Wall St. accounting under scrutiny by SEC

The U.S. Securities and Exchange Commission said Tuesday it is examining whether any of the 19 largest U.S. banks are using an accounting measure which is believed to have led to the collapse of Lehman Brothers.

SEC chairman Mary Schapiro testified at a congressional hearing that the SEC is scrutinizing Lehman's use of the accounting move, known as Repo 105, that allowed it to mask its weakness before it failed.

Repo 105 is the practice of removing high-risk debt from the balance sheet just before the end of a quarter and then buying it back early in the next quarter.

The commission has sent letters to the 19 banks, seeking information about any such transactions.

The investment bank was forced to declare bankruptcy — the biggest in U.S. history — in the fall of 2008 after the U.S. government was unable to engineer a rescue for the firm.

That threw global financial markets into crisis. Lehman's meltdown also cost school districts, local governments and hospitals millions, forcing them to make cutbacks.

The former CEO of Lehman Brothers, Richard Fuld, testified that he has "absolutely no recollection whatsoever" of the company using its accounting to mask the fact that it was carrying too much debt.

In March, an examiner appointed by the bankruptcy court, Anton Valukas, issued a report finding that the firm masked $50 billion in debt.

In his report, Valukas found that Lehman sold high-risk debt — mainly tied to subprime mortgages — at the end of each quarter so that it didn't have to show that on its balance sheet, avoiding the scrutiny of regulators and shareholders. It then repurchased them at the beginning of the next quarter.

"Although the public had a right to expect that firms like Lehman were being regulated in a meaningful way, in reality, they were not," Valukas told lawmakers. Regulators, he said, missed opportunities to alter Lehman's conduct "before its situation had reached the point of no return."

Accounting rules require banks to use some of their share capital — in addition to borrowed money — to underpin their assets since that increases the cushion of losses it can absorb before going bankrupt.