C n m kiefer economics 4230 banks 31 40 summary repo

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Unformatted text preview: po 105: “[T]he firm has a function called repo 105 whereby you can repo a position for a week and it is regarded as a true sale to get rid of net balance sheet.” “We have been using Repo 105 in the past to reduce balance sheet at the quarter-end.” c N. M. Kiefer Economics 4230: Banks 31/ 40 Summary: Repo 105 and Lehman The examiner does not opine on legality. ”Although Repo 105 transactions may not have been inherently improper, there is a colorable claim that their sole function as employed by Lehman was balance sheet manipulation.” In 2007-08, Lehman knew that leverage numbers were critical to the rating agencies and to counterparty confidence. Its ability to deleverage by selling assets was limited by the illiquidity and depressed prices of its assets. Lehman turned to Repo 105 transactions to temporarily remove $50 billion of assets from its balance sheet at first and second quarter ends in 2008 so that it could report significantly lower net leverage numbers than reality. c N. M. Kiefer Economics 4230: Banks 32/ 40 Summary: Repo 105 and Lehman Key: The ”crime,” if there was a crime, was the nondisclosure. Transparency to counterparties (and regulators) is crucial for maintaining confidence. Disclosure would have notified market participants of Lehman’s deep trouble... Any transactions with no clear business purpose are suspicious should attract attention from managers (here complicit) and regulators. Discussion? c N. M. Kiefer Economics 4230: Banks 33/ 40 Mark to Market of outstanding debt With mark to market in place, some banks are now not only marking to market their trading book assets, but their outstanding debt. As a bank’s finincial condition deteriorates, the value of its bonds falls. With M to M, the value of its debt falls (it could retire the bonds for less, in principle). FT: This is to combine the black magic of leverage with the alchemy of mark-to-market accounting. c N. M. Kiefer Economics 4230: Banks 34/ 40 Games with Sovereign Financing The Maastricht Treaty - establishing the European Union - has requirements for member states, including that national debt be <60% of GDP and that annual deficits be <3% of GDP. The first seems to be ignored routinely. The second is addressed by creative accounting - with Italy and Greece providing examples. c N. M. Kiefer Economics 4230: Banks 35/ 40 Is Italy the Next Greece? - Carnegie Endowment for International Peace http://www.carnegieendowment.org/ieb/?fa=view&id=40641 After Italy and Greece adopted the euro in 1999 and 2001, respectively, interest rates in both countries fell to near German levels (the lowest in the Euro area), fueling consumer spending and house prices, particularly in Greece. Though the two governments used the lower borrowing costs to increase spen...
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