Why They Do It by Eugene Soltes

Author:Eugene Soltes
Language: eng
Format: epub
ISBN: 9781610395373
Publisher: PublicAffairs
Published: 2016-09-10T04:00:00+00:00

Vallecillo: So what’s up with repo 105? Why are we doing less next quarter end?

McGarvey: It’s basically window-dressing. We are calling repos true sales based on legal technicalities. The exec committee wanted the number cut in half.

Vallecillo: I see . . . so it’s legally do-able but doesn’t look good when we actually do it? Does the rest of the street do it? Also is that why we have so much BS [balance sheet] to Rates Europe?

McGarvey: Yes, No and yes.:)

According to Martin Kelley, Lehman’s global financial controller, “there was no substance to the transactions.” The Repo 105 deals were simply done to improve the appearance of the publicly reported financial statements. Lehman’s executives couldn’t find a law firm in the United States willing to sign off on Repo 105 transactions, either. They eventually found a British law firm, Linklaters, that was willing to give its assurances on the use of Repo 105 under English law—but only if the transactions were executed in the UK. Lehman’s executives figured out how to manage this requirement, too. To the extent that a US-based Lehman division sought to do Repo 105 transactions, executives could simply transfer the assets temporarily to a UK-based Lehman subsidiary, which could undertake the transaction itself.

Such creative efforts to sidestep regulation is consistent with what University of Chicago accounting Professor Roman Weil has called the “show me where it says I can’t” approach to financial management. Weil argues that it has become common for managers to say, “detailed accounting rules cover so many transactions and none of them covers the current issue so we can devise accounting of our own choosing.” A manager might infer that a transaction is acceptable and appropriate because he cannot find an explicit rule forbidding it. But relying on this logic leads to the calamitous and incorrect notion that regulation has managed to restrain all adverse conduct.

Fastow looks back on his career at Enron and wonders what he could have done differently. “If I had the character I should have had, I would have said time out . . . but I didn’t,” he explained. “But the reality is, if at any point in my career I said ‘time out, this is bullshit, I can’t do it’ . . . they would have just found another CFO, but that doesn’t excuse it. It would be like saying it’s OK to murder someone because if I didn’t do it someone else would have.”

What makes fields like structured finance and tax challenging is that those who succeed often do so by being focused on rules rather than on principles. Individuals who are clever and figure out more creative solutions to “problems” are quickly rewarded.

“Everyone thinks these structured finance deals are reprehensible, but guys who find loopholes are sometimes celebrated,” Fastow said wistfully. “The person who found the Apple tax loophole that’s saved them literally tens of billions of dollars of income, I’m sure he’s as well compensated as the guy who invented the iPad . . .

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