Home > The "Repo 105" Scam: How Lehman Fooled Everyone (Including Allegedly Dick Fuld) And How Other Banks Are Likely Doing This Right Now

The "Repo 105" Scam: How Lehman Fooled Everyone (Including Allegedly Dick Fuld) And How Other Banks Are Likely Doing This Right Now

By Tyler Durden

Created 03/11/2010 – 17:53

Presenting a detailed look at "Repo 105" – the next soundbite sure to fill the airwaves over the next weeks and months, as more and more banks are uncovered to be using this borderline criminal accounting gimmick to make their leverage ratios look better. This is the first time we have heard this loophole abuse by a bank, be it defunct (Lehman) or existing (everyone else). There should be an immediate investigation into how many other banks are currently taking advantage of this artificial scheme to manipulate and misrepresent their cap ratio, and just why the New York Fed can claim it had no idea of this very critical component of the Shadow Economy.

From the report:

Lehman employed off?balance sheet devices, known within Lehman as “Repo 105” and “Repo 108” transactions, to temporarily remove securities inventory from its balance sheet, usually for a period of seven to ten days, and to create a materially misleading picture of the firm’s financial condition in late 2007 and 2008. Repo 105 transactions were nearly identical to standard repurchase and resale (“repo”) transactions that Lehman (and other investment banks) used to secure short?term financing, with a critical difference: Lehman accounted for Repo 105 transactions as “sales” as opposed to financing transactions based upon the overcollateralization or higher than normal haircut in a Repo 105 transaction. By recharacterizing the Repo 105 transaction as a “sale,” Lehman removed the inventory from its balance sheet.

Lehman regularly increased its use of Repo 105 transactions in the days prior to reporting periods to reduce its publicly reported net leverage and balance sheet. Lehman’s periodic reports did not disclose the cash borrowing from the Repo 105 transaction – i.e., although Lehman had in effect borrowed tens of billions of dollars in these transactions, Lehman did not disclose the known obligation to repay the debt. Lehman used the cash from the Repo 105 transaction to pay down other liabilities, thereby reducing both the total liabilities and the total assets reported on its balance sheet and lowering its leverage ratios. Thus, Lehman’s Repo 105 practice consisted of a two?step process: (1) undertaking Repo 105 transactions followed by (2) the use of Repo 105 cash borrowings to pay down liabilities, thereby reducing leverage. A few days after the new quarter began, Lehman would borrow the necessary funds to repay the cash borrowing plus interest, repurchase the securities, and restore the assets to its balance sheet.

Lehman never publicly disclosed its use of Repo 105 transactions, its accounting treatment for these transactions, the considerable escalation of its total Repo 105 usage in late 2007 and into 2008, or the material impact these  transactions had on the firm’s publicly reported net leverage ratio. According to former Global Financial Controller Martin Kelly, a careful review of Lehman’s Forms 10?K and 10?Q would not reveal Lehman’s use of Repo 105 transactions. Lehman failed to disclose its Repo 105 practice even though Kelly believed “that the only purpose or motive for the transactions was reduction in balance sheet;” felt that “there was no substance to the transactions;” and expressed concerns with Lehman’s Repo 105 program to two consecutive Lehman Chief Financial Officers – Erin Callan and Ian Lowitt – advising them that the lack of economic substance to Repo 105 transactions meant “reputational risk” to Lehman if the firm’s use of the transactions became known to the public. In addition to its material omissions, Lehman affirmatively misrepresented in its financial statements that the firm treated all repo transactions as financing transactions – i.e., not sales – for financial reporting purposes.

And here is the Fed punchline, as it once again implicates Tim Geithner:

From 2003 to 2009, Treasury Secretary Timothy Geithner served as President of the Federal Reserve Bank of New York (“FRBNY”). The Examiner described to Secretary Geithner how Lehman used Repo 105 transactions to remove  approximately $50 billion of liquid assets from the balance sheet at quarter?end in 2008 and explained that this practice reduced Lehman’s net leverage. Secretary Geithner “did not recall being aware of” Lehman’s Repo 105 program, but stated: “If this had been a bank we were supervising, that [i.e., Lehman’s Repo 105 program] would have been a huge issue for the New York Fed.”

