Repo 105

March 23, 2010
“Repo 105″ was the term used at Lehman Brothers for what its own staff labeled an “accounting gimmick”. The bank had used the trick since 2001 to manipuate its balance sheet.

At the end of each quarter, Lehman sold some of its loans and investments temporarily to other financial institutions for cash using short-term repurchase (or “repo”) agreements and then bought them back a few days later. The assets would normally still be included on the firm’s balance sheet, but because they were valued at 105% or more of the cash received, the transactions counted as a “sale” under accounting rules and Lehman was able to report a less risky balance sheet.

JPMorgan also employed the same practice between 2001 and 2005. However, unlike Lehman, JPMorgan’s transactions were done in very small amounts and were fully disclosed.

The video below does a pretty good job at explaining, in layman’s terms, how a repo works.

Featured Video:

Its the title of a dubious financing transaction that Lehman Brothers used in 2008 to make its balance sheet look healthier than it really was. Senior Editor Paddy Hirsch takes a stab at explaining how Repo 105 worked.

Hear more about the fallout of the Lehman report at Marketplace:

http://marketplace.publicradio.org/