensome and timeconsuming to run and to acquire from
Barclays. Nevertheless, Duff & Phelps understands that this limitation is reasonable, given that all
potentialpreferentialtransferswouldlikelyhavebeenrecordedasIntercompanytransactions,asthey
wouldaffectanintercompanyaccount.
38ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.5.
39Id.
37

13


foranotheraffiliate,again,ratherthanhavingthecashremittedtothetradingaffiliate,
thecashmaybesweptbyLBHI,andthetradingaffiliatewoulddebititsintercompany
accountwithLBHI.Theformofthetransactionscouldeffectivelybeconsideredatype
offunding.
Because of uncertainty in the facts surrounding each transaction, all GCCM
activity that affects the intercompany account, and which is not identified with the
sourcecodeoffunding,hasbeenlabeledasquasifundingforthepurposesofthis
Appendix. Duff & Phelps has run different models, some of which reflect this
intercompanyactivityasapotentialpreference,whileothersdisregarditassuch.These
modelsarediscussedbelow.
b) FundingTransactionsinMTS
GCCMwasnottheonlysystemthroughwhichLBHIAffiliateswerefundedby
LBHI.FundingcouldalsobeaccomplishedthroughMTS,LehmansU.S.basedtrading
platform for fixedincome securities.40 LCPI was funded through MTS by means of
purportedrepotransactionsinvolvingcertainTrustReceipts,whichapparentlywere
dummy securities referred to as Trust 89 and Trust 86, the details of which are
discussed in greater detail below.41 There were actually very many Trust Receipts

40Id.at67.
41Id.;Trust86.xlsx[LBEXLL3627748toLBEXLL3627927];Trust86612007to1032008.xlsx[LBEXLL

3627928 to LBEXLL3628124]; Trust89.xlxs[LBEXLL 3628125 toLBEXLL 3628755]; Trust89 FY2006 to


2008.xlsx [LBEXLL 3628756 to LBEXLL 3631626]; Trust89 round2.xlsx [LBEXLL 3631627 to LBEXLL
3632411];Trust86122007to92008.xlsx[LBEXLL3636692toLBEXLL3636873];Trust86Trust89200706
0120081003.xls[LBEXLL3658168toLBEXLL3668279].

14


involvingtheLehmanentities,whichserveddifferentpurposes.42Trust89andTrust86
transactionswereenteredintoextensivelybetweenLCPIandLBHIduringtheDefined
Preference Period.43 Through searches of Lehmans APB system, it has been verified
thatneitherLBCSnorLBSFwasinvolvedinanyTrust89orTrust86transactions,either
withLBHIoranyotherLehmanentity.
Technically, these transactions were recorded in MTS as repos and reverse
repos.44However,thesefundingtransactionswererecordedbyuseofthedesignations
Trust89andTrust86.AlthoughtheTrust89andTrust86designationswererecorded
inLehmansMTSsystemastheCUSIPandtheMTSSecurityID(fieldlabeledMTS
SEC ID) for these purported trades, in reality these transactions were essentially
funding. Within MTS, the product description (labeled PR DSC) for Trust 89 states
UNSECUREDINTERCOMPANYFINANCING.Thenecessitytobookthisactivityas
purportedtradeswasmerelyasoftwarelimitationinMTS,andDanielFlemingstated
thatthesetransactionswerenotrealrepos.45
AlthoughTrust89andTrust86transactionsbothappeartoconstituteunsecured
lendingbetweenentities,Duff&Phelpshashaddifficultygainingafullunderstanding
oftheirrespectivepurposes.TheMTSdataassociatedwiththeseTrust89transactions
referencesFUNDINGastheSecurityDefinitionType(fieldlabeledSECDEFTY).

42ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.6,n.2.
43SeeExhibits22&24.
44ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.6.
45Id.

15


DanielFleminghasadvisedthatTrust89wasusedforoccasionswheretheLCPIChase
accounthadexcesscashattheendoftheday,thatthecashwasmovedtoLBIsChase
account on an overnight basis, and that the trade was unwound the next day, with
money being sent back with interest.46 Duff & Phelps observed in MTS the Trust 89
transactions between LBI and LCPI, but also observed Trust 89 transactions between
LCPIandnumerousotherentitiesidentifiedinExhibit26.47
Trust 86 transactions had a much more limited set of trading entities and
counterparties. All Trust 86 transactions observed in MTS were between LCPI, LBHI
andLBI.48DanielFlemingadvisedthatTrust86transactionsalsoinvolvedPAMI,ALI
and LCC, but no such relationships have been observed in MTS with these entities.49
Trust89transactionsrefertoFUNDINGastheSecurityDefinitionType,whereasthe
Trust86transactionsinsteadrefertoHIC(HeldinCustody)inthatfield.
Duff & Phelps requested additional clarity regarding these Trust Receipts,
including their purpose, but no additional information has been provided. A more
detailed description of the particular Trust 89 and Trust 86 transactions entered into
between LCPI and LBHI is set forth below, in the section pertaining to the preference
analysisforLCPI.

46Id.at67.
47SeeExhibit26anddiscussioninfra.
48LCPIsTrust86transactionsduringtheDefinedPreferencePeriodwereonlywithLBHI.SeeExhibit26.
49 Examiners Interview of Daniel J. Fleming, Dec. 17, 2009, at p. 7. Fleming may have been confusing

Trust86withTrust89transactionsinthisregard.

16


G. CalculationofPreferences,NetofNewValue
1.

PreliminaryConsiderationRegardingAntecedentDebt

Because a required element of any preference analysis is that the payment be


made for or on account of an antecedent (preexisting) debt,50 the balance of these
intercompanyaccountsisverysignificant.Duff&Phelpshasassumedthattherelevant
LBHI Affiliate has an antecedent debt if, from the LBHI Affiliates perspective, this
intercompanyaccounthasacreditbalance.
LBCS,LBSFandLCPIwereallindebtedtoLBHI.Alistingoftheintercompany
account balances between each of these three entities, on the one hand, and LBHI, on
theotherhand,issetforthintheattachedExhibits13.Thecombinedbalancesonall
intercompany accounts with LBHI carried a credit balance from the affiliates
perspective.Ofnote,theaffiliates1262000099accountsalsocarriedcreditbalances.
2.

CategoriesofPotentialPreferencesandNewValue

Toidentifypotentialpreferences,itisnecessarytofirstreviewLehmansgeneral
ledger activity, as reflected in Lehmans DBS data, as well as its cash transactions
recordedinGCCM.TocalculatethevalueofthepreferencesforLBCSandLBSF,netof
newvalueprovidedbyLBHI,Duff&Phelpsstartedbydeterminingtheentiredailynet
debitandcreditactivityfortherelevantintercompanyaccount(s),assetforthinDBS.51

5011U.S.C.547(b).
510C11intercompanyversion2.xlsx[LBEXLL3638527toLBEXLL3638795];00591262000099Acct.xlsx

[LBEXLL 3637590 to LBEXLL 3637745]; 0059 1262000911 Acct.xlsx [LBEXLL 3637746 to LBEXLL
3638526].

