TAKING INVENTORY; STICKING TANKS; SALAD OIL. I gave my first post on the problem of locating the Lehman Brothers assets the somewhat irreverent caption of “GETTING HOLD OF THE BEANS BEFORE VALUING THEM” because it seemed to me that the accountants for Lehman had been preoccupied with complex and interesting valuation problems and had forgotten about the less interesting preliminary step of keeping track of Lehman’s assets. Small businesses take inventory regularly by counting what’s on the shelves. In the oil business, accountants or auditors “stick the tanks”, to verify how much is in them. It’s a lot like checking how much oil you have in your car. It’s a little dangerous; stories are told that there was once a drowning. One of the famous frauds of fifty years ago took advantage of this way of taking inventory. The product was salad oil, rather than a petroleum product. There were several ways of doing the scam. The salad oil floated so that a few feet of salad oil seemed like a full tank when the stick was pulled out. There were also pipes from one tank to another so that the salad oil could be moved from a tank that had been checked to another that had not yet been checked. There was also a tank with a much smaller cylinder inside. The cylinder was filled with salad oil, as the stick verified, but the tank was not. The fraud nearly wiped out American Express. Here, the problem for Lehman and its counterparty banks appears to be that the assets are there, but it’s going to take months to find them.

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