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Repo 105 is Lehman Brothers' name for an accounting maneuver that it used where a short-term repurchase agreement is classified as a sale. The cash obtained through this "sale" is then used to pay down debt, 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. After the company's financial reports are published, the company borrows cash and repurchases its original assets.

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, were aware of this questionable classification.^[1] Law firm Linklaters 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.^[2] 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.^[3]

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. 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 (SEC) sent letters to chief financial officers of nearly two dozen large financial and insurance companies asking about their firms' use of repurchase agreements, 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, indicated that the agency was trying to determine whether other companies used similar techniques as the "repo 105" used by Lehman Brothers.^[4]

Fraud charges

In response to the report, the auditors said that the transactions were accounted for in line with Generally Accepted Accounting Principles. However, New York attorney general Andrew Cuomo filed charges against Ernst & Young in December 2010, alleging that the firm "substantially assisted... a massive accounting fraud" by approving the accounting treatment, seeking $150 million.^[5]^[6] 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.^[7] The Wall Street Journal drew attention to the increasing levels of fees that Ernst & Young had been paid by Lehman from 2001 to 2008.^[8]

Review of accounting treatment

The IASB and FASB, senior bodies responsible for setting accounting standards, met in April 2010 to review the accounting treatment for such repo transactions.^[9]

Comparison to tobashi schemes

Several writers have stated that Repo 105 was essentially a tobashi scheme.^[10]^[11]

Notes

^ Lehman Cooked Books before Collapse, Report Finds. CBS News, March 12, 2010
^ "British law firm cleared way for Lehman cover-up". The Times. March 12, 2010. Archived from the original on 2011-06-11. Retrieved 2010-12-22.
^ "Stock Portfolio & Tracker - Yahoo Finance".
^ SEC Queries Firms on Repos, Wall St Journal, March 30, 2010
^ E&Y sued over Lehman audit, Accountancy Age, December 21, 2010
^ "Ernst & Young Settles with New York over Lehman Brothers Repo 105 Deals". Forbes.
^ "Ernst & Young Settles with New York over Lehman Brothers Repo 105 Deals". Forbes.
^ Liz Rappaport, Michael Rapoport (December 21, 2010). "Ernst Accused of Lehman Whitewash". Wall Street Journal. Archived from the original on 2012-11-11. Retrieved 2010-12-22.
^ Repo accounting up for review, Accountancy Age, April 8, 2010
^ Duane, Dan (March 14, 2010). "The Lehman Report, "Repo 105", and "tobashi"". Practical Stock Investing. Retrieved July 27, 2014.
^ Alloway, Tracy (March 23, 2010). "Repo ichi zero go?". FT Alphaville. Retrieved July 27, 2014.

External links

[1] Lehman Cooked Books before Collapse, Report Finds. CBS News, March 12, 2010

[2] "British law firm cleared way for Lehman cover-up". The Times. March 12, 2010. Archived from the original on 2011-06-11. Retrieved 2010-12-22.

[3] "Stock Portfolio & Tracker - Yahoo Finance".

[4] SEC Queries Firms on Repos, Wall St Journal, March 30, 2010

[5] E&Y sued over Lehman audit, Accountancy Age, December 21, 2010

[6] "Ernst & Young Settles with New York over Lehman Brothers Repo 105 Deals". Forbes.

[7] "Ernst & Young Settles with New York over Lehman Brothers Repo 105 Deals". Forbes.

[8] Liz Rappaport, Michael Rapoport (December 21, 2010). "Ernst Accused of Lehman Whitewash". Wall Street Journal. Archived from the original on 2012-11-11. Retrieved 2010-12-22.

[9] Repo accounting up for review, Accountancy Age, April 8, 2010

[10] Duane, Dan (March 14, 2010). "The Lehman Report, "Repo 105", and "tobashi"". Practical Stock Investing. Retrieved July 27, 2014.

[11] Alloway, Tracy (March 23, 2010). "Repo ichi zero go?". FT Alphaville. Retrieved July 27, 2014.