17


Theselectionofrelevantaccountsisdiscussedbelow.DailyDBSactivityiscategorized
intofivegroups:1)UpFunding;2)DownFunding;3)NetQuasiUpFunding;4)Net
QuasiDownFunding;and5)Other.
UpFundingandDownFundingconsistofthefundingtransactionsidentified
in GCCM on that particular day. All such funding transactions flowing from the
affiliatetoLBHIforthedayaresummedandplacedintheUpFundingcolumn,andall
fundingtransactionsflowingfromLBHItotheaffiliatearesummedandplacedinthe
DownFunding column. Separating these into two columns is necessary because of
assumptionsdiscussedbelowregardingthetimingofthesepayments.
NetQuasiUpFundingandNetQuasiDownFundingconsistofthenetGCCM
relatedactivitythatflowsintotherelevantaccount,withtheexclusionofthosesourced
to the funding function and set forth in the UpFunding and DownFunding
categories.Because,underLehmanscashmanagementsystem,allsuchGCCMrelated
intercompany activity could potentially be classified as relating to funding, these
transactions are separated from those specifically designated as such but are
neverthelesscalledquasifundingforuseinaseparateanalysisdiscussedbelow.All
quasifundingactivityforeachdayisnettedtoasingleamount.Ifthisnetamountisan
upflowfromtheaffiliatetoLBHIitisplacedintheNetQuasiUpFundingcolumn,and
if it the net amount is a downflow from LBHI to the affiliate it is placed in the Net
Quasi DownFunding column. Thus, unlike the funding amounts discussed in the

18


preceding paragraph, there cannot be an entry in both columns for any given day.
Alteringthisassumptioncandramaticallychangetheresults.
The fifth column, denoted merely as Other, consists of all other DBSrelated
activity affecting the relevant accounts for each day. To undertake a complete
preference analysis based on this account activity, it would be necessary to research
eachoftheseentries,whicharedifficulttodiscernbasedontheirdescriptions,andthe
sourcesystemsassociatedwiththeseentrieswerenotreadilyavailable.Nevertheless,
Duff&Phelpshasobservedthatthevastmajorityofthesejournalentriesarecreditsto
therelevantaccounts,meaningtheycausedtheantecedentdebttobecomelarger;thus,
there are very few potential preferences that could possibly be discerned from a
detailed review of these entries. In light of the costs and benefits associated with
undertaking this review and analysis, in particular the minimal risk of missing a
potentialpreference,Duff&Phelpshasnotundertakenathoroughreviewofthenature
ofthetransactionsbehindthesejournalentries.52

52 Thereis one adjustmentmade to thedata. Both the 1262000099accountand the1262000911account

contained certain journal entries on the first day of each month that were for the purpose of reversing
entries made the previous day, i.e. the last day of the previous month. This is an accounting method
commonlyseeninLehmansbooksandrecords.Certainactivityisonlyenteredoncepermonth,atthe
endofthemonth,butratherthansimplymakinganadjustmenttothisparticularitemattheendofthe
followingmonthtoupdatethebalanceofthisitem,Lehmaninsteadwouldreversetheentryentirelyon
thefirstdayofthemonth,thusremovingitfromthebooksentirely,andthenrerecordingthissameitem
onthebooksandrecordsinitsfull,newamountattheendofthatmonth.Thisaccountingmethodology
has no impact on the monthend account balances but does, however, result in an inaccurate account
balancewhenviewedonanintramonthbasis.Italsoskewsthepreference,netofnewvalue,analysis,
becausetheverylargecreditintheOthercolumnrepresentspotentialnewvalue,whiletheoffsetting
debitentryisignoredentirely.Thiseffectontherunningbalanceofpreferences,netofnewvalue,could
bematerial.AnadjustmenttotheOtherdatahasthereforebeenmadeforpurposesofthepreference

19


3.

ConstructionofPreference/NewValueModels

Withtheaccountactivityseparatedintothecategoriesdescribedabove,Duff&
Phelps has constructed three separate preference/new value analyses for the relevant
accountsdiscussedbelow.Theseanalysesarebasedoncertainassumptionsrelatedto
the transactions affecting the account. In any analysis, all UpFunding activity,
representing flows of cash from the affiliate to LBHI, is classified as a potential
preference. Downward cash movements and other extensions of credit by LBHI
constitute potential new value, although the different categories of credit activity
consideredvary,dependingonthemodel.
Timing Assumptions. Because preferences can only be reduced by new value
givenbythecreditorafterthedateofthepreferentialtransfer,theorderofthetransfers
issignificantinapreference/newvalueanalysis.Acriticalassumptioninthesemodels
isthatallUpFundingactivityoccurredafterallotheractivityfortheday,meaningthat
itcouldnotbereducedbyanynewvaluegivenbyLBHIonthatsameday.Allother
accountactivity,includingDownFunding,isassumedtohaveoccurredthroughoutthe
day.Accordingly,therearenoadditionalassumptionsmadewithregardtothetiming
ofanyotherpayments.

analysis alone, whereby these particular entries are merely adjusted to their new balances at the end of
each month, rather than being reversed entirely on the first day of the month and then rerecorded
entirelyatthenewamountattheendofeachmonth.Althoughthisadjustmentismadetothepreference
calculation,itisnotreflectedintheOthercolumnreportedineachoftheattachedExhibits.

20


ModelNo.1.Withtheforegoingdataandassumptions,Duff&Phelpshasbuilt
three separate preference/new value models for LBCS and LBSF and calculated a
runningdailybalanceofthepotentialpreferencesnetofnewvalueundereachmodel
duringtheDefinedPreferencePeriod.ThefirstmodellookssolelytoUpFundingand
DownFunding activity, with UpFunding being the potential preference and Down
Funding being potential new value, and ignored all other activity. This analysis
assesses the preference picture based on cash funding alone. In each of the
preference/new value spreadsheets attached hereto as Exhibits 46 and 1315, this
preference/newvalueanalysisissetforthinColumnI.Foranygivenday,theexisting
preference, net of new value, balance in Column I (i.e. the balance at the end of the
previousday)isnettedagainsttheDownFunding,constitutingpotentialnewvalue,for
thepresentday.Thisnewvaluewillreducethepreferencebalancebutnotbelowzero.
Any excess new value from DownFunding is thus disregarded and is not carried
forward and applied subsequently. After that netting produces a revised temporary
preferencebalance(whichisnotreflectedinthespreadsheets,asthisisjustaninterim
balancebeforetheendoftheday),theUpFundingforthepresentdayisapplied,based
on the notion that this UpFunding occurs later in the day. This will increase the
updated balance by the amount of the UpFunding for the day, as that amount is all
potential preference and is not reduced in any way, as this is assumed to be the last
activityoftheday.Thatadditionwillproducetherevisedpotentialpreference,netof