And even though the Fed should have been fully aware of any shadow transaction be they "matched book" repos or the "105 variety, nobody had any clue. Just who the hell was regulating banks???

Jan Voigts, who was an Examining Officer in FRBNY’s Bank Supervision Department, had no knowledge of Lehman removing assets from its balance sheet at or near quarter?end via a repo trade treated as a true sale under a United Kingdom opinion letter.

Arthur Angulo, who was a Senior Vice President in FRBNY’s Bank Supervision department, likewise was unaware that Lehman engaged in repo transactions at quarter?end, under a United Kingdom true sale opinion letter, where the assets would be returned to Lehman’s balance sheet following the end of the reporting period. Angulo said that the described repo transactions appeared to go “beyond other types of [permissible] balance sheet management." Angulo also said that he would have wanted to know about off?market transactions where Lehman accepted a higher haircutthan a repo seller normally would accept for a certain type of collateral.

Thomas Baxter, FRBNY General Counsel, had no knowledge of Repo 105 transactions, either by name or design. Baxter was generally aware of firms using quarter?end and month?end “balance sheet window?dressing,” but did not recall this being an issue linked to Lehman specifically.

Stunningly, nobody at the SEC was aware of Lehman’s Repo 105 program. And guess what: NEITHER DID DICK FULD. This is unbelievable – the criminality reaches to the very top, yet the very top denies all knowledge.

Richard Fuld, Lehman’s former Chief Executive Officer denied any recollection of Lehman’s use of Repo 105 transactions. Fuld said he had no knowledge that Lehman treated any kind of repo transaction as a true sale or that Lehman ever removed from its balance sheet assets transferred in a repo transaction. In addition, Fuld did not recall having seen any reports referencing the amount of the firm’s Repo 105 activity. Fuld further stated that he did not know that Lehman removed approximately $49 and $50 billion in inventory off its balance sheet at quarter?end
through the use of Repo 105 transactions in first quarter 2008 and second quarter 2008, respectively. Fuld said, however, that if he had learned that Lehman was temporarily cleansing its balance sheet of assets at quarter?end through Repo 105 transactions, it would have concerned him.

Alas it seem Fuld is blatantly lying:

Fuld’s denial of recollection must be weighed by a trier of fact against other evidence. Fuld recalled having many conversations with his executives about reducing net leverage and emphasized to the Examiner how important it was for Lehman to reduce its net leverage. The night before the March 28, 2008 Executive Committee meeting, Fuld received materials for the meeting, including an agenda of topics including “Repo 105/108” and “Delever v Derisk” and a presentation that referenced Lehman’s quarter?end Repo 105 usage for first quarter 2008 – $49.1 billion.  The
materials also were forwarded by Fuld’s assistant to other Lehman executives. It appears that Fuld did not attend the March 28 meeting, but Bart McDade recalled having specific discussions with Fuld about Lehman’s Repo 105 usage in June 2008. Sometime that month, McDade spoke to Fuld about reducing Lehman’s use of Repo 105 transactions. McDade walked Fuld through the Balance Sheet and Key Disclosures document (reproduced in part below) and discussed with Fuld Lehman’s quarter?end Repo 105 usage – $38.6 billion at year?end 2007; $49.1 billion at first quarter 2008; and $50.3 billion at second quarter 2008.

[1]

Based upon their conversation, McDade understood that “Fuld knew, at a basic level, that Repo 105 was used in the firm’s bond business” and that Fuld “was familiar with the term Repo 105.”3524 McDade recalled that when he advised Fuld in June 2008 that Lehman should reduce its Repo 105 usage to $25 billion, “Fuld understood that this would put pressure on traders.”3525 McDade also recalled that “Fuld knew about the accounting of Repo 105."

