Most of the stories you will read today about the 2,200-page document that lays out how Lehman Brothers used accounting gimmicks to conceal its true financial condition will understate just how important the lies told by its top executives were.

This is one of those few news stories where there is much more than meets eye. The headlines are understating the seriousness of the deception Lehman’s executives employed in an effort to fool investors and creditors about the health of their investment bank.

The health of Lehman’s balance sheet was such an important question in 2008 that the bank went out of its way to claim multiple times that it was reducing the size of its balance sheet. Let’s start with the earnings call in June 2008.

“Regarding our balance sheet, we reduced our gross assets by $147 billion over the quarter, which exceeded the targets that we set,” chief executive Dick Fuld said at the start of the June 16th conference call in 2008.

“Turning now to leverage, we reduced our gross assets by $147 billion — from $786 billion to $639 billion — in the second quarter and we reduced net assets by $70 billion — from $397 billion to $327 billion. As a result, we reduced our gross leverage from 31.7X times to 24.3X at May 31, and we reduced net leverage from 15.4X to 12X prior to the impact of last week’s capital raise,” chief financial officer Ian Lowitt said on the same call.

Thanks to the bankruptcy examiner’s report, we now know this was not true. Lehman’s deleveraging was largely an accounting fiction. Fifty billion of it’s supposedly $70 billion reduction in assets was produced entirely through the Repo 105 transactions.

The importance of this deception cannot be overstated. Their should be no doubt in anyone’s mind that the amount of leverage and the size of the balance sheet was pretty much all that mattered at the time. The catch phrase at the time was “Earnings are the past. The balance sheet is the future.” The extra details the firm was offering on that June conference call were meant to reassure everyone about the health of the balance sheet.

On that same call, the third question came from Merrill’s Guy Moszkowski.

Guy Moszkowski, Merrill Lynch

Just a follow-up on the question about the asset sales and whether there were vintage concentrations or anything like that. How about with respect to timing? Were the sales pretty much ratably spread over the quarter, or were they more skewed toward either the earlier or the latter part of the quarter?

Ian T. Lowitt, Chief Financial Officer

They were spread over the whole quarter. I mean, it was a focus of the entire firm to de-lever through the course of the quarter. That was obviously a focus which shifted attention, to some extent, and I think that impacted the quarter in some ways. But it was even across the whole quarter so there was no concentration in terms of the timing. That was true across all of the elements, so that would be true within residential as within commercial.

This wasn’t true at all. In fact, according to the bankruptcy examiner’s report, $50 billion in alleged “sales” were actually repos timed to reduce the balance sheet for exactly the period necessary for earnings reporting.

NEW YORK (MarketWatch) — Fairy tale season is about to begin.

Wall Street banks and brokerages are readying second-quarter numbers for mass digestion. They’ll show healthy balance sheets, tolerable risk levels and have all the trappings of well-run companies.

Don’t believe a word of it.

If the second quarter is anything like quarters of the past couple years, risk is up and capital is down. And what you’ll see on earnings day bears little resemblance to the business being conducted between the bookends of the start and end of the latest quarter. After all, Wall Street is an industry built on prevaricating for clients — Enron Corp., Greece and Parmalat Spa (IT:PLT 1.92, 0.00, 0.00%) to name a few — why would it come clean with its own financials?

Late last week, Bank of America Corp. (BAC 15.36, +0.15, +0.99%) became the latest big financial firm to cop to manipulating end-of-the-quarter earnings. In a letter to the Securities and Exchange Commission, B. of A. said it masked debt levels between 2007 and 2009 by making six trades designed to shine up the numbers on earnings day.

Reuters

Bank of America CEO Brian Moynihan.

You can bet that the Charlotte, N.C.-based bank isn’t the only one using the David Blaine accounting method. In April, the The Wall Street Journal examined data from the Federal Reserve bank of New York and found 18 banks including Goldman Sachs Group Inc.  (GS 137.65, +0.40, +0.29%) , Morgan Stanley (MS 24.70, +0.14, +0.57%) and J.P. Morgan Chase & Co.  (JPM 39.51, +0.32, +0.82%) masked debt levels in the five quarters ending in March.

The Journal found the banks “understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data showed. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.” Read Journal report on masked risk levels at banks.

Of course, like many Wall Street practices in the era of deregulation, all of the trades were perfectly legal, just as the “repo” accounting used by Lehman Brothers to hide its leverage exposure was legal — at least in the opinion of the U.K. attorneys they could get to approve the deals. See related column on Lehman’s repo deals.

Lehman was hardly alone. Before, during and after the financial crisis, banks used countless accounting tricks, including off-balance sheet entities called special purpose vehicles, short-term repurchase agreements, securities that banks label “available for sale,” and all varieties of “intent-based accounting.”

Research conspiracy

You would think this kind of window dressing would raise the ire of analysts whose rosy analysis of Wall Street firms including American International Group Inc. /quotes/comstock/13*!aig/quotes/nls/aig (AIG 36.06, +0.49, +1.38%) Bear Stearns, Lehman Brothers and Merrill Lynch were made to look foolish by opaque and misleading balance sheets.

Think again. Most analysts still read the suspect financial data they’re handed every three months and take it as gospel.

Take a look at the usual suspects. Since the start of the year, analysts have issued six ratings upgrades to Citigroup /quotes/comstock/13*!c/quotes/nls/c (C 4.17, +0.06, +1.46%) , six to Goldman, four to Morgan Stanley and nine to Bank of America, according to FactSet. Combined, analysts have only issued five downgrades.

Even some of the best analysts, including Brad Hintz at Bernstein Research, Meredith Whitney, who runs her own research company and Glenn Schorr at Deutsche Bank AG seem reluctant to mention the fact that banks are tweaking the numbers. And why should they? Admitting that a bank has cut risk for earnings day undermines their “analysis.”

Denials and lies

Less than a decade ago, a crusading attorney general upended Wall Street with a series of investigations and settlements concerning practices that the industry and public took for granted: late trading of mutual funds, bid-rigging in the insurance market and research conflicts.

Regardless of Eliot Spitzer’s personal failings and his lasting impact as a reformer, at least he had the gumption to challenge practices on the grounds of common sense and evenhandedness. Unfortunately, no one seems to have taken up the mantle of championing fairness in the markets.

Even after the financial crisis, financial firms still take short cuts behind the scenes, the analysts keep playing it straight, investors continue to follow the analysts and credit ratings agencies. Not only does the emperor have no clothes, no one in the kingdom cares.

Maybe it’s the obfuscation: like the way a chief financial officer authoritatively patronizes investors on the earnings call. Or perhaps it’s the way banks such as Goldman and Morgan Stanley vehemently deny they use “repo” transactions to make the books look better at the end of the quarter but are hazy when asked about other transactions.

Maybe it doesn’t matter anyway. All of this stuff, we’re told, is legal. And if the SEC does make a move, it’s only going to require more disclosure of mid-quarter activities.

Maybe lie is too strong a word for the game big finance plays at the end of the quarter. It is, after all, trickery played inside the lines.

But here’s something you should refuse to call it: the truth.

David Weidner covers Wall Street for MarketWatch.

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