21


new value, balance as of the end of that day, which is reflected in Column I for the
givenday.
Model No. 2. Second, Duff & Phelps considered only UpFunding as the
potential preference, with all credit activity, whether it is DownFunding, Net Quasi
DownFundingorintheOthercategory,aspotentialnewvalue.Thisanalysisisin
ColumnJoftheaforementionedexhibits.Thiscalculationissimilartothatsetforthin
the previous paragraph but with material modifications. In this scenario, the
preference,netofnewvalue,balanceattheendofthepreviousdayisfirstnettedwith
all credit activity for the present day, resulting in a revised (and necessarily reduced)
temporarybalance,againwiththelimitationthatthisbalancecannotbereducedbelow
zero.Afterthisnetting,theUpFundingforthepresentday,whichisconsideredtobe
theonlypotentialpreferencefortheday,isaddedtothistemporarybalance,resulting
inthenewpotentialpreference,netofnewvalue,balanceattheendoftheday.This
revisedbalanceisreflectedinColumnJforthegivenday.
Model No. 3. Third, Duff & Phelps considered UpFunding and Quasi Up
Funding as potential preferences, with credit activity from all three categories as
potential new value. This analysis, set forth in Column K in the attached exhibits,
ignoresonlythenetdebitactivityassociatedwiththeOthercolumn.Thiscalculation
issimilartothatsetforthinColumnJ,withonematerialmodification.Theinclusionof
QuasiUpFundingasapreferencemaypotentiallyincreasethepreferencebalance,but

22


itisnotsimplyaddedtotheUpFundingfortheday.Instead,thepreferencebalanceat
the end of the previous day is netted with both the credit activity for the day and the
Net Quasi UpFunding for the day, as this Net Quasi UpFunding arises out of
Lehmansdailyoperationsthroughouttheday,unlikeUpFunding,whichoccursatthe
end of the day. This netting is applied to produce a revised temporary preference
balance. Unlike the previous models, in this scenario this revised temporary balance
canbehigherthanthebeginningbalance,iftheNetQuasiUpFundingisgreaterthan
theothercreditactivityfortheday.Then,theUpFundingisaddedtothistemporary
balance,resultinginthenewpotentialpreference,netofnewvalue,calculationforthe
day.ThisrevisedbalanceisreflectedinColumnKforthegivenday.
4.

SelectingtheRelevantIntercompanyAccounts

Thethreemodelsofpreferences,netofnewvalue,willchangebasedonwhich
account(s) are selected for review. For LBCS and LBSF, Duff & Phelps ran the three
modelsdiscussedabovebasedonthreedifferentsetsofaccountdata:1)the1262000099
account; 2) the 1262000911 account; and 3) a combination of these two intercompany
accounts.
AnalysisofLBCSsandLBSFs1262000099accountsbythemselvesisinstructive,
because these are the accounts that were impacted by all of the GCCM Funding
activity.BasedonGCCM,therewerenocashsweeps(oranyotherfundingactivity
associatedwiththeseaffiliates)byLBHI(UK),makingananalysisbasedsolelyonthose

23


entities 1262000911 account alone less compelling. The combined approach would
appear to be the most informative, as this would not only reflect all funding between
the affiliates and LBHI but also other extensions of credit associated with the entities
tradingactivity,regardlessofwhetheritaroseoutofarelationshipbetweentheaffiliate
andLBHIsLondonbranch.
Duff&Phelpsalsoconsideredundertakingasimilaranalysiswithrespecttothe
other intercompany accounts between the relevant debtors and LBHI/LBHI (UK), i.e.
those with prefixes other than 12620. After reviewing the activity in those accounts,
Duff&Phelpsruledouttheneedtoincludethemintheanalysis.First,thoseaccounts
often reflected little to no activity throughout the Defined Preference Period. Second,
basedonthisreview,itwasnotapparentthatthesejournalentriesreflectedanyactual
transfersorextensionsofcreditthatmayconstitutepotentialpreferencesornewvalue.
H. AnalysisofPriorCourseofDealingwithLBHI
Finally,Duff&PhelpsanalyzedLBCSsandLBSFscourseofdealingwithLBHI.
This analysis was limited to the actual transactions between these parties, without
consideration of industry practices among similar businesses. In doing so, Duff &
Phelpslookedbacktothepartiesfundingandquasifundingactivitiesthroughout
the entire time period that such transactions were reported in GCCM, and noted

24


patternsinthisactivity.53Thisanalysisiscontainedinvariousexhibitsattachedhereto,
asdiscussedbelow.
II.

PREFERENCEANALYSISFORLBCS,LBSFANDLCPI
A. LBCS
1.

FundingActivityandNewValue

All potential preferential transfers made from LBCS to LBHI were identified
through GCCM, Lehmans cash management system. First, the set of Funding
transactions beginning on June 1, 2008 was identified from GCCM.54 As these
transactions consisted of actual cash transfers, they were also verified through GSSR,
whichcontainedrelevantbankstatementdata.55
ThroughouttheDefinedPreferencePeriod,thereweresignificantfundingcash
flowsbetweenLBCSandLBHI,althoughthenumberoffundingtransactionsperday

53LBCSsandLBSFsfundingtransactionsforpurposesofthisordinarycourseanalysiswereextracted

from a separate custom intercompany report Duff & Phelps obtained from Barclays. This report was
limited to funding transactions but with no restrictions as to the dates. See GCCM Funding
transactions NEW.xls [LBEXLL 3396885 to LBEXLL 3406582]. Analysis of quasifunding required
subtracting the funding data from all GCCMrelated journal entries for each entity. That data was
extracted from DBS. See LBCS (0C11) GL Detail for GCCM entries for ordinary course.xlsx [LBEXLL
3655400toLBEXLL3655965];LBSF(0059)GLDetailforGCCMentriesforordinarycourse11310.xlsx
[LBEXLL3655966toLBEXLL3658167].
54 Rather than using the usual frontend interface of GCCM, Duff & Phelps relied upon the custom
intercompanyreportobtainedfromBarclaysforthispurpose.Seesupran.38.Althoughthisreportwas
onlyrunthroughSeptember15,2008,Duff&Phelpsobservedthroughthefrontenduserinterfacethat
therewerenoFundingtransactionsafterSeptember12,2008.
55Unfortunately,GSSRdatawasavailableonlyfortheperiodbeginningJuly3,2008.SeeGSSRGCCM
comparisonDatabase20091104v1.xlsb[LBEXAM340340toLBEXAM345848].Nevertheless,forthat
time period, every LBCS funding payment recorded in GCCM was reconciled to the bank statements.
FundingactivityrecordedpriortoJuly3,2008couldnotbereconciled,butgiventhattherewasa100%
match between the payments recorded in GCCM and reconciled through GSSR for the majority of the
timeperiodatissue,Duff&PhelpsfoundGCCMreliableasreflectingactualfundingpayments.

