Lehman Repo 105

I don’t know if you have been following this, but the final report on Lehman Brothers’ bankruptcy was released this week and it pretty much affirms the fear that many people have that the banking system is effectively unregulated and banks are allowed to lie about the value of the assets they hold.

The Pawn Shop is Open
Repo 105 was an accounting device used by Lehman to manage its balance sheet, so that it appeared at each quarterly reporting that Lehman had a lower leverage ratio than was actually true. Basically what Lehman did was “sell” assets at the end of the quarter for more than they were actually worth, through complex accounting tricks and then promised to “buy” them back after the quarter closed to bring them back onto the balance sheet. It was done to make it look like they held fewer assets and more cash.

They did it a lot and they did it for years. They were cooking the books. Management got rich, by giving themselves bonuses based on the fraudulent numbers –


What were the regulators doing about it? Stress Tests
They kept running new less-stressful tests until Lehman qualified as a going concern.

These transactions were not disclosed on SEC filings and they were not called into question by Lehman’s auditor. These transactions were only done to misrepresent Lehman’s numbers to the markets.

We all know that this stuff is going on. Think of what Greece was doing, using Goldman to create accounting tricks to make it appear that they were not spending as much as they actually were. Think about states like California, where they are using accounting tricks like pulling revenue in from next year by making you pay 80% of this year’s taxes by June 30th (close of the fiscal year) and pushing spending out until July 1st.

From CNBC last week –

http://www.cnbc.com/id/35768105

“Accounting rules require that banks write down the value of those loans on their books, and experts tell me that if banks really accounted for all the losses in the home loan market, they'd all be insolvent.

That's why the Obama Administration has created this kind of shell game in the first place.

I stole that shell game idea from housing consultant Howard Glaser: "We're spending tens of billions of dollars on a tax credit to get people to purchase homes, we're spending federal money to keep them in their homes through the modification program, and now we're going to pay them to move out of their homes. This is not a sustainable system for the housing market. It's a shell game. Bernie Madoff could have created this system," Glaser told me today.”

How many other banks are pulling this stuff? How many states and countries are using accounting tricks to appear to be solvent?

The only reason Lehman finally blew up is because they finally ran out of good assets to promise. They literally got to a point where they were using assets as collateral with other banks and the banks told them that the collateral had no value. Lehman was asked to promise other securities as collateral and when they could not offer any, there was a run on Lehman and they collapsed.

Heralded author Brian Ritholtz had this to say –

“All in all, the entire system failed. The situation is utterly disgusting, and if the investing public pulls its money out of the completely corrupt public markets for a generation or more, it would not surprise me . . .”

Let’s see if anybody actually goes to jail or has to repay bonuses over this.