C n m kiefer economics 4230 banks 22 40 illustration

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Unformatted text preview: worth of securities removed from its balance sheet in a Repo 105 transaction. For the sake of simplification, Illustrations 3 and 4 do not include the $5 derivative. c N. M. Kiefer Economics 4230: Banks 22/ 40 Illustration 5 In a Repo 105 transaction, Lehman uses the cash it generates to reduce traditional borrowings, such as ordinary repos (“collateralized financings” in the example below). By applying the cash from a Repo 105 transaction to pay down liabilities such as ordinary repos, Lehman reduces its balance sheet and leverage. Assets (in millions) Cash Liabilities 7,500 Financial Instruments Collateralized Agreements Short Term Borrowings 200,000 300,000 Collateralized Financings 275,000 350,000 Long Term Borrowings 150,000 Receivables 20,000 Payables Other 72,500 Stockholders’ Equity Total 750,000 Gross Leverage 27,000 750,000 28 Net Leverage 98,000 15 When the Repo 105 transaction matured, Lehman borrowed funds to repay the Repo 105 cash borrowing plus interest and the previously transferred securities inventory returned to Lehman’s balance sheet as securities inventory.2935 Accordingly, total assets and total liabilities increased. Although it is undisputed that Lehman received cash as part of Repo 105 transactions, the documents and witness testimony reveal that the financing Lehman 2935 Lehman, Global Balance Sheet Overview of Repo 105 (FID)/108 (Equities) (July 2006), at p. 1 [LBEX WGM 748489]; Duff & Phelps, Repo 105 Balance Sheet Accounting Entry and Leverage Ratios Summary c N. M. Kiefer Economics 4230: Banks 23/ 40 Is it legal? Lehman first introduced its Repo 105 program in approximately 2001. Unable to find a United States law firm that would provide it with an opinion letter permitting the true sale accounting treatment under United States law, Lehman conducted its Repo 105 program under an opinion letter the Linklaters law firm in London wrote for LBIE, Lehman’s European broker-dealer in London, under English law. Accordingly, if United States-based Lehman entities such as LBI and LBSF wished to engage in a Repo 105 transaction, they transferred their securities inventory to LBIE in order for LBIE to conduct the transaction on their behalf. c N. M. Kiefer Economics 4230: Banks 24/ 40 Is it legal? FAS 140 governs when to recognize a transfer of assets as a financing transaction or as a sale. A particular provision of SFAS 140 permits the transferor of assets in a repo agreement to account for the repo transaction as a “sale” with a forward purchase commitment if the transaction satisfies certain criteria. As an accounting matter, and consistent with Lehman’s publicly reported statements, the vast majority of repo transactions do not satisfy SFAS 140’s criteria to recharacterize the repo transaction as a sale and thereby move the transferred inventory “off balance sheet.” c N. M. Kiefer Economics 4230: Banks 25/ 40 Is it legal? Lehman argued that because the assets were 10...
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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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