Repo 105 is

Lehman Brothers Lehman Brothers Holdings Inc. ( ) was an American global financial services firm founded in 1847. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, ...

' name for an accounting maneuver that it used where a short-term

repurchase agreement A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in government securities. The dealer sells the underlying security to investors and, by agreement between the two pa ...

is classified as a sale. The cash obtained through this "sale" is then used to pay down

debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...

, allowing the company to appear to reduce its leverage by temporarily paying down liabilities—just long enough to reflect on the company's published

balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...

. After the company's

financial report Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...

s are published, the company borrows cash and repurchases its original

asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...

Use by Lehman Brothers

Repo 105 was used by investment bank Lehman Brothers three times according to a March 2010 report by the bankruptcy court examiner. The report stated that Lehman's auditors,

Ernst & Young Ernst & Young Global Limited, trade name EY, is a multinational professional services partnership headquartered in London, England. EY is one of the largest professional services networks in the world. Along with Deloitte, KPMG and Pricewat ...

, were aware of this questionable classification. Law firm

Linklaters Linklaters LLP is a multinational law firm, headquartered in London, England. Founded in 1838, it is a member of the " Magic Circle" of elite London-headquartered law firms. It currently employs over 5,000 lawyers across 31 offices in 21 coun ...

has received unfavorable press treatment in relation to their issuance of an English law opinion which characterised the arrangements as a ''true sale'' as opposed to a transfer by Lehman with a charge back in favour of the transferor. Apparently, the use of the British law firm was necessitated by the fact no law firm in the US was prepared to give a legal opinion on the legality of the use of Repo 105

Examiner’s report

The report published, on March 11, 2010, was titled "Lehman Brothers Holdings Inc. Chapter 11 Proceedings". The Examiner in this matter was Anton R. Valukas, Chairman of

Jenner & Block Jenner & Block is an American law firm with offices in Chicago, London, Los Angeles, New York City, San Francisco, and Washington, D.C. The firm is active in corporate litigation, business transactions, the public sector, and other legal fields ...

. The report details the use of both "repo 105" and "repo 108" which are identical procedures, the first costing 4.76% and the second 7.41% of the assets exchanged. In other words, assets valued at 105 will produce 100 in cash, assets valued at 108 will produce 100 in cash respectively. After the Examiner’s report was published, the

Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...

(SEC) sent letters to

chief financial officer The chief financial officer (CFO) is an officer of a company or organization that is assigned the primary responsibility for managing the company's finances, including financial planning, management of financial risks, record-keeping, and fina ...

s of nearly two dozen large financial and insurance companies asking about their firms' use of

s, including the number and amount of such agreements that qualify for sales accounting, and detailed analysis of why such transactions can be treated as sales. SEC chairman,

Mary Schapiro Mary Lovelace Schapiro (born June 19, 1955) served as the 29th Chair of the U.S. Securities and Exchange Commission (SEC). She was appointed by President Barack Obama, unanimously confirmed by the U.S. Senate, and assumed the Chairship on January ...

, indicated that the agency was trying to determine whether other companies used similar techniques as the "repo 105" used by Lehman Brothers.

Fraud charges

In response to the report, the auditors said that the transactions were accounted for in line with

Generally Accepted Accounting Principles Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...

. However, New York attorney general

Andrew Cuomo Andrew Mark Cuomo ( ; ; born December 6, 1957) is an American lawyer and politician who served as the 56th governor of New York from 2011 to 2021. A member of the Democratic Party, he was elected to the same position that his father, Mario Cuo ...

filed charges against

in December 2010, alleging that the firm "substantially assisted... a massive accounting fraud" by approving the accounting treatment, seeking $150 million. The suit was eventually settled in 2015 for $10 million (most of which was to be paid to Lehman bondholders), without E&Y admitting any wrongdoing. The ''Wall Street Journal'' drew attention to the increasing levels of fees that Ernst & Young had been paid by Lehman from 2001 to 2008.

Review of accounting treatment

The IASB and

FASB The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Sec ...

, senior bodies responsible for setting

accounting standards Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...

, met in April 2010 to review the accounting treatment for such repo transactions.

Comparison to tobashi schemes

Several writers have stated that Repo 105 was essentially a tobashi scheme.

Notes

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External links

The Examiner Valukas's Report on Lehman's Repo 105 (Volume 3- Section III.A.4: Repo 105)

The Origins of Lehman’s ‘Repo 105’
Accounting in the United States Accounting scandals Lehman Brothers Ethically disputed business practices Finance fraud