Lehman and its financial controller
The report on the events and accounting contributing to the collapse of Lehman Brothers has at its centre a single key figure – global financial controller Martin Kelly.
Much of the evidence against the bank’s two CFOs, Chris O’Meara and Eric Callan, and the former CEO Dick Fuld seems to come from Kelly to the bankruptcy examiner.
It is Kelly’s testimony that crops up time and again as you browse the more than 2,000 pages included in the report. It is Kelly who clearly provided much of the insight to the examiner as he undertook his investigation.
At the heart of the Lehman controversy is the use of so-called repo transactions which the examiner alleges concealed the true state of the bank’s position because they enabled the bank to move risky assets off balance sheet.
When the report turns to the balance sheet it leans on Kelly’s testimony.
“According to former global financial controller Martin Kelly, a careful review of Lehman’s forms 10k and 10-Q (its statutory filings) would not reveal Lehman’s use of Repo 105 transactions,” the report says.
It quotes Kelly again saying that “Kelly believed ‘that the only purpose or motive for the transactions was reduction in balance sheet;’ felt that ‘there was no substance to the transaction.'”
It is Kelly who claims that he issued warnings to CFO Callan. The examiner’s report says that Kelly that repo 105 transactions represented “headline risk” and that there was a “reputation risk” because the bank had not disclosed the transactions. He is also said to have warned that the repo transactions lacked economic substance”.
Ironically, the report notes that Kelly was recruited by Callan and yet the bank ploughed on with its strategy despite his misgivings.
Kelly was barely a year in his role (Dec 2007 to Sept 2008) when Lehman collapsed. It must have been some of the most dramatic ten months any controller has ever served.