Lehman assets funnelled through UK-based arm

Lehman Brothers used its London-based arm to funnel billions of dollars into short-term loans designed to artificially bolster its books, according to a report into the collapsed bank.

In a report for the United States Bankruptcy Court, examiner Anton Valukas, claims Lehmans took advantage of repo-transactions, used to quickly raise funds for a fixed period, to temporarily remove assets from its balance sheets.

This transactions were recorded as sales, which kept billions in liabilities off its balance sheet.

According to Valukas, Lehman could not find a US law firm to provide an opinion letter. They used an opinion letter from British Magic Circle law firm Linklaters, which was made to Lehman’s London-based European arm, Lehman Brothers International Europe (LBIE).

Linklaters is now advising on the administration of LBIE. For the first six months of the insolvency the firm earned £33m.

Lehman's US arms transferred their assets to LBIE in order for LBIE to conduct the transactions on their behalf, according to the report.

The bank did not disclose the arrangement which enabled it to temporarily remove approximately $50bn (£33bn) of assets from the balance sheet at the end of the first and second quarters of 2008, the report claims.

In a statement, Linklaters said: "The US Examiner's report into the failure of Lehman Brothers includes references to English Law opinions which Linklaters gave in relation to a number of Lehman transactions. The Examiner - who did not contact the firm during his investigations - does not criticise those opinions or say or suggest that they were wrong or improper. We have reviewed the opinions and are not aware of any facts or circumstances which would justify any criticism."

Further reading:

E &Y "negligent" in Lehman audits, report claims

Lehman CFOs were warned of "reputational risk" of transactions