Lehman's Problem was ... Lehman???

You mean it wasn't a conspiracy of short sellers?

I see from Sorkin's book that back on April 2, 2008, Dick Fuld had a breakfast meeting with Jim Cramer and sold him on the theory that Lehman's real problem was "a cabal of shorts," and the abolition of the uptick rule in 2007, which had presumably empowered said cabal.

Many have echoed Fuld's views. Indeed, in September 2008 the SEC halted the short selling of stocks in the financial sector altogether. That didn't last long, and it didn't seem to have any impact while it lasted, but the geniuses in Washington thought they had to show that they could collectively be a tough sheriff coming into Dodge.

Now there is a bounty of new evidence for what those of us who were skeptical of the anti-shorting cause have suspected all along. The problem with Lehman according to a report by the bankruptcy court's examiner just released was Lehman's own management, compounded by overly creative accounting and its enablers at Ernst & Young.

The report is available in full here. It's more than 2,000 pages long, and accordingly each of the links on the Jenner & Block page to which I've just linked you represents a separate volume. (The examiner is J&B's chairman, Anton Valukas.) But let's just stick to the Executive Summary, which appears at pp. 58-70 of the first volume/PDF.

Lehman failed because it was unable to retain the confidence of its lenders and counterparties. Why was it unable to retain their confidence? Because "a series of business decisions had left it with heavy concentrations of illiquid assets with deteriorating value...." Those decisions, misguided though they were, were within the business judgment rule -- i.e. they were legal. What may not have been legal, though, was the use of accounting trickier to obscure them.

The short sellers, then, were right. They accurately perceived the rottenness that Lehman's accounting trickier was designed to hide. Short sellers are the heroes of this examination, not the villains. Of course, they are well-compensated heroes, so there is no need to cry over their underappreciated character., Still, the short sellers were doing a valuable job, doing it well, and were made the scapegoats by the real malfeasors.

Who'd a thought?