Combing through the Appendix on what collateral was actually "sold" (only to be promptly bought back) in Repo 105s:

Most securities Lehman used in Repo 105 transactions were “governmental” in nature, implying a certain level of liquidity. While representing a relatively small percentage of Lehman’s total Repo 105 assets/securities, at times the nominal amount of non?”governmental” securities Lehman used in Repo 105 transactions was quite large. For example, as of February 29, 2008 (the end of Lehman’s first quarter 2008), Lehman utilized over $1 billion of highly structured securities, i.e., CLOs and CDOs, private RMBS, CMBS and asset?backed securities, in Repo 105 transactions. In the market environment that existed for Lehman in early 2008, these structured securities were likely relatively illiquid as indicated by declines in origination volumes, wider bid?offer spreads, and higher margin requirements.

[2]

In August 2008, just before it was over, the firm allowed $55 million, or seven securities, rated CCC to be included in a Repo 105 transaction.

[3]

The next chart makes it evident it that 105s were used simply to game the firm’s assets into quarter end (yellow highlights), by reducing overall asset for leverage ratio calculations.

[4]

That this scam was going unsupervised (just who the hell were the counterparties?) for many years, and that many banks are likely using it right now to fool investors, regulators, rating agencies, and the idiots at the FRBNY (who certainly also know about this), is beyond criminal. Yet that nobody will go to jail for this is as certain as the market going up another 10% tomorrow. A full investigation has to be conducted immediately into whether existing Wall Street firms, and in particular those who use Ernst & Young as auditors, are currently abusing public confidence via such transactions.

It appears Bank of America is intentionally failing to collect on the portion of its mortgage portfolio that is back by Uncle Sam.  Screwed again, America!

I have long suspected that it was only a matter of time before banks began to adjust their Collection efforts to reflect Government Guarantees on their loan portfolios.

Simply put, imagine you are a bank with $100 billion in loans. Of this, $20 Billion is guaranteed by the government, $80 billion is your own money. If you managed the collection organization responsible for servicing this debt wouldn’t you be just a wee bit tempted to make sure that your $80 billion was getting the priority?

The table below details the past 12 quarters of Total Loans for Bank of America along with the portion that is Noncurrent:

The Noncurrent percentage has jumped from 5.30% in Q3 to 6.75% in Q4. Quarter on Quarter there is another $12.44 Billion in Noncurrent loans.

The next table details the same 12 quarters and reviews what portion of the Noncurrent loans are guaranteed by the Government (er, you and me the taxpayer):

Bank of America has had a massive jump in the Noncurrent loans that are Government Guaranteed. The Quarter on Quarter jump is… wait for it… $11.40 Billion.

So, magically, the incremental $12.44 Billion that has become Noncurrent Quarter on Quarter at Bank of America has a guarantee on $11.40 Billion. Nearly 92% of the jump in their Noncurrent loans are covered by us, the taxpayer.

This is no conspiracy theory discussion – these are cold hard facts supporting what any reasonable actor would do in the situation. If the government is going to cover my losses on a portion of my loan portfolio I can damn well guarantee you I’d be moving my best collectors to the portfolio I’m responsible for. The government can have my new hires, my undesirables, my slow workers, etc…

I highly doubt that we’ll ever hear about this, but this is yet another massive shift from the taxpayer to the bank!

Screwed Again!

Publius

If you really take the time to ask these good questions, and others, some easy research will educate you to the truth. Yes, the truth, and NOT what is often referred as “common knowledge”.

When it comes to Uncle Sam, the truth is what is actually written in the law (not what isn’t), what is written in the regulations implementing the law, and of course, what a conniving lawyer can get a court to say what the law is.

In every day American language, money is what ever you want to use to exchange goods and services. If chicken noodle soup cans can be used to pay your neighbor’s kid for cutting your lawn, then those soup cans are “money”.

