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. 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, 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
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 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.
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.
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. The Wall Street Journal drew attention to the increasing levels of fees that Ernst & Young had been paid by Lehman from 2001 to 2008.
Review of accounting treatment
Comparison to tobashi schemes
Several writers have stated that Repo 105 was essentially a tobashi scheme.
- 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 2010-12-22. Retrieved 2010-12-22.
- SEC Queries Firms on Repos, Wall St Journal, March 30, 2010
- E&Y sued over Lehman audit, Accountancy Age, December 21, 2010
- Liz Rappaport, Michael Rapoport (December 21, 2010). "Ernst Accused of Lehman Whitewash". Wall Street Journal. Archived from the original on 2010-12-22. 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.