25


wasonlybetweenoneandsevenperday.Ofthese,betweenzeroandfivetransactions
per day were UpFunding transfers. At least one cash sweep occurred nearly every
day, with the total dollar amount per day ranging widely, up to approximately $215
million.
Asdiscussedabove,limitingtheuniverseofpotentialpreferencestocashflows
identifiedinGCCMbythesourcecodeoffundingiscomplicatedbyLehmanscash
management system. One could conclude that potentially all debits to an affiliates
1262000099and1262000911accountsflowingthroughGCCMarepotentialpreferences,
despitethefactthatLehmanscashmanagementsysteminvolvedtheuseofmanyin
house/virtual accounts, and transfers of funds often did not involve the movement of
realworldcashfromonebanktoanother.Forthatreason,alldebitsflowingthrough
GCCM, other than those labeled as funding in the source system column, were
categorizedasquasifundingandconsideredinthealternativepreference/newvalue
analysesbelow.
Thebalancesofpotentialpreferences,netofnewvalue,underthemethodologies
undertakenhereinthroughSeptember30,2008aresetforththetablebelow.56

56ThetimeperiodofthispreferenceanalysisdoesnotincludeOctober13,2008.AlthoughGCCMdata

wasavailable,DBSdatawasnotavailablewhenthisanalysiswasundertaken.Therefore,itwasdecided
notto includeGCCM data for October 2008 because the analysis would have been incompleteas DBS
informationwasacriticalpartoftheanalysis.ThefollowingistheGCCMrelatedactivityforOctober:

26

LBCS
Preference, Net of New Value, Balances ($)
September 30, 2008
Up-Funding Preference
Net of Down-Funding,
Up-Funding
Net Quasi DownPreference Net of
Funding and Other
Down-Funding New
Activity New Value
Value

Up-Funding and Quasi UpFunding Preference Net of


Down-Funding, Net Quasi
Down-Funding and Other
Activity New Value

Exhibit

Account

1262000099

642,515,617

164,921,169

740,079,308

1262000911

Combined

642,515,617

14,919,678

633,128,085

These analyses are set forth in their entirety in the attached Exhibits 46. The
following observations are apparent from the table above and the corresponding
exhibits:

Only the analyses related to intercompany account no. 1262000099, and for
thecombinedaccounts,produceapotentialpreferencebalance.Analysisof
account 1262000911 alone does not yield any meaningful results, as there
wasnoUpFundingtiedtothataccount.

Withrespecttoaccount1262000911,theQuasiFundingactivitywasusually
inthedownwarddirection,meaningthatanypotentialpreferencesfromNet
Quasi UpFunding was subsequently netted by new value in the following
days,ultimatelyleavingzerobalancesunderallthreeapproaches.

The preference balances for the combined accounts approach is not simply
thesumofthebalancesforthetwoindividualaccountapproaches.Thisis
because,whentheaccountactivityiscombined,excessnewvaluefromone
accountmaybeusedtoreduceapreferencebalanceassociatedwithanother
account. For that reason, the preference balance from the combined

Date
October 1, 2008
October 2, 2008
October 3, 2008

GCCM Activity
(168,341.79)
(183,763.72)
(538,912.63)

27


approach will be lower than the sum of the balances under the two other
approaches.

For this particular entity, consideration of the Net Quasi UpFunding as a


potential preference has a significant effect on the preference balance. As
seeninExhibits6,thereisNetQuasiUpFundingon33daysthroughoutthe
DefinedPreferencePeriod,withtheamountexceeding$100milliononsixof
those days. This activity had the effect of significantly increasing the
preferencebalancethroughouttheDefinedPreferencePeriod.

The daily movement of these combined account balances based on DBS data is
set forth in Exhibit 7. The daily movement of the potential preferences, net of new
value,basedonthismethodologyisattachedasExhibit8.
2.

PriorCourseofDealingwithLBHI

LBCSspatternofUpFundingandDownFundingwithLBHIissetforthinthe
attachedExhibits911,whileLBCSsquasifundingactivityisillustratedinExhibit12.57
LBCSs total funding activity from April 5, 2007, when LBCSs funding transactions
werefirstrecordedinGCCM,throughSeptember12,2008,arebrokendownbydollar
amount per month (Exhibit 9) and number of funding transactions per month
(Exhibit10).EachoftheseexhibitsseparatesUpFundingactivityfromDownFunding
activity.Exhibit11illustratestheaveragefundingtransactionamountpermonth.
Throughout the entire period under examination, there was not a consistent
patternastothedirectionofthefundingactivity.Therewasasignificantamountof
UpFundingandDownFundingactivityeverymonth,intermsofbothdollaramount

57ThedataforthisanalysiswasextractedfromGCCMandfromDBS.SeeGCCMFundingtransactions

NEW.xls[LBEXLL3396885toLBEXLL3406582];LBCS(0C11)GLDetailforGCCMentriesforordinary
course.xlsx[LBEXLL3655400toLBEXLL3655965].

28


and number of transactions. As shown in Exhibit 9, the monthly funding activity,
expressed in dollar amount, sometimes resulted in a net UpFunding, while in other
monthstherewasanetDownFunding.Thispattern,orlackthereof,continuedduring
the Defined Preference Period. In June and September 2008 there was net Down
Funding,butinJulyandAugust2008therewasnetUpFunding.Inthisregard,there
was no noticeable difference between the funding activity before and during the
DefinedPreferencePeriod.
Overall, the extent of funding activity increased in the months during and
immediatelybeforetheDefinedPreferencePeriod;however,thisincreasedactivitywas
inbothdirectionsandgenerallycancelledeachotherout.Exhibit8demonstratesthat
the number of funding transactions during May through August 2008 was
approximately double the activity of some earlier months reviewed. Nevertheless, as
noted above, the total net dollar amount involved in all of these transactions did not
materially change. Exhibit 11 further shows that the average transaction amount did
notmateriallychangeduringtheDefinedPreferencePeriod,andinthemonthswhere
there was UpFunding, the average amount was noticeably smaller than previous
months.
LBCSsquasifundingactivity,asshowninExhibit12,showsagreaterdisparity
inthelevelofactivitybeginninginMarch2008.Priortothattime,themonthlyamount
of quasifunding activity was a fraction of what it became in March and the months

29


thereafter.Inparticular,theUpFundingmorethandoubledinMay2008andremained
atorabovethislevelthroughAugust2008.BecausequasifundingisbasedonGCCM
activity, which was implemented over a period of time and was still not fully
implemented even at the time of LBCSs bankruptcy, it is possible that the quasi
funding did not actually increase but would appear that it did due to greater activity
being recorded in GCCM. Duff & Phelps has not investigated whether this is what
happened.
B. LBSF
1.

FundingActivityandNewValue

LBSF similarly had significant funding activity with LBHI throughout the
relevantperiod.AswithLBCS,thesetoffundingtransactionsbeginningonJune1,
2008 were identified in GCCM and then reconciled with GSSR.58 Throughout the
DefinedPreferencePeriod,thenumberoffundingtransactionsperdaywasbetween
oneand twelve perday. Of these, between zero andseventransactions perday were

58 As was the case with LBCS, GSSR data relating to LBSF was available only for the period beginning

July3,2008.SeeGSSRGCCMcomparisonDatabase20091104v1.xlsb[LBEXAM340340toLBEXAM
345848]. Nevertheless, for LBSF, every funding payment except for three two of which were on
September12,2008,thebusinessdaybeforeLBHIsbankruptcyfiling,andanotherintheamountofonly
$125couldbetracedtoGSSR.Thesethreepaymentswereremovedfromtheanalysis.Fundingactivity
recordedpriortoJuly3,2008couldnotbereconciled,butgiventhat,forLBCS,therewasa100%match
between the payments recorded in GCCM and reconciled through GSSR for the majority of the time
period at issue, and that, for LBSF, there was a near 100% match, with all discrepancies being either
insignificantorlikelyrelatedtotheimpendingbankruptcyfilingsand/ortheconditionoftheentitiesat
thatlatetime,GCCMwasfoundtobeareliablemeansforidentifyingactualfundingpaymentsforthe
portionoftimeGSSRdatawasnotavailable.

