Remember that investigation into repurchase agreements the Securities and Exchange Commission launched earlier this year? The SEC wanted banks and other financial institutions to step forward and explain how they were using “repo 105” deals, one of several accounting contraptions that put Lehman Brothers into bankruptcy in 2008. We have some fresh news on that front.
Repurchase agreements, I’m sure you recall, are where a bank secures short-term financing by transferring assets to another lender at slightly higher prices—that is, Bank A transfers assets valued at $102 million to Bank B, in exchange for $100 million in cash. At that 2 percent difference, Bank A can only book the transaction as a secured lending. That’s not terribly helpful, however, since a secured lending means Bank A can’t use that cash to reduce leverage on the balance sheet. Lehman, therefore, pushed the envelope to 5 percent (hence the term “repo 105 deals”) and sometimes even 8 percent—and then declared that such transactions were a sale, and that the cash could be used to reduce leverage. The small detail that Lehman would need to repurchase the assets within a week or so? Feh.