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+{{Short description|Accounting maneuver used by Lehman Brothers}}
 '''Repo 105''' is [[Lehman Brothers]]' name for an [[accounting maneuver]] that it used where a short-term [[repurchase agreement]] is classified as a sale. The cash obtained through this "sale" is then used to pay down [[debt]], allowing the company to appear to reduce its [[Leverage (finance)|leverage]] by temporarily paying down [[liability (financial accounting)|liabilities]]—just long enough to reflect on the company's published [[balance sheet]]. After the company's [[financial report]]s are published, the company borrows cash and repurchases its original [[asset]]s.
 ==Use by Lehman Brothers==
-Repo 105 was used by investment bank Lehman Brothers three times according to a [[Report of Anton R. Valukas|March 2010 report]] by the bankruptcy court examiner. The report stated that Lehman's auditors, [[Ernst & Young]], were aware of this questionable classification.<ref>[http://www.cbsnews.com/8301-503983_162-20000341-503983.html Lehman Cooked Books before Collapse, Report Finds]. CBS News, March 12, 2010 </ref> Law firm [[Linklaters]] 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,<ref>{{cite web |url=http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article7059592.ece |title=British law firm cleared way for Lehman cover-up |accessdate= 2010-12-22 |author= |date=March 12, 2010 |work= |publisher=''The Times'' |archiveurl=https://www.webcitation.org/query?url=http%3A%2F%2Fbusiness.timesonline.co.uk%2Ftol%2Fbusiness%2Findustry_sectors%2Fbanking_and_finance%2Farticle7059592.ece&date=2010-12-22 |archivedate=2010-12-22 }} </ref> although there is no suggestion that their advice was wrong. 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 http://www.dailyfinance.com/2010/12/23/fraud-files-is-ernst-and-young-to-blame-in-lehman-bros-fraud/
+Repo 105 was used by investment bank Lehman Brothers three times according to a [[Report of Anton R. Valukas|March 2010 report]] by the bankruptcy court examiner. The report stated that Lehman's auditors, [[Ernst & Young]], were aware of this questionable classification.<ref>[https://www.cbsnews.com/news/lehman-cooked-books-before-collapse-report-finds/ Lehman Cooked Books before Collapse, Report Finds]. CBS News, March 12, 2010 </ref> Law firm [[Linklaters]] 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.<ref>{{cite news|url=http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article7059592.ece|title=British law firm cleared way for Lehman cover-up|accessdate=2010-12-22|date=March 12, 2010|newspaper=The Times|archiveurl=https://web.archive.org/web/20110611190608/http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article7059592.ece|url-status=dead|archivedate=2011-06-11}} </ref> 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.<ref>{{Cite web|url=http://www.dailyfinance.com/2010/12/23/fraud-files-is-ernst-and-young-to-blame-in-lehman-bros-fraud/|title = Stock Portfolio & Tracker - Yahoo Finance}}</ref>
-===Examiner’s Report===
+===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]]. The report details the use of both "repo 105" and "repo 108" which are basically identical procedures, the first costing 5% and the second 8% 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.
+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]]. 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]] (SEC)  sent letters to [[chief financial officer]]s of nearly two dozen large financial and insurance companies asking about their firms' use of [[repurchase agreement]]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]], indicated that the agency was trying to determine whether other companies used similar techniques as the "repo 105" used by Lehman Brothers.<ref>[https://www.wsj.com/articles/SB10001424052702304370304575152040736357802  SEC Queries Firms on Repos], ''Wall St Journal'', March 30, 2010</ref>
+After the Examiner's report was published, the [[Securities and Exchange Commission]] (SEC)  sent letters to [[chief financial officer]]s of nearly two dozen large financial and insurance companies asking about their firms' use of [[repurchase agreement]]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]], indicated that the agency was trying to determine whether other companies used similar techniques as the "repo 105" used by Lehman Brothers.<ref>[https://www.wsj.com/articles/SB10001424052702304370304575152040736357802  SEC Queries Firms on Repos], ''Wall St Journal'', March 30, 2010</ref>
 ===Fraud charges===
