UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ x : In re : Chapter 11 Case No. : LEHMAN BROTHERS HOLDINGS INC., : 08‐13555 (JMP) et al., : : (Jointly Administered) Debtors. : ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ x REPORT OF ANTON R. VALUKAS, EXAMINER Jenner & Block LLP 353 N. Clark Street Chicago, IL 60654‐3456 312‐222‐9350 919 Third Avenue 37th Floor New York, NY 10022‐3908 212‐891‐1600 March 11, 2010 Counsel to the Examiner VOLUME 3 OF 9 Section III.A.4: Repo 105 EXAMINER’S REPORT TABLE OF CONTENTS (SHORT‐FORM) VOLUME 1 Introduction, Sections I & II: Executive Summary & Procedural Background Introduction...................................................................................................................................2 I. Executive Summary of the Examiner’s Conclusions......................................................15 A. Why Did Lehman Fail? Are There Colorable Causes of Action That Arise From Its Financial Condition and Failure?.....................................................15 B. Are There Administrative Claims or Colorable Claims For Preferences or Voidable Transfers?......................................................................................................24 C. Do Colorable Claims Arise From Transfers of LBHI Affiliate Assets To Barclays, or From the Lehman ALI Transaction? ....................................................26 II. Procedural Background and Nature of the Examination ..............................................28 A. The Examiner’s Authority...........................................................................................28 B. Document Collection and Review..............................................................................30 C. Systems Access..............................................................................................................33 D. Witness Interview Process...........................................................................................35 E. Cooperation and Coordination With the Government and Parties......................37 Section III.A.1: Risk III. Examiner’s Conclusions......................................................................................................43 A. Why Did Lehman Fail? Are There Colorable Causes of Action That Arise From Its Financial Condition and Failure?.....................................................43 1. Business and Risk Management..........................................................................43 a) Executive Summary .......................................................................................43 i b) Facts..................................................................................................................58 c) Analysis .........................................................................................................163 VOLUME 2 Section III.A.2: Valuation 2. Valuation ..............................................................................................................203 a) Executive Summary .....................................................................................203 b) Overview of Valuation of Lehman’s Commercial Real Estate Portfolio .........................................................................................................215 c) Senior Management’s Involvement in Valuation....................................241 d) Examiner’s Analysis of the Valuation of Lehman’s Commercial Book................................................................................................................266 e) Examiner’s Analysis of the Valuation of Lehman’s Principal Transactions Group......................................................................................285 f) Examiner’s Analysis of the Valuation of Lehman’s Archstone Positions.........................................................................................................356 g) Examiner’s Analysis of the Valuation of Lehman’s Residential Whole Loans Portfolio.................................................................................494 h) Examiner’s Analysis of the Valuation of Lehman’s RMBS Portfolio .........................................................................................................527 i) Examiner’s Analysis of the Valuation of Lehman’s CDOs ....................538 j) Examiner’s Analysis of the Valuation of Lehman’s Derivatives Positions.........................................................................................................568 k) Examiner’s Analysis of the Valuation of Lehman’s Corporate Debt Positions ...............................................................................................583 l) Examiner’s Analysis of the Valuation of Lehman’s Corporate Equities Positions .........................................................................................594 ii Section III.A.3: Survival 3. Lehman’s Survival Strategies and Efforts........................................................609 a) Introduction to Lehman’s Survival Strategies and Efforts.....................609 b) Lehman’s Actions in 2008 Prior to the Near Collapse of Bear Stearns............................................................................................................622 c) Actions and Efforts Following the Near Collapse of Bear Stearns .......631 VOLUME 3 Section III.A.4: Repo 105 4. Repo 105................................................................................................................732 a) Repo 105 – Executive Summary.................................................................732 b) Introduction ..................................................................................................750 c) Why the Examiner Investigated Lehman’s Use of Repo 105 Transactions ..................................................................................................764 d) A Typical Repo 105 Transaction ................................................................765 e) Managing Balance Sheet and Leverage ....................................................800 f) The Purpose of Lehman’s Repo 105 Program Was to Reverse Engineer Publicly Reported Financial Results.........................................853 g) The Materiality of Lehman’s Repo 105 Practice ......................................884 h) Knowledge of Lehman’s Repo 105 Program at the Highest Levels of the Firm .....................................................................................................914 i) Ernst & Young’s Knowledge of Lehman’s Repo 105 Program..............948 j) The Examiner’s Conclusions ......................................................................962 iii VOLUME 4 Section III.A.5: Secured Lenders 5. Potential Claims Against Lehman’s Secured Lenders .................................1066 a) Introduction and Executive Summary....................................................1066 b) Lehman’s Dealings With JPMorgan ........................................................1084 c) Lehman’s Dealings With Citigroup.........................................................1224 d) Lehman’s Dealings With HSBC ...............................................................1303 e) Lehman’s Dealings With Bank of America ............................................1375 f) Lehman’s Dealings With Bank of New York Mellon............................1376 g) Lehman’s Dealings With Standard Bank................................................1382 h) Lehman’s Dealings With the Federal Reserve Bank of New York .....1385 i) Lehman’s Liquidity Pool...........................................................................1401 Section III.A.6: Government 6. The Interaction Between Lehman and the Government..............................1482 a) Introduction ................................................................................................1482 b) The SEC’s Oversight of Lehman ..............................................................1484 c) The FRBNY’s Oversight of Lehman ........................................................1494 d) The Federal Reserve’s Oversight of Lehman .........................................1502 e) The Treasury Department’s Oversight of Lehman ...............................1505 f) The Relationship of the SEC and FRBNY in Monitoring Lehman’s Liquidity....................................................................................1507 g) The Government’s Preparation for the “Lehman Weekend” Meetings at the FRBNY .............................................................................1516 iv h) On the Evening of Friday, September 12, 2008, the Government Convened a Meeting of the Major Wall Street Firms in an Attempt to Facilitate the Rescue of Lehman ..........................................1523 i) Lehman’s Bankruptcy Filing ....................................................................1535 VOLUME 5 Section III.B: Avoidance Actions B. Are There Administrative Claims or Colorable Claims for Preferences or Voidable Transfers....................................................................................................1544 1. Executive Summary ..........................................................................................1544 2. Examiner’s Investigation of Possible Administrative Claims Against LBHI (First Bullet) .............................................................................................1546 3. Examiner’s Investigation of Possible