30


UpFunding transfers. At least one such cash sweep occurred nearly every day, with
thetotaldollaramountperdayrangingwidely,uptoapproximately$948million.
Based on this data and other data derived from DBS, the same analysis
undertakenabovewithrespecttoLBCSwasconstructedusingLBSFdata.Thebalances
ofpotentialpreferences,netofnewvalue,underthemethodologiesundertakenherein
aresetforthinthetablebelow:59

LBSF
Preference, Net of New Value, Balances ($)
September 30, 2008
Up-Funding Preference
Net of Down-Funding,
Up-Funding
Net Quasi DownPreference Net of
Funding and Other
Down-Funding New
Activity New Value
Value

Up-Funding and Quasi UpFunding Preference Net of


Down-Funding, Net Quasi
Down-Funding and Other
Activity New Value

Exhibit

Account

13

1262000099

3,773,000,144

682,009,859

2,407,243,419

14

1262000911

152,044,747

15

Combined

3,773,000,144

635,860,994

718,049,945

59AswithLBCS,thetimeperiodofthispreferenceanalysisdoesnotincludeOctober13,2008.Although

GCCMdatawasavailable,DBSdatawasnotavailablewhenthisanalysiswasundertaken.Therefore,it
was decided notto includeGCCM data for October 2008 because the analysis would have been
incompleteas DBS information was a critical part of the analysis. The following is the GCCMrelated
activityforOctober:

Date
October 1, 2008
October 2, 2008
October 3, 2008

GCCM Activity
(1,670,144.10)
(1,823,147.39)
(5,349,424.17)

31


TheseanalysesaresetforthintheirentiretyintheattachedExhibits1315.The
following observations, some of which are identical to those noted with respect to
LBCS,areapparentfromthetableaboveandthecorrespondingexhibits:

LBSFsUpFundingandDownFundingwerebothsubstantial.Overall,the
DownFunding of $21.7 billion during the Defined Preference Period
exceeded the UpFunding of $19.4 billion during the same time.
Nevertheless, nearly half of this DownFunding occurred in June 2008.
Thereafter, the UpFunding exceeded the DownFunding. The timing of
these payments resulted in a potential preference balance of nearly $3.8
billionbasedonfundingalone.

Only the analyses related to intercompany account no. 1262000099, and for
the combined accounts, produce a potential preference balance under the
first two approaches. Analysis of account 1262000911 alone produces a
potentialpreferencebalanceonlyifQuasiUpFundingisconsideredtobea
potentialpreference,andeveninthatcaseonlytotheextentof$152million.

With respect to account 1262000911, the Quasi Funding activity in the


downward direction on approximately half of the days, although the total
Quasi DownFunding of $20.8 billion throughout the Defined Preference
Period was more than twice the $10.1 billion in Quasi UpFunding.
Nevertheless, under the approach that includes Quasi UpFunding as a
potential preference, there was still a potential preference balance at
September 30, 2008. This was due to the increasing Quasi UpFunding
toward the end ofthe DefinedPreferencePeriod,which totaled$1.6billion
onandafterAugust29,2008.

ConsiderationoftheNetQuasiUpFundingasapotentialpreferencehasan
effect on the preference balance based on analysis of either account
individually or when combined; however, only where the activity is based
on the 1262000099 account alone is that effect relatively significant. In that
case,thepotentialpreferencebalanceisincreasedfrom$682milliontoover
$2.4billion.

The preference balances for the combined accounts approach is not simply
the sum of the balances for the two individual account approaches. When
theactivityoftheaccountsiscombined,excessnewvaluefromoneaccount
maybeusedtoreduceapreferencebalanceassociatedwithanotheraccount.
32


Forthatreason,thepreferencebalancefromthecombinedapproachwillbe
lowerthanthesumofthebalancesunderthetwootherapproaches.Inthis
case, that effect was significant. Potential new value from the 1262000911
account, arising out of more than $10 billion of net Quasi DownFunding
during the Defined Preference Period, substantially reduced the potential
preferencebalancefrom$4.2billion,basedonthe1262000099accountalone,
downto$718million,underthecombinedapproach.
The daily movement of these combined account balances based on DBS data is
set forth in Exhibit 16. The daily movement of the potential preferences, net of new
value,basedonthismethodologyisattachedasExhibit17.
2.

PriorCourseofDealingwithLBHI

LBSFspatternofUpFundingandDownFundingwithLBHIissetforthinthe
attachedExhibits1820,whileLBSFsquasifundingactivityisillustratedinExhibit21.60
LBSFstotalfundingactivityfromJune9,2006,whenLBSFsfundingtransactionswere
first recorded in GCCM, through September 12, 2008, are broken down by dollar
amount per month (Exhibit 18) and number of funding transactions per month
(Exhibit19).EachoftheseexhibitsseparatesUpFundingactivityfromDownFunding
activity.Exhibit20illustratestheaveragefundingtransactionamountpermonth.
Throughouttheentireperiodunderexamination,aswithLBCS,therewasnota
consistentpatternastothedirectionofLBSFsfundingactivity.AsshowninExhibit
13,themonthlyfundingactivity,expressedindollaramount,sometimesresultedin a

60ThedataforthisanalysiswasextractedfromGCCMandfromDBS.SeeGCCMFundingtransactions

NEW.xls[LBEXLL3396885toLBEXLL3406582];LBSF(0059)GLDetailforGCCMentriesforordinary
course11310.xlsx[LBEXLL3655966toLBEXLL3658167].

33


netUpFunding,whileinothermonthstherewasanetDownFunding,andnopattern
is evident, including during the Defined Preference Period. Also similar to LBCS, in
June and September 2008 there was net DownFunding, but in July and August 2008
therewasnetUpFunding.Inthisregard,therewasnonoticeabledifferencebetween
thefundingactivitybeforeandduringtheDefinedPreferencePeriod.
Like LBCS, the monthly funding activity for LBSF, both in terms of dollar
amountandnumberoftransactions,increasedovertime,butforLBSFthistrendbegan
significantly earlier, in mid2007, and the total monthly funding amount actually
decreasedinJulyandAugustascomparedtothepreviouselevenmonths.Moreover,
UpFundingascomparedtoDownFundingalsodidnotnoticeablychangeatanypoint
during the Defined Preference Period. Only in August was there a somewhat
noticeabledeclineinDownFunding,buttheUpFundinginthatmonthremainedata
relatively modest level for this entity lower than most months in the previous year.
Exhibit 15 further shows that the average funding transaction amount did not
materiallychangeduringtheDefinedPreferencePeriod,andinthemonthswherethere
wasUpFunding,theaveragetransactionamountwasrelativelysmall.
Unlike LBCS, LBSFs quasifunding activity during the Defined Preference
Periodwasconsistentwiththatofthepreviousyearandahalf,asshowninExhibit21.
NeithertheQuasiUpFundingnortheQuasiDownFundingreflectedunusuallevelsof

34


activity during the Defined Preference Period, as compared with the prior months
underexamination.
C. LCPI
1.

