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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
Disclosure would have notiﬁed market participants of Lehman’s
Any transactions with no clear business purpose are suspicious should attract attention from managers (here complicit) and
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
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- Spring '12