There are colorable claims against lehmans external

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Unformatted text preview: e effects of those judgments does give rise to colorable claims against the senior officers who oversaw and certified misleading financial statements – Lehman’s CEO and its CFOs. There are colorable claims against Lehman’s external auditor Ernst & Young for, among other things, its failure to question and challenge improper or inadequate disclosures in those financial statements. In this Report a colorable claim is one for which there is sufficient credible evidence to support a finding by a trier of fact. c N. M. Kiefer Economics 4230: Banks 16/ 40 Lehman: Examiner’s Findings Lehman employed off-balance sheet devices, known within Lehman as “Repo 105” and “Repo 108” transactions, to temporarily remove securities inventory from its balance sheet, usually for a period of seven to ten days, and to create a materially misleading picture of the firm’s financial condition in late 2007 and 2008. Repo 105 transactions were nearly identical to standard repurchase and resale (“repo”) transactions that Lehman (and other investment banks) used to secure short-term financing, with a critical difference: Lehman accounted for Repo 105 transactions as “sales” as opposed to financing transactions. By recharacterizing the Repo 105 transaction as a “sale,” Lehman removed the inventory from its balance sheet. c N. M. Kiefer Economics 4230: Banks 17/ 40 Lehman: Examiner’s Findings Lehman’s Repo 105 practice consisted of a two-step process: (1) undertaking Repo 105 transactions followed by (2) the use of Repo 105 cash borrowings to pay down liabilities, thereby reducing leverage. A few days after the new quarter began, Lehman would borrow the necessary funds to repay the cash borrowing plus interest, repurchase the securities, and restore the assets to its balance sheet. c N. M. Kiefer Economics 4230: Banks 18/ 40 How did Repo 105 Work? Illustration 1 Assume this simplified balance sheet for Lehman: Assets (in millions) Cash Liabilities 7,500 Financial Instruments Collateralized Agreements Short Term Borrowings 200,000 350,000 Collateralized Financings 325,000 350,000 Long Term Borrowings 150,000 Receivables 20,000 Payables Other 72,500 Stockholders’ Equity Total 800,000 Gross Leverage2918 27,000 800,000 30 Net Leverage2919 98,000 17 Illustration 2, below, shows the impact of an ordinary repo on Lehman’s balance sheet and leverage ratios. c N. M. Kiefer Economics 4230: Banks 19/ 40 Illustration 2 If Lehman executes $50 billion of typical repo transactions with $50 billion of its financial instruments, those instruments remain on the balance sheet; Lehman receives a $50 billion cash borrowing, increasing its cash position; and Lehman records $50 billion of additional collateralized financing liabilities; at the moment of the repo transactions, total balance sheet and leverage increase: Assets (in millions) Liabilities 57,500 Cash Financial Instruments Collateralized Agreements Short Term Borrowings 200,000 350,000 Collateralized Financings 375,000 350,000 Long Term Borrowings 150,000 Receivables 20,000 Payables Other 72,500 Stockholders Equi...
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This note was uploaded on 01/27/2014 for the course ECONOMICS 103 taught by Professor Angie during the Spring '12 term at Columbia College.

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