-In response to the report, the auditors said that the transactions were accounted for in line with [[Generally Accepted Accounting Principles (United States)|Generally Accepted Accounting Principles]]. However, New York attorney general [[Andrew Cuomo]] filed charges against Ernst & Young in December 2010, alleging that the firm "substantially assisted... a massive accounting fraud" by approving the accounting treatment.<ref>[http://www.accountancyage.com/aa/news/1934026/-sued-lehmans-audit E&Y sued over Lehman audit], ''Accountancy Age'', December 21, 2010</ref> The ''Wall Street Journal'' drew attention to the increasing levels of fees that Ernst & Young had been paid by Lehman from 2001 to 2008.<ref>{{cite web |url=https://www.wsj.com/articles/SB10001424052748704259704576033540546160536?mod=WSJEUROPE_newsreel_business |title=Ernst Accused of Lehman Whitewash |accessdate= 2010-12-22 |author=Liz Rappaport, Michael Rapoport |date=December 21, 2010 |work= |publisher=Wall Street Journal |archiveurl=https://www.webcitation.org/query?url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052748704259704576033540546160536.html%3Fmod%3DWSJEUROPE_newsreel_business&date=2010-12-22 |archivedate=2010-12-22 }} </ref>
+In response to the report, the auditors said that the transactions were accounted for in line with [[Generally Accepted Accounting Principles (United States)|Generally Accepted Accounting Principles]]. However, New York attorney general [[Andrew Cuomo]] filed charges against [[Ernst & Young]] in December 2010, alleging that the firm "substantially assisted... a massive accounting fraud" by approving the accounting treatment, seeking $150 million.<ref>[http://www.accountancyage.com/aa/news/1934026/-sued-lehmans-audit E&Y sued over Lehman audit], ''Accountancy Age'', December 21, 2010</ref><ref>{{Cite web|url=https://www.forbes.com/sites/antoinegara/2015/04/15/ernst-young-settles-new-york-lehman-brothers-repo-105-deals/|title = Ernst & Young Settles with New York over Lehman Brothers Repo 105 Deals| website=[[Forbes]] }}</ref> 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.<ref>{{Cite web|url=https://www.forbes.com/sites/antoinegara/2015/04/15/ernst-young-settles-new-york-lehman-brothers-repo-105-deals/|title = Ernst & Young Settles with New York over Lehman Brothers Repo 105 Deals| website=[[Forbes]] }}</ref>
+The ''Wall Street Journal'' drew attention to the increasing levels of fees that Ernst & Young had been paid by Lehman from 2001 to 2008.<ref>{{cite news |url=https://www.wsj.com/articles/SB10001424052748704259704576033540546160536?mod=WSJEUROPE_newsreel_business |title=Ernst Accused of Lehman Whitewash|accessdate=2010-12-22|author=Liz Rappaport, Michael Rapoport |date=December 21, 2010|newspaper=Wall Street Journal|archiveurl=https://web.archive.org/web/20121111061108/http://online.wsj.com/article/SB10001424052748704259704576033540546160536.html?mod=WSJEUROPE_newsreel_business |url-status=live |archivedate=2012-11-11 }} </ref>
 ==Review of accounting treatment==
 The [[IASB]] and [[FASB]], senior bodies responsible for setting [[accounting standards]], met in April 2010 to review the accounting treatment for such repo transactions.<ref>[http://www.accountancyage.com/accountancyage/news/2260964/repo-accounting-review Repo accounting up for review], ''Accountancy Age'', April 8, 2010</ref>
-==Comparison to [[tobashi scheme]]s==
+==Comparison to tobashi schemes==
-Several writers have basically stated that Repo 105 was essentially a [[tobashi scheme]].<ref>{{Cite web|first=Dan |last=Duane |url=http://practicalstockinvesting.com/2010/03/14/the-lehman-report-and-repo-105/ |title=The Lehman Report, "Repo 105", and "tobashi" |website=Practical Stock Investing |date=March 14, 2010 |accessdate=July 27, 2014}}</ref><ref>{{Cite web|first=Tracy |last=Alloway |url=http://ftalphaville.ft.com/2010/03/23/181376/repo-ichi-zero-go/ |title=Repo ichi zero go? |website=FT Alphaville| date=March 23, 2010 |accessdate=July 27, 2014}}</ref>
+Several writers have stated that Repo 105 was essentially a [[tobashi scheme]].<ref>{{Cite web|first=Dan|last=Duane|url=http://practicalstockinvesting.com/2010/03/14/the-lehman-report-and-repo-105/|title=The Lehman Report, "Repo 105", and "tobashi" |website=Practical Stock Investing |date=March 14, 2010|accessdate=July 27, 2014}}</ref><ref>{{Cite web|first=Tracy |last=Alloway |url=http://ftalphaville.ft.com/2010/03/23/181376/repo-ichi-zero-go/ |title=Repo ichi zero go? |website=FT Alphaville| date=March 23, 2010 |accessdate=July 27, 2014}}</ref>
 ==See also==
 *[[Repurchase agreement]]
@@ Line 26: / Line 29: @@
 ==External links==
 * [https://web.archive.org/web/20111115193217/http://lehmanreport.jenner.com/ The Examiner Valukas's Report on Lehman's Repo 105 (Volume 3- Section III.A.4: Repo 105)]
-* [http://dealbook.blogs.nytimes.com/2010/03/12/the-british-origins-of-lehmans-accounting-gimmick/ The Origins of Lehman’s ‘Repo 105’]
+* [http://dealbook.blogs.nytimes.com/2010/03/12/the-british-origins-of-lehmans-accounting-gimmick/ The Origins of Lehman's 'Repo 105']
 [[Category:Accounting in the United States]]
 [[Category:Accounting scandals]]
 [[Category:Lehman Brothers]]
-[[Category:Ethically disputed business practices]]
 [[Category:Finance fraud]]