What Was Repo 105?

Repo 105 was a type of loophole in accounting for repurchase (repo) transactions that the now-extinguished Lehman Brothers exploited in an attempt to hide true amounts of leverage during its times of trouble during the 2007-2008 financial crisis. In this 澳洲幸运5官方开奖结果体彩网:repurchase agreement, since updated to close the loophole, a company could classꦯify a short-term loan as a sale and subsequently use the cash proceeds from the "sale" to reduce its liabilities.

Understanding Repo 105

In the repo market, a firm can gain access to excess funds of other firms for short periods, usually overnight, in exchange for 澳洲幸运5官方开奖结果体彩网:collateral. The firm that borrows the funds promises to pa🌟y back the short-term loan with a small amount of interest; the collateral typically never changes hands. This is what allows firms to record the incoming cash as a sale—the collateral is assumed to have been "sold off" and bought back later.

Lehman Brothers and Repo 105

Repo 105 made headlines following the collapse of Lehman Brothers. It was reported that Lehman grasped for this accounting maneuver to pay down $50 billion in 澳洲幸运5官方开奖结果体彩网:liabilities to reduce leverage on their balance sheet. 

Technically, according to the repo rule as written then, and to the stretched imagination of CFO Erin Callan and her underlings, their Repo 105 transactions allowed the recognition of sales instead of borrowings, kept the borrowings off the balance sh🀅eet and did not require disclosure of the debt obligations. 

In reality, given the situation at the time, they were not valid in practice. Under the rule that existed, a repo would be reported as a sale or financing, depending on whether a company retained effective control over the collateralized assets for the short-term loan. If a company had the ability to repurchase the assets, it would be a financing transaction; if it did not, it ♒would be a sale. 

In the Repo 105 transactions, Lehman claimed it gave up effective control because it received only $100 for each $105 in posted collateral (hence the "105"). Thus, the investment bank stated, they were sale transactions that generated proceeds for leverage reduction.

Special Considerations

Having learned a valuable lesson about how 澳洲幸运5官方开奖结果体彩网:Wall Street will find a way to abuse an accounting rule, the 🌃澳洲幸运5官方开奖结果体彩网:Financial Accounting Standards Board (FAꦛSB) issued ASU No. 2011-03, "Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements."𓆏 

The rule has been improved upon, the FASB said in a press release, "by eliminating consideration of the transferor's ability to fulfill its contractual rights and obligations from the criteria in determining effective control."