FundingActivityandNewValue

LCPI was funded through MTS, because its primary bank account was tied to
thatsystem.61Asdiscussedabove,thesetransactionswerenotrealreposandcontained
no actual security.62 Through searches of Lehmans APB system, which contains all
trading data contained in MTS, TMS (Lehmans U.S.based system for equity
transactions involving LBI, which acted as the registered brokerdealer), ITS
(internationalsystemfornonU.S.tradesofbothfixedincomeandequitytransactions),
GL1 (U.K.based system for stock and loan transactions) and CDY (commodities and
foreign exchange transactions, also known as RISC), all Trust 89 and Trust 86
transactions involving LCPI and LBHI beginning from June 1, 2007 have been
identified.Duff&Phelpssobservationsareasfollows:
a) Trust89
Trust 89 transactions were generally recorded, from LCPIs perspective, as a
repo. (From LBHIs perspective, these same transactions were recorded as reverse
repos.) These transactions purportedly consisted of two legs a sell and then a

61ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.7.
62Seesupradiscussionaccompanyingn.46.

35


buy.Throughthesell,LCPIwouldreceivefundsfromLBHI;throughthebuy,
LCPIwouldremitfundsbacktoLBHI.
TheTrust89transactionsobservedbetweenLCPIandLBHIduringtheDefined
Preference Period are listed in Exhibit 22. These transactions generally fall into two
categories.OnesetofTrust89swasintherangeof$168millionto$330million.When
entering into these particular repos with LBHI, LCPI would also enter into reverse
reposwithBankhausforthesameamountsandonthesamedatesandterms.Thisclass
of Trust 89s generally stayed open for approximately one week before being replaced
with another identical or very similar repo that would open on the same day that the
previousrepowouldclose.Theentitieswouldbookboththesellandbuylegsat
thesametime,withtheselltosettlethatsamedayandthebuytoalwayssettleon
December31,2014. Then,severaldaysoraweeklater,theentitieswould replacethe
buy leg with a new buy leg, with identical terms as the former except that the
settlement date would be altered to the present date. With that position closed, the
entities would enter into a new Trust 89 repo on the same day, again with the buy
booked to settle on December 31, 2014. The pattern would continue in that manner.
Throughthismechanism,therewasalwaysanopenrepoattheendofanygivendate.
The amount for the new repo was usually identical to the previous; occasionally, it
would be in a different amount. Because these repos were opened for approximately
oneweek,onlyeighteensuchtransactionswererecordedduringtheDefinedPreference

36


Period.Theamountoftheopenpositionchangedonlytwice.Theopenpositionwas
$300 million as of June 1, 2008, increasing to $330 million on August 12, 2008, and
decreasingto$168milliononAugust26,2008.Thefinalsuchtransactionwasbooked
on September 12, 2008, but only the sell leg settled. The buy leg remained
outstandingatthetimeofitsbankruptcyfiling.
The more significant set of Trust 89 transactions, in terms of both size and
number of transactions, is between LCPI and the Lehman Capital Division of LBHI.63
Throughout the relevant time period, the amount of these transactions ranged up to
approximately $3 billion. These particular repos appear to have been set up initially
withoutaclosedate,butthenthebuylegwouldbereplacedtypicallyafteronlyone
business day, to settle on that same date. On August 8, 2008, these repos changed to
beingreversereposfromLCPIsperspective.
Exhibit 23 demonstrates LCPIs daily outstanding positions associated with its
Trust 89, along with its Trust 86, transactions with LBHI beginning June 1, 2007, thus
coveringafullyearpriortotheDefinedPreferencePeriodaswell.ThepeakofLCPIs
Trust 89 outstanding positions during this period, in the amount of $3.2 billion, was
actually the starting point, June 1, 2008. The following day, this outstanding amount

63 The MTS data made reference to LB Holdings/LCD and Lehman Capital, Division of. This last

description,listedasthecounterpartytocertaintradeswithLCPI,appearstobeatruncationofalonger
name. These descriptions refer to Lehman Capital Division, which is a division of LBHI. See Email
fromInessaGrinn,BarclaystoColeMorgan,Duff&Phelps,etal.,Jan.5,2010.Accordingly,theTrust89
transactionsinvolvingLCPIandthisentityareincludedintheLCPI/LBHIanalysis.

37


fellimmediatelyto$1.1billionandremainedbelow$2billionthereafter.OnAugust8,
LCPIspositionwithrespecttoLBHIchangeddramaticallywhenitbeganenteringinto
reversereposwithLBHIinsteadofrepos,suggestingthatLCPIsTrust89repoposition
as to LBHI was completely wiped out. Ultimately, LCPI had a Trust 89 reverse repo
positionwithrespecttoLBHIatthetimeofLBHIsbankruptcyfiling,intheamountof
nearly$5.2billion.
Duff & Phelps has not been able to identify any movements of cash associated
with Trust 89 transactions. No Trust 89 transactions were located in TWS.64 It is
believedthatthe cashtransferswere madethrough Lehmans FPS system, which was
tied to MTS in some manner.65 FPS is a system to which Duff & Phelps has not been
providedaccess.
b) Trust86
LPCIs Trust 86 transactions with LBHI throughout the Defined Preference
Period are listed in Exhibit 24. These transactions operated similarly to the Trust 89
transactions but with some differences. First, the transactions were typically in
substantially larger amounts, with most being between $12 billion and $16 billion.
Someweresubstantiallysmaller,however,rangingfrommerehundredsofmillionsof

64Duff&PhelpswasgivenverylimitedaccesstotheliveversionofTWS.Accordingly,Duff&Phelps

could only search for transactions by TWS Reference ID number, which was only helpful in the rare
instanceswherethatnumberwasalreadyknown.Subsequently,BarclaysprovidedDuff&Phelpswith
an Excel report downloaded from TWS, allowing for greater search capabilities. See DP_Data.xlsm
[LBEXBAR000438toLBEXBAR001101].TheTWSsearchesdiscussedinthisAppendixwithregardto
Trust89andTrust86transactionsarebasedonsearchesofthisreport.
65ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.6.

38


dollarstoapproximately$1.2billion,buttheseappeartobesupplementaltransactions.
Second,mostoftheTrust86transactionswerebookedtosettle,anddidsettle,within
one business day. However, a subset of these transactions was booked in a more
openmanner,suchthatthetransactionswerebookedtocloseonDecember31,2008
(i.e. the buy leg of the repo was scheduled to settle on that date), and then
approximately two weeks later, Lehman would replace the buy leg with one that
would settle on that date instead. Overall, there were 148 Trust 86 transactions that
wereopenedand/orsettledduringtheDefinedPreferencePeriod.Ofthese,threesuch
transactions,totalingapproximately$3.4billion,remainedopenwhenLBHIandLCPI
filedforbankruptcy.
Withlimitedexception,alloftheTrust86transactionsthatwerebookedtoopen
and close within one business day have been located in TWS; however, none of the
Trust86transactionsthatwereinitiallybookedtosettleonDecember31,2008,andthen
rebookedapproximatelytwoweekslatertosettleatthatpointinstead,hasbeenfound
inTWS.ItisunclearhowthoseparticularTrust86transactionsaredifferentfromthe
others,andwhy,onacategoricalbasis,onesetcanbefoundinTWSwhiletheotherset
cannot.
LCPIsdailyoutstandingpositiontoLBHIassociatedwithTrust86issetforthin
theattachedExhibit23.LCPIstotaloutstandingTrust86positionastoLBHIgradually
increasedfromJune1toAugust14,2008,whenitreachedapeakof$22.9billion.On

