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Unformatted text preview: ty Total 850,000 Gross Leverage 27,000
850,000 31 Net Leverage 98,000 19 Illustration 3, below, shows the impact of an ordinary repo followed by the use of
the cash borrowing to pay down liabilities. c N. M. Kiefer Economics 4230: Banks 20/ 40 Illustration 3
Assuming Lehman were to use the $50 billion cash borrowing from typical
repo transactions to pay off current liabilities, the effect on the balance sheet
would be neutral – no net increase in total assets/liabilities, and no effect upon
leverage:2920 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 Leverage 27,000
800,000 30 Net Leverage 98,000 17 Although Lehman publicly reported that it treated all repo transactions as
financing transactions for accounting purposes,2921 Lehman booked “Repo 105”
transactions as sales under the Financial Accounting Standards Board’s Statement of 2920 This is not to suggest that Lehman regularly used the funds received in a typical repo transaction to
pay down liabilities. In the Notes to its Consolidated Financial Statements, for example, Lehman stated
“We enter secured borrowing and lending transactions to finance inventory positions, obtain securities
for settlement and meet clients’ needs.” See LBHI 2007 10 K, at p. 110.
2921 See LBHI 2007 10 K, at p. 97 (stating that Lehman treats repo transactions as financing transactions for
reporting purposes); LBHI 10 Q (filed Apr. 9, 2008), at p. 13 (same); LBHI 10 Q (filed July 10, 2008), at p.
16 (same); see also Lehman, Global Balance Sheet Overview of Repo 105 (FID)/108 (Equities) (July 2006), at c N. M. Kiefer Economics 4230: Banks 21/ 40 Illustration 4
If Lehman executes $50 billion of Repo 105 transactions, rather than typical
repos, the transaction is recharacterized as a sale and $50 billion of financial
instruments, considered sold, are removed from the balance sheet;2933 Lehman
receives $50 billion in cash, exchanging one form of asset for another, so total
assets are unchanged; Lehman records no liability to return the cash borrowing so
liabilities likewise remain unchanged; at the moment of the Repo 105 transactions,
leverage is unaffected: Assets (in millions)
57,500 Short Term Borrowings 200,000 300,000 Collateralized Financings 325,000 350,000 Long Term Borrowings 150,000 Receivables 20,000 Payables Other 72,500 Stockholders’ Equity Total 800,000 Gross Leverage 27,000
800,000 30 Net Leverage 98,000 17 2933 As discussed in greater detail in Section III.A.4.d.2.d of this Report, Lehman created a $5 derivative
asset for every $105...
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- Spring '12