Let me see if I get this.

Lehman takes the position that the repo transactions it entered into in order to reduce the size of its balance sheet, constituted a sale transaction rather than a loan.  (See, Floyd Norris, NY Times, April 2, 2010, Demystify the Lehman Shell Game). The argument is that since the value of the securities exchanged by Lehman were greater than the amount of cash it received in the transaction, it would never purchase these securities for the same price.  In other words, it would never “overpay” for these assets, therefore, the transaction had to be a sale.

But wait a second, forget for a moment about the repurchase part of the transaction, doesn’t that mean that Lehman “sold” the securities for less than adequate consideration?  If I’m understanding this correctly, the logic is that it is OK to sell an asset for less than its value, but not OK to overpay for an asset.

This feels like Alice in Wonderland.

If I were a Lehman shareholder or a board member, I’d be very happy that my smart, hard-charging Wall Street financiers were not willing to overpay for assets. But, I’d be distressed that these same investment professionals were willing to sell corporate assets for less than fair value.  Great business franchises are not built upon selling assets for less than fair value.

The convoluted logic put forth by Lehman is likely supported by well articulated legal and accounting documentation.  The problem is that we have a generation of talented, lawyers, accountants and investment professionals who are adroit at mastering complicated concepts and principles for the purposes of erecting extraordinarily complicated and sophisticated legal structures.  All too often, however, these professionals get lost in the brilliance of their creativity and problem solving capability.

This is the proverbial forest and trees issue.  Everyone gets so caught up in the composition and structure of the trees, that they lose sight of the forrest.

How could it ever be acceptable to assume less than adequate consideration upon the sale of an asset and yet refuse to pay more than fair value upon buying the exact same asset.  Lehman is asking us to accept that 1+1=3.

As fiduciaries, it is our responsibility not to loose sight of the forest.  We need to be able to both assess complicated products and structures, but we also to be able to step back and ask a simple question: Does this make sense?  Or, more specifically, using the language of fiduciaries:  Is this prudent?

Ostensible a simple question:  Is this prudent?   However, when certain practices and assumptions become common place throughout an industry and culture, it can be a very difficult question to ask.  However the importance of asking the question, is directly related to the difficulty in raising it.

Our entire retirement industry, and even the global financial markets, require fiduciaries to raise their hands and say, “No, 1+1, does not equal 3.”

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