Posts Tagged ‘Lehman Brothers’

SEC Asks Banks About Accounting Dodge

April 14, 2010

SEC Asks Banks About Accounting Dodge

The Securities and Exchange Commission (SEC) has sent a letter to a score of bank CFOs asking if they used the same maneuver as Lehman Brothers to cook the books during quarterly reporting periods. In the trick, called Repo 105, a  bank uses a short-term contract (a Repurchase Agreement) to exchanges assets for cash, agreeing to buy them back later at 105 percent of their value, but the firm reports the resulting cash as if it were a straight sale. This gives the temporary illusion of bank soundness and profitability.

More:

“SEC: Did others use Lehman accounting gimmick?” AP via Salon.

“SEC to Banks: Who Else Used Repo 105?” Marian Wang, ProPublica.

“Do other firms use Lehman’s accounting ‘drug’?” Alistair Barr, MarketWatch.

 

Image by Mike Licht. Download a copy here. Creative Commons license; credit Mike Licht, NotionsCapital.com

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Wall Street’s Sleight-of-Hand Accounting

March 13, 2010

Wall Street's Sleight-of-Hand Accounting

Is it a liquid asset or collateral? Both! That’s the magic of Repo 105.

A report on the Lehman Brothers bankrupcy lifts the curtain on the unregulated market in repurchase agreements (repos). In repos, financial instruments are sold with an agreement to buy them back at a later date.

“Lehman’s trick was to use a clause in the accounting rules to classify [a] deal as a sale, even though it was still obliged to repurchase the assets at a later date. That meant the assets disappeared from the balance sheet, and it could use the cash it received to temporarily pay down other liabilities…. [Repo 105] was crucial for maintaining the group’s credit rating as rating agencies and investors began to focus more on leverage and demanded lower risk.” — Simon Kennedy, Market Watch.

A British law firm provided Lehman with cover for double-counting billions pledged to back short-term loans as liquid assets. A U.S. law firm had previously disapproved the practice. Lehman’s auditors, Ernst & Young, did not object.

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