Whiteboard repo 105
That was a great way to explain it.
Thanks for your efforts on explaining these financial concepts. I must say that a lot of this is sounding familiar from the Enron days. In fact, as I recall, Enron seemed to have tried a similar trick with Merill-Lynch in the Nigerian Barge scandal? Not that you have the time, but it would be fascinating to compare the tricks of the accounting scandals of 10 years ago to the stuff that happened in the Financial Crisis.
Can anyone post the journal entries that happen when there is a "repo 105" transaction or a "repo" in general?
I think the idea was primarily (1)to replace securities and other assets with cash, improving liquidity ratios on the balance sheet; and (2)record additional sales for the quarter, regardless of profitability. Clearly, a strategy born of desperation. I see that Dick Fuld considers that he is exonerated by the examiner's report which seems a bit, shall we say, counter-intuitive...
Echoing question from Jim Lamb above - why was there not a $5 loss, and therefore damage to income statement and balance sheet? Thanks.
2 questions - if if was accounted for as a sale - wouldn't the sale of $105 in assets for $100 result in a $5 loss in the quarter in question (thereby hurting its income statement)? And, second, if it is selling a $105 in assets and only receiving $100 in assets in return, wouldn't this make its balance sheet appear weaker, not better, as it just lost $5 in assets?
Regarding your discription of repo 105, a couple of questions:
Why was it necessary to get an opinon from a British law firm? No matter what Lehman legal entity did the transaction would it not ultimately ( in consolidation be governed by US GAAP ?
Also if Lehman was recogognizing the repo as a sale, would gain or loss also been required to be recognized?
Great Video. Yet another accounting scandal!
Thanks so much man, really appreciate you work in this section!
Sounds just like going to your friendly pawnbroker. But he/she usually charges more interest.
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