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!

And when pressured, this one admits the truth!

Watch and learn!

You are so screwed, America!

(CNSNews.com) - President Barack Obama told the American Medical Association yesterday that he believes single-payer health care systems have worked "pretty well" in some countries, but no major U.S. newspaper available in the Nexis database reported the president’s comment in their news stories about the speech.

However, three of the nation’s most prestigious newspapers—the Washington Post, the New York Times and the Los Angeles Times—did publish quotes from the president’s speech that artfully took language from both immediately before and after the president’s statement that single-payer systems work.

"I’ll be honest," Obama said in his speech to the AMA, "there are countries where a single-payer system works pretty well."
A search of the the terms "Obama," "single-payer," and "pretty well" in the "Major Newspapers" file of Nexis turned up no hits as of 3:00 PM on Tuesday, June 16.

Read the entire article on this 3 Major Newspapers Expunge Obama’s Words link.

America, you’ve been screwed by the American news media operations for a couple of centuries now. Problem for news outlets today is that we have tools like the internet to prove their bias and out-and-out fraud in their reporting.

ALL NEWS OUTLETS LIE OR WITHHOLD THE TRUTH!

Read this…

WASHINGTON | Asset sales came after meeting with Fed, Treasury chiefs

June 13, 2009

As U.S. stock markets plummeted last September, the Senate’s No. 2 Democrat, Dick Durbin, sold more than $115,000 worth of stocks and mutual-fund shares and used much of the money to invest in Warren Buffett’s Berkshire Hathaway Inc.

The Illinois senator’s 2008 financial disclosure statement shows he sold mutual-fund shares worth $42,696 on Sept. 19, the day after then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke urged congressional leaders in a closed meeting to craft legislation to help financially troubled banks. The same day, he bought $43,562 worth of Berkshire Hathaway’s Class B stock, the disclosure shows.

(AP)

Altogether, Durbin sold investments worth $116,000 in September. By Oct. 2, he had invested $98,046 in Omaha, Neb.-based Berkshire Hathaway, the form shows.

The Standard & Poor’s 500 index plunged 4.7 percent last Sept. 15 after the bankruptcy of Lehman Brothers Holdings Inc. and Bank of America Corp.’s government-engineered takeover of Merrill Lynch & Co. By the end of October, the index had fallen 22.6 percent.

"Durbin was doing what a lot of other people were doing, taking a look at their savings" and seeing it "start to tank and trying to preserve some level of wealth by getting out of the market," said his spokesman, Joe Shoemaker.

Shoemaker said Durbin didn’t capitalize on anything Paulson and Bernanke told congressional leaders at the Sept. 18 meeting.

Whatever information Paulson gave lawmakers wasn’t secret or classified and was disclosed publicly the next day, Shoemaker said.

Bloomberg News

And you keep voting these people in election after election.  You didn’t know that sometimes you screw yourself America?

Publius

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!