Can anyone tell me why repo 105 is an accounting gimmick? Apparently almost all banks are using repo and resale agreements in A&L to get short term funds. It seems like they are just picking on Lehman. All the big banks are doing it.
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Because it was booked as a SALE through an accounting loophole, not as a FINANCING as repo transactions are usually accounted for. The difference is that in the first case, billions in cash appear on the balance sheet virtually out of nowhere temporarily leading to a boost in cash levels and a decrease in leverage. In the second case, the increase in Cash is counteracted by an increase in liabilities of the same amount, leading to leverage that is unchanged. Lehman utilized the first transaction, while most banks usually utilize the second on a day-to-day basis to meeting funding requirements. One is accounting fraud, whereas the other one isn't.
Thema, Thanks for clearing this up for me. Silver banana for you!
There has been some articles around this topic recently, this one being one: http://online.wsj.com/article/SB100014240527487034471045751181506517900…
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