39


September12,2008,thistotalopenpositionwas$18.7billion,afterenteringintoanew
transaction with a notional amount of $15.3 billion. Although this last Trust 86
transaction was closed out according to its terms on September 15, 2008 and was not
followedwithanother,Duff&Phelpshasseennoevidencethatthesumof$15.3billion
waseverremittedbacktoLBHI(aswouldnormallybethecasewitharealrepo).Duff
& Phelps has been informed that these transactions would close out automatically in
MTS,regardlessofwhetherfundswereactuallytransferred,andthatthefundstransfer
stillhadtobemanuallyauthorizedbytheTreasuryDepartment.66Itisthereforelikely
that LCPIs final Trust 86 open position with respect to LBHI, on the dates of LBHIs
andLCPIsbankruptcyfilings,remainedat$18.7billion,despitethefactthatthisfinal
Trust86transactionsettled.
Duff & Phelps has had limited success tracing funds transfers related to these
particularTrust86transactions.ForallTrust86paymentsthathavebeenidentified,the
transferswerebetweenanLCPIaccountatCitibank,no.40615659,andanLBHIaccount
atCitibank,no.40615202.UsingtheTWSReferenceIDsassociatedwiththeTrust86s
thatwerefoundinTWS,asdiscussedabove,Duff&Phelpswasabletotracesomeof
these transactions into GCCM and ultimately to GSSR, confirming the payment with
bank statement data. The dollar amount reflected in the GCCM record does not
correlate with the notional amount of the purported trade, as referenced in the TWS

66Id.at7.

40


record. Duff & Phelps understands that data would flow from TWS into GCCM and
would be captured in a presettlement function, where the transaction was netted
withothertransactions.67Ultimately,paymentsweremadeinnetamounts ofthose
transactions. Duff & Phelps has, in fact, observed payments reflected in GCCM and
GSSR that equate to the net amounts of the notional amounts of the repos closed
andopenedonthatparticularday,factoringintheinterestpaidontheTrust86repo
closingoutonthatday.Forexample,onSeptember12,2008,whenoneTrust86inthe
amountof$16.15billionwasclosed,andanotherintheamountof$15.277billionwas
opened, a cash payment, as reflected in both GCCM and GSSR, was made in the
amount of $874,060,404.51.68 When the interest on the $16.15 billion Trust 86, which
amounts to $1,060,404.51 as stated in the TWS record,69 is included in this netting, the
cashpaymentreconcilesperfectlywiththesetransactions.
Duff & Phelps undertook the same analysis for other Trust 86 transactions,
focusing on the month prior to September 12, 2008, but was able to reconcile the
transactions with GCCM and GSSR records in only limited instances. One problem
noted is Lehmans apparent reluctance to make cash transfers in excess of $1 billion
(although, at times, such transfers were made), resulting in some transfers being split

67ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.7.
68 GCCM Records for TWS Ref ID 185955H [LBEXLL 2408921 to LBEXLL 2408925]; TWS Records for

TWS Ref ID 185955H [LBEXLL 3406736 to LBEXLL 3406739]; TWS Records for TWS Ref ID 186007H
[LBEXLL 3406743 to LBEXLL 3406746]; GSSRGCCM comparison Database 20091104 v1.xlsb [LBEX
AM340340toLBEXAM345848].
69TWSRecordsforTWSRefID185955H[LBEXLL3406736toLBEXLL3406739].

41


betweenmultiplecashpayments,makingitmoredifficulttotracethecashtransactions.
Forexample,onAugust29,2008,thenetchangeincertainTrust86openpositionswas
$1.116 billion, and Duff & Phelps was able to locate two payments in the amounts of
$900 million and $104,065,215.63, which, when the recorded interest of $1,065,215.63,
relatedtothepositionsbeingclosedonthatdate,isincludedinthenetting,reconciles
perfectly.70 Duff & Phelps obtained a download of data from the presettlement
function in GCCM, which Duff & Phelps understands requires a significant effort in
linking recorded transactions to specific payments but potentially could allow
additionalcashpaymentsarisingoutofthesetransactionstobetraced.71
c)

Other

TheExaminerhasconsideredwhetherfundsarisingoutofcapitalinfusionsand
remitted to LBHI from LCPI or on LCPIs behalf may constitute a preference.
Accordingly, as described in the Examiners Report, Duff & Phelps has identified all
transfers of $900 million on August 28 and 29, 2008. Those payments are set forth in
Exhibit25.72

70GCCMRecordsforTWSRefID185327H[LBEXLL2408886toLBEXLL2408895].Thiswastheresult

oftwoTrust86transactionsintheamountsof$16.155millionand$450million(areverserepo)closingon
August29,2008andanotherTrust86transactionintheamountof$14.702millionopeningonAugust29,
2008.TWSRecordsforTWSRefID185327H[LBEXLL3406666toLBEXLL3406669];TWSRecordsfor
TWS Ref ID 185358H [LBEXLL 3406670 to LBEXLL 3406673]; TWS Records for TWS Ref ID 185395H
[LBEXLL3406674toLBEXLL3406677].
71MikePreSettlement2.xlsx[LBEXLL3356611toLBEXLL3357411].
72 Various GCCM Records [LBEXLL 3396835 to LBEXLL 3396884]; TWS Records for TWS Ref ID
185225H [LBEXLL 3406662 to LBEXLL 3406665]; TWS Records for TWS Ref ID 185212H [LBEXLL
3406658 to LBEXLL 3406661]; TWS Records for TWS Ref ID 185327H [LBEXLL 3406666 to LBEXLL

42


2.

PriorCourseofDealingwithLBHI

Trust86andTrust89transactionswithLBHIwerenotnewtransactionsforLCPI
duringtheDefinedPreferencePeriod.Tothecontrary,bothtypesoftransactionshad
beenenteredintobyLCPIandLBHIforatleastayearpriortothistimeframe,although
Duff & Phelps did not investigate the length of time in which these parties had been
engaging in them. Exhibit 23 illustrates the combined Trust 86 and Trust 89
outstandingpositionsbetweenLBHIandLCPIbeginningJune1,2007afullyearprior
totheDefinedPreferencePeriod.

3406669];TWSRecordsforTWSRefID185358H[LBEXLL3406670toLBEXLL3406673];TWSRecords
forTWSRefID185395H[LBEXLL3406674toLBEXLL3406677].

43


PreferencesAgainstOtherLehmanEntities
[BulletFourofExaminerOrder]73
I.

Methodology
Bullet four of the Examiner Order directs the Examiner to investigate potential

preference payments that were made by LBHI Affiliates to other Lehman entities.
Summarized below is the methodology undertaken to identify such potential
preferences.
A.

RelevantEntitiesandRelationships

As with bullet three of the Examiner Order, Duff & Phelps has focused on
preferentialtransfersfromonlythreedebtors:LBCS,LBSFandLCPI.However,unlike
bulletthree,thereisamuchlargerpopulationofpotentialintercompanyrelationships.
Each of the three relevant LBHI Affiliates did not maintain an intercompany
relationshipwitheverysingleLehmanentity,butthelistofintercompanyaccountsfor
eachoftherelevantLBHIAffiliatesisextensive.
B.