We started out in this country using aside from the barter system coin, both gold and silver, but of course, the banking community took care of that and conveniently exchanged (with the help of Franklin Delano Roosevelt) real “lawful money” for paper money, or what is lawfully called “currency”. Yes, the dollars you have in your pocket is lawfully, “U. S. Government currency”. Now, if I pay my neighbor’s kid for cutting my lawn with the government’s currency, and the kid accepts it as a “tender in payment”, then I’ve fulfilled my obligation and paid the kid.

But the government doesn’t stop there. It goes further. Read on…

12 USC Sec. 411 TITLE 12 – BANKS AND BANKING CHAPTER 3 – FEDERAL RESERVE SYSTEM SUBCHAPTER XII – FEDERAL RESERVE NOTES Sec. 411. Issuance to reserve banks; nature of obligation; redemption Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal reserve banks through the Federal reserve agents as hereinafter set forth and for no other purpose, are authorized. The said notes shall be obligations of the United States and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues. They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank.

So, if you read the emphasized words in the quote in one sentence and translate it to every day American English, it will read as this:

An unelected private group of bankers, here now and now forever, sell obligations (debt instruments) of the United States government (to the United States) and will pay this debt with revenue from public taxes (from you and me)

And Oh, by the way.  If you use it because you thought it was “money”, well hey, that’s your problem!

There’s more to this story.  I just gave you this snippet just to make you think for yourself.  Can you at least question on your own, using your own smarts and not what is spoon fed by government schools and their media proponents?

Think!  Just think!  Your money is a DEBT!  Not an asset (gold and silver) that it used to be.

So look again.  Which is it?  Money or Debt?

Perhaps you’ve been getting screwed by Uncle Sam because you didn’t know that you’ve been using dollars as both-Money and Debt!

Here’s a quote:

“…citizens now have a responsibility: “The most important single thing that can be done now is for each one of us to continue normal, reasonable buying.” Everyone should buy their normal needs, “put aside a small percentage for savings, and buy [as] much of the additional articles which contribute to general comfort and enjoyment as can be properly afforded”; this will lead to improved business.”

What did the Citizens do?  Most saved their money and spent as little as possible.  What was their reward? 

Roosevelt becomes the next constitutional dictator, closes the banks down, and steals your grandparents money they saved and replaced them with “paper notes” that they can’t redeem in gold anymore, starts the great depression.

“Gee, my grandparents got screwed by Uncle Sam too?”  You betcha!!

On whom did you think he got some practice in?

Oh, and the quote came from whom?

R. Lamont, Commerce Secretary, 1930.  The government no less!  What a shock, I know.

So tell me America, are you going to listen to the government again?

Hmm, yeah.  You will.  You’ve been screwed so long you can’t tell the condom from the rubber.  I mean the forest from the trees!

Publius

Should the United States ever adopt the same accounting standards for itself that it foists upon private enterprise, its financial reports would leave the majority of Americans in a state of shock. Americans would have tremendous difficulty recovering from the magnitude of misrepresentation that is going on now. Accounting isn’t just a game either; there are material, legal, and ethical consequences when it’s done wrong.

As an example of the accounting fictions used daily to dupe the public, consider the US dollars the United States claims to own in the Treasury "coffers." Now brace yourself, because this explanation is going to remind many readers of Alice tumbling down the rabbit hole.

All of the interests the United States has in US dollars are cancelled out by liabilities on the Federal Reserve Balance Sheet, so that they have no effect of ownership.

The United States owns no domestic money when its off-budget entities are incorporated into its balance sheet. The Treasury general fund is an accounting fantasy. So this begs the question; what happens to tax dollars?

Read more how the federal government does not account for its money as federal law says your businesses have to account their money.

Click this "The United States owns no domestic money." and be amazed.

Publius

By itself, the Troubled Asset Relief Program (“TARP”) is a huge program at $700 billion. As discussed in SIGTARP’s April Quarterly Report, the total financial exposure of TARP and TARP-related programs may reach approximately $3 trillion. Although large in its own right, TARP is only a part of the combined efforts of the Federal Government to address the financial crisis. Approximately 50 initiatives or programs have been created by various Federal agencies since 2007 to provide potential support totaling more than $23.7 trillion.

