'Repo 105' at the heart of Lehman report

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By Sean Farrell

Mr Valukas finds what he calls "colorable claims" that could support a court decision against the former executives and the accountancy firm.

At the heart of his findings is "Repo 105", an accounting ruse that was instead used to try and keep the bank alive.

Repo 105 was the name used at Lehman for what its own staff called an "accounting gimmick". The bank had used the trick since 2001, but what started as "a lazy way of managing the balance sheet" became crucial as the bank tried to survive the credit crisis.

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. Ordinarily the assets would still be included on the bank's balance sheet, but because they were valued at 105pc 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.

The bank stuck roughly to a limit of $25bn of Repo 105 until early 2007 but increased its use so that in the first and second quarters of 2008 Lehman was hiding $50bn of assets from investors, the government, rating agencies and regulators. For the second quarter, Lehman reported a net leverage ratio of 12.1 when the true figure was 13.9 - and a difference of 0.1 was regarded as material.

In Mr Valukas's words, Lehman was "trumpeting" its reduced leverage as it reported a massive $2.8bn second-quarter loss without revealing that it had bought the assets back once its books were signed off.

'Repo 105' at the heart of Lehman report

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