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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)
7,500 Financial Instruments
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.
- Spring '12