Huh? How does $700 Billion become $23.7 Trillion? Only in America!

Click this $23.7 Trillion Dollar Heist link.

You know, this is starting to add up to real money!

This little video, shows Democrats defending an out-of-control Freddie Mac, and Republicans trying (rather weakly, I believe) to remedy a perceived fault in Freddie Mac.

It’s a little “then & now” to show you the overwhelming ability of elected officials to lie right to our faces when the truth is but a video away.

You are so screwed America!

Under considerable pressure from the American people Congress finally demanded that AIG come clean as to where all that money pouring into that uniquely constructed black money hole was really going. With the total amount of funds being forked over to AIG approaching $180 billion dollars some citizens were getting worked up about all of that money going so quickly to money heaven.

Read more… AIG Bailout and Money Laundering

It seems as though that the government not only prosecutes money launderers, the government passes laws authorizing it!

America, you are so Screwed!!

Publius

By Diana West

http://www.JewishWorldReview.com | Congratulations, American taxpayer. Finally, something has roused you from the stupor, the torpor, the catatonia of lingering Obamania.

It was those bonuses. Those AIG bonuses of $165 million. Because that’s your money, your millions of dollars paid out to the same incompetents who got us into this mess, right? Sure. But you’re on the case now.

You’re on top of it. Gave your representatives in Washington a piece of your mind, too. Nobody fools the American taxpayer like that and gets away with it, right?

Sigh. Dear American Taxpayer: If only you knew how easily you have been gulled, played like a greenhorn, a rube, a Madoff mark. This $165 million scandal may have unleashed the first genuine feeding frenzy of the Obama administration, but it is a distraction, a sideshow, a smokescreen over what is really going on: namely, the Bush-initiated, Obama-Pelosi-Reid-led incursion into the private sector designed to nationalize the workings of the economy in order to take over, capture and enslave enough of the free market to transform the fundamental character of this nation.

Remember what our 44th president said back in 1995: "In America," he told the Chicago Reader, "we have this strong bias toward individual action. You know, we idolize the John Wayne hero who comes in to correct things with both guns blazing. But individual actions, individual dreams are not sufficient. We must unite in collective action, build collective institutions and organizations."

That is exactly what’s going on behind the $165 million smokescreen — truly, a masterpiece of misdirection. I have no reason to believe it was planned, although I am open to suggestion. After all, it is notable that the nearly $4 billion in Merill Lynch bonuses, doled out just before the dying firm’s Jan. 1 takeover by Bank of America (which received bailout funds partly due to the takeover), failed to churn the same national waters.

But I digress.

Up in arms about the AIG bonuses, the body politic remains calm, cool, practically collected about the trillions of taxpayer dollars Obama & Co. are drawing on to buy out the economy, expanding the population’s dependency on Biggest Government in the process. There are simply too few of us seeing red, for example, over the surprise Federal Reserve decision (announced this week at the height of Bonus Rage) to pump another $1 trillion into the economy, money the International Herald Tribune said the Fed "will create out of thin air."

Still, there is good in Bonus Rage. It’s a sign of life. As the president said this week, "I don’t want to quell anger. People are right to be angry. I’m angry. What I want us to do is channel our anger in a constructive way." My sentiments exactly (this must be a first), although I’m sure we differ when it comes to what constitutes a "constructive way."

For starters, Bonus Rage should finally drive Democratic Sen. Christopher Dodd from office when he runs for re-election in 2010 — unless he peels off the blindfold and sees the error of his ways sometime sooner. Dodd, after all, is the largest recipient of AIG largesse, "most of it," as John Batchelor reports, "from a dozen AIG executives whose bonuses are protected under the legislation Dodd now admits he wrote."

