In his damning analysis of the spectacular collapse of Lehman Brothers Holdings, court-appointed examiner Anton Valukas found that conduct by Lehman executives that eventually led to the investment banking firm’s bankruptcy ranged from “serious but nonculpable errors of business judgment to actionable balance sheet manipulation.”
At the core of this questionable activity is a controversial accounting device that was known inside Lehman as Repo 105. In his report, Valukas describes the tactic and details the extent to which it allowed the firm to doctor its balance sheet and misrepresent its desperate situation.
Here are some highlights from the 2,200-page report:
• “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. Lehman’s own accounting personnel described Repo 105 transactions as an ‘accounting gimmick’ and a ‘lazy way of managing the balance sheet as opposed to legitimately meeting balance sheet targets at quarter end.’”
• “In an ordinary repo, Lehman raised cash by selling assets with a simultaneous obligation to repurchase them the next day or several days later; such transactions were accounted for as financings, and the assets remained on Lehman’s balance sheet. In a Repo 105 transaction, Lehman did exactly the same thing, but because the assets were 105 percent or more of the cash received, accounting rules permitted the transactions to be treated as sales rather than financings, so that the assets could be removed from the balance sheet.”
• “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.”
Here is the full text of the report on Lehman’s collapse prepared by court-appointed examiner Anton Valukas:
Volume 1- Sections I & II: Introduction, Executive Summary & Procedural Background; Section III.A.1: Risk
Volume 2- Section III.A.2: Valuation; Section III.A.3: Survival
Volume 3- Section III.A.4: Repo 105
Volume 4- Section III.A.5: Secured Lenders; Section III.A.6: Government
Volume 5- Section III.B: Avoidance Actions; Section III.C: Barclays Transaction
Volume 6- Appendix 1
Volume 7- Appendices 2 - 7
Volume 8- Appendices 8 - 22
Volume 9- Appendices 23 - 34
