Thursday, March 22, 2018

Lehman Brothers Used “Repo 105” to Mislead Balance Sheets

August 26, 2015 by · Leave a Comment 

After more than a year of filing one of the biggest bankruptcies in the history of US, the defunct investment bank Lehman Brothers has been put into scrutiny once again as audit officials discovered misleading balance sheets that led to the firm’s bankruptcy.

Accordingly, Lehman Brothers used an accounting manipulation known as “Repo 105” or “repurchase and resale” to hide the true health of its balance sheets to the investing public. Now how did Lehman do that?

Lehman Brothers manipulated some of its accounting rules to classify certain assets as sold even though it was not yet considered as sold since they are still obliged to repurchase it at a later date. These assets, upon being considered as sold, disappeared in their balance sheets and use the cash proceeds to temporarily pay down their huge debts causing credit agencies to either upgrade or maintain their existing credit ratings.

Some of Wall Street companies use this type of accounting tactic to beautify their balance sheets to look better in the eyes of investors. Investigations are now ongoing on Lehman’s books about this $50 billion amount that is subject of the “Repo 105” accounting manipulation. Lehman executives and its auditor fim Ernst & Young are now being asked for several questions for being negligent about this tactic of Lehman.

I guess this is the same accounting manipulation done by another huge bankruptcy filed in US in the case of Enron. I just hope that the US Government will implement stricter rules on transparency of Wall Street companies to help prevent another possible collapse like the size of Lehman Brothers which caused a domino effect causing failures of other banks and companies.

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