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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?
Assume this simplified balance sheet for Lehman: Assets (in millions)
7,500 Financial Instruments
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
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.
- Spring '12