Ouch. For several days this week, the influential Senate Banking chairman — he who never met a sweetheart deal he didn’t find irresistible — lied about his role in writing legislation that protects AIG’s bonuses. Repeatedly, Dodd insisted that he had had nothing to do with the bonus-protection language in the, ahem, Dodd Amendment until, mirabile dictu, he remembered that he had. As he finally told CNN on Wednesday evening, he actually wrote the provision himself with, he added, input from the administration.

Did I mention President Obama was the No. 2 recipient of AIG largesse? Dodd received $103,100. Obama received $101,332. Now Dodd, after being scorched by these disclosures, says he’ll give his AIG money back. Will Obama? Does it matter? The proof is already in the pudding, even if the burnt offerings go back to the kitchen.

Fume, baby, fume. But there’s more. The nationalization of AIG is not just bankrupting the country by throwing billions of our dollars at AIG’s toxic assets. The nationalization of AIG is forcing the American taxpayer to support a very different kind of toxic asset. I refer to AIG’s promotion of Sharia (Islamic law) in its Takaful division, the Sharia-compliant insurance sector of AIG. Since we the people own 80 percent of AIG, we the people now promote Sharia, too.

Don’t believe me? Takaful insurance, our very own AIG Takaful Web site explains, "avoids prohibited elements in accordance with the Sharia law," adding: "We do not invest in anything that is haram (prohibited under Sharia). We do not borrow, lend or enter into any financial transaction that is unIslamic."

At the very least — aside from promoting from the law of the Koran, Osama bin Laden, the Taliban, the mullahs of Iran, the clerics of Saudi Arabia (not to mention Afghanistan, whose Sharia-supreme "justice" system recently upheld a journalist’s 20-year prison sentence for "blasphemy") — taxpayer support for AIG is by definition sectarian and therefore in violation of the Establishment Clause of the Constitution.

It is on these grounds — that the American taxpayer is now directly funding sectarian Islamic religious activities — that a lawsuit, conducted by the Thomas More Law Center, has been filed against the government. Recently, the Justice Department, another U.S. taxpayer-funded entity last time I checked, entered the case to defend the AIG bailout, filing a motion to dismiss, the Thomas More Law Center notes, based on this being a time of "crisis."

You better believe this is a time of crisis — but not the crisis envisioned by Justice officials charged with safeguarding gross government fecklessness. Only two of our elected officials — Reps. Sue Myrick, R-N.C., and Frank Wolf, R-Va., and bless them for it — have publicly decried the government’s AIG Sharia-bailout; that’s a crisis. Chump change bonuses arouse the wrath of the nation — not the nefarious movement to nationalize the marketplace; that’s a crisis, too. The American people are angry, good. But we need to understand there are far more important things to be angry about.

JWR contributor Diana West is a columnist for The Washington Times.

While you and I are continuously harassed by the IRS to pay “Our fair share”, the one entity responsible for the boom-and-bust cycles of our economy, doesn’t pay one thin dime of income tax on billions of dollars of income it earns every year.

But, “why should they, they’re the government”, you ask, no?

Um, no, they are not the government.  They are a banking corporation created by Congress.  And if they were “government”, why would they need a special exemption put into law?

Read the statute yourself:

U.S. Code
12 USC Sec. 531 01/16/96

-EXPCITE-
TITLE 12 – BANKS AND BANKING
CHAPTER 4 – TAXATION
SUBCHAPTER I – FEDERAL RESERVE BANKS

-HEAD-
Sec. 531. Exemption from taxation

-STATUTE-
Federal reserve banks, including the capital stock and surplus
therein and the income derived therefrom, shall be exempt from
Federal, State, and local taxation, except taxes upon real estate.

So keep slaving away at your jobs, keep paying “your fair share”, and while you’re doing so, private companies and investors, both here in America and Off-shore (foreigners), are laughing all the way to the bank!

The “I don’t have to pay my fair share” bank known as the Federal Reserve knows you don’t care that your sweat and energy goes to line their pockets!

America, you are so screwed!