Excessive Use of Repo 105 is White Collar Crime

Joshua M Brown
March 13th, 2010

I won't bore anyone with a two page dissembling of Lehman's use of Repo 105 which we learned about from the report on its demise this week. Rather, this post will simply be a sledgehammer that slams the obvious into the side of the blogosphere.

For the uninitiated, the scam that was being perpetrated by Lehman Bros senior execs and their auditors isn't a new one, it was just pulled off on a massive scale, costing investors and the economy dearly.

Repo 105 was an accounting trick that allowed Lehman to temporarily shift $50 billion in liability off of their balance sheet just in time to show investors a quarterly report demonstrating reduced leverage. Once the quarter was closed, Lehman would then repurchase (repo) that debt back onto its balance sheet. And they did this several times.

This window dressing allowed the company to fake solvency and sucker in investors, both in the stock market and, the company had hoped, from the sovereign wealth funds it was flirting with.

They would hide tens of billions of dollars temporarily and then trot out "Rock Star CFO" Erin Callan to lie to the world on television about how everything in Lehmanland was just fine.

Auditors Ernst & Young, the Lehman Bros Board of Directors and especially the Senior Executives who signed off on this practice have committed a crime. This is securities fraud. Their culpability ranges from negligence to outright thievery. It may be Ivy League caliber securities fraud, but it is fraud nonetheless. And if technology or industrial executives had engaged in this exact same behavior, they'd be in court defending themselves right now.

Not much more to it.

Now we'll see if Sarbanes-Oxley has any actual teeth or if it turns out to have only been an Enron band-aid all along.

Excessive Use of Repo 105 is White Collar Crime

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