RelevantTimePeriod

AsdiscussedabovewithrespecttobulletthreeoftheExaminerOrder,thetime
period analyzed consists of the approximately fourmonth period from June 1 to the
dateofthebankruptcyfilingforeachoftherelevantLBHIAffiliates,whichisOctober3,

73ThefollowingaretheLehmansystems(alongwithLehmansdescriptionofthesesystems)thatwere

relied upon in the analysis herein: DBS (see DBS Global General Ledger Overview powerpoint
presentation[LBEXLL766023]);MTS(seeLehmanLivedescriptionofMTS[LBEXLL3396037]);APB(see
LehmanLivedescriptionofAPB[LBEXLL3396042]);TWS(seeLehmanLivedescriptionofTWS[LBEX
LL2228241]);GSSR(seeLehmanLivedescriptionofGSSR[LBEXLL3396041]);andGCCM(seeLehman
LivedescriptionofGCCM[LBEXLL3356455]).

44


2008 for LBCS and LBSF, and October 5, 2008 for LCPI. This is referred to as the
Defined PreferencePeriod.The problemsdiscussedabove, with respect to thedata
fromSeptemberandOctober2008,existhereaswell.
C.

IdentificationofPotentialPreferences

DanielFlemingstatedinaninterviewthatLehmanAffiliatesdidnotfundeach
other.74 Despite these statements, Duff & Phelps searched for potential preferences
under three approaches: 1) review of DBS data related to certain intercompany
accounts; 2) searches in GCCM; and 3) searches in Lehmans MTS trading system for
Trust Receipts involving LBCS, LBSF and LCPI. The results of these approaches are
discussedbelow.
II.

PreferenceAnalysisfortheLBHIAffiliates
1.

DBSApproach

Severalanalysestoidentifypotentialpreferenceswereundertaken.First,Duff&
Phelps investigated general ledger activity of certain intercompany accounts for
transactions that may constitute potential preferences. This was done through
examinationofLehmansDBSdata.Becauseoftheverylargenumberofintercompany
relationships,itwasdecidedthatDuff&Phelpswouldsearchforpotentialpreferences
byfirst examining the intercompanyaccountsand their monthendbalances and then
investigatingtheaccountactivityinmonthswheretherewereswingsinthemonthend

74ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atp.2.

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balances of at least $100 million. Duff & Phelps limited the review to those
intercompanyaccountsofLBCS,LBSFandLCPIthathadcreditbalances(implyingan
antecedent debt owed by these entities to other affiliates) and where the monthend
balancereflectedanetdebitchangeofatleast$100millionfromonemonthtothenext.
This task did not produce meaningful results for several reasons. The journal entries
themselves were not descriptive enough to gain an understanding of the underlying
transactions, necessitating a much more detailed investigation of the accounting
personnel who recorded the entries and possibly of operational personnel who could
explainthetransactionsthemselves.75Suchalengthyandarduousprocedure,coupled
with the unavailability of many Lehman personnel who would be needed to describe
theunderlyingtransactions,renderedthisapproachcompletelyineffective,andDuff&
Phelpsabandonedsuchefforts.
2.

GCCMFundingData

Second, Duff & Phelps looked to GCCM for potential funding activities;
however,Duff&Phelpswasunabletoidentifyanypotentialpreferencesthroughthat
approach either. Searches in GCCM during the Defined Preference Period have not
revealedanyfundingactivitybetweenaffiliates.Asseenabovewithrespecttobullet
three of the Examiner Order, Lehmans practice was to have LBHI fund the affiliates

75Inaddition,manyofthejournalentriesweremerelysourcefeedsfromtradingsystems,andthedetail

ofthosetransactionswouldneedtobeinvestigatedthroughthosetradingsystemsthemselves,whichin
itselfwouldbeadifficulttaskgiventheamountofdataavailablethroughthosemeansandthefactthat
customerswererecordedbycoderatherthanname.

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throughaconcentratedcashmanagementsystem.76Accordingly,itislikelythatthere
were no intercompany preferences from affiliate to affiliate, based on the analytical
frameworkadoptedundertheanalysisdescribedaboveintheanalysisofbulletthreeof
theExaminerOrder.77
3.

TrustReceiptsinMTS

Finally, Duff & Phelps looked for potential preferences in Lehmans trading
systems.Asdiscussedatlengthabove,LehmansMTSsystemwasameansbywhich
some of the Lehman entities recorded funding transactions. MTS was the system in
which Lehman recorded Trust 86, Trust 89 and other similar Trust Receipts.78 These
Trusttransactionswerestructuredintheformofrepos,buttheTrustReceiptsdidnot
constitute actual security for these purported trades and appeared to be related to
funding.79 Nevertheless, Duff & Phelps has had difficulty ascertaining the purpose of
these various Trust Receipts, as well as the manner in which they were transacted, in
particularthemovementofcash,whichcouldbesignificanttoapreferenceanalysis.
Searches of MTSdatahaveverifiedthatLBCSand LBSF didnot enter into any
Trust 86, Trust 89 or other such Trust trades with any affiliates. Each did, however,

76ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atpp.24.
77 GCCM does reflect intercompany transactions between affiliates sourced to other systems, as ASAP,

LOANIQ and TWS. As discussed above with respect to bullet three of the Examiner Order, all such
intercompany transactions in GCCM that were not identified as Funding were classified as Quasi
Funding.Potentially,GCCMdoesreflectsuchquasifundingactivitiesbetweenaffiliates,butduetoits
uncertainnature,Duff&Phelpsdidnotquantifysuchactivity.
78ExaminersInterviewofDanielJ.Fleming,Dec.17,2009,atpp.67.ThedatarelatingtoTrust89and
Trust86transactionswasextractedfromAPBandMTS.Seesupran.42.
79Id.;seealsodiscussionsupraaccompanyingnn.4150.

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enter into one type of Trust Receipt, with one counterparty each, during the Defined
PreferencePeriod.80LBCSenteredintoatleastoneTrust71transactionwithChampion
Energy Marketing. The Security Description provided by Barclays for Trust 71 is
WHOLELOANFUNDING.81LBSFenteredintoatleastoneTrust24transactionwith
7thAvenue,Inc.TheSecurityDescriptionprovidedbyBarclaysforTrust24isGIC
DEAL (T),82 which is unknown to Duff & Phelps. The details of these transactions,
includingnumberoftransactionsandthedollaramount,havenotbeeninvestigated.
LCPI, on the other hand, entered into extensive Trust Receipt activity, as
illustrated in part by the discussions of Trust 89 and Trust 86 above. A list of all the
TrustReceiptsenteredintobyLCPI,alongwiththecounterpartiesbyTrustReceipt,is
attachedheretoasExhibit26.OtherthanTrust86andTrust89activity,littleisknown
about the details of these Trust Receipt transactions, including the number of
transactionsanddollaramount.TheseTrustReceiptshavenotbeeninvestigated.

80ThedatarelatingtotheseadditionalTrustReceiptswasextractedfromMTS.SeeVariousTrusts7129
2461321501612007to1032008.xlsx[LBEXLL3637043toLBEXLL3637589].
81EmailfromRichardPolicke,BarclaystoChristopherMcShea,Duff&Phelps,etal.,Dec.22,2009.
82Id.

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