‘Grill baby grill’ is the mantra over at the House Financial Services Committee today. Dick Fuld (no introduction needed) and Thomas Cruickshank (ex chair of Lehman’s Board Audit Committee) are busy getting ‘marinated’ for their broiling session later today. Their testimony was made public yesterday, and I thought it may be worthwhile to examine Mr.Cruikshank's testimony considering that Dick Fuld’s testimony had already saturated the blogosphere enough without adding to the swarm.
Lets cut to the chase……Mr.Cruickshank’s testimony makes the entire (ex)Board of Lehman look like puppets…either in the hands of management or the auditors. On at least 4 different occasions Mr.Cruikshank claims the Board was “told” about things that they depended on. Now management is the primary source of information for the Board, but is that all the Board did ? Accepted whatever was “told” to them? Is this what the Board is for? To be “told” things? What is the true meaning of oversight?
Here are some more incongruous statements from his testimony-
"Since the beginning of 2007 through Lehman’s bankruptcy filing in September 2008, our Board and its committees convened on more than 80 occasions in that less than 21 month span. I still remember one week in July 2008, when we were examining and analyzing the company’s strategic options, meeting every day for six days in a row." – Great work, pat yourself on the back, but what about before 2007? Did they not meet as often before 2007?
"One issue that management spent a great deal of time discussing with the Board was risk." - And yet, it appears from his own testimony, that Risk Management was not on the Board agenda at all in 2007. It was discussed only in April 2008.
"Board members probed management, asked numerous questions and demanded and received detailed, cogent answers." – This I find hard to believe. Hopefully, the committee will ask for minutes of the meetings to support this assertion of Mr. Cruikshank.
“We also retained Ernst & Young (“E&Y”), one of the most highly-regarded accounting firms in the world, as the company’s auditors. E&Y performed reviews on a quarterly basis by applying analytical review procedures and making inquiries of persons responsible for financial and accounting matters.”- A big part of Analytical review procedures generally includes month to month or period to period comparison in which case Repo 105 transactions are not going to show up.
If the Board depended on E&Y’s ‘Analytical review procedures’ it is no wonder they were in the dark all this time.
“The Board was told how Lehman’s liquidity had, between the second quarter of 2007 and the second quarter of 2008, nearly doubled to a record high.”- Once again that troubling word “told” . Total absence of any apparent oversight.
“As the Examiner has concluded, this Repo 105 issue was never brought to the attention of the Board by anyone.” – Like someone is going to present a big time bomb to the Board and say here is a huge gaping governance hole. What do you think we should do about it?
A couple of times, Mr. Cruikshank quite skillfully passes the buck to the public accounting firm, Ernst & Young. “…I believe that E&Y would have promptly raised the issue with the Audit Committee and I would have expected them to do so. They did not.”
Mr.Cruikshank also laid bare his feelings on mark to market accounting - “…the firm’s real estate exposure (which was exacerbated by the rules for applying mark-to-market accounting)…”.
He ended his testimony by thanking all the other Lehman board members…including the “the first woman to command a U.S. naval station, and the head of the American Red Cross”. Great as their achievements maybe, it is hard to understand how a naval officer could possibly have understood and provided oversight over complicated financial transactions at Lehman. Many of the other directors had similar stellar personal backgrounds but almost zero financial industry experience.
And concluding his testimony was this blanket CYA, (Cover your a--) “While I may not have the knowledge and expertise of my fellow panelists appearing before this Committee…”- Short for, I don’t know anything, my eyes were shut, my ears were closed and my hands of course were stretched out to receive the easiest money I made in my life, so don’t ask me anythin’ about nothin’.
Disclosure: "No Position"