It doesn’t often take banks too long to find loopholes in legislation they don’t agree with. Surely, it will be an issue to contend with as the administration works toward financial overhaul. A reminder of this comes in the form a report issued by the bankruptcy examiner of Lehman Brothers.
After approaching collapse in 2008, Lehman skewed the appearance of account to data in order to reallocate $50 billion in assets off its books. Lehman reinterpreted accepted accounting rules of repo transactions in order to push the books in their favor.
Lehman is well practiced in manipulating repo rules, they have been it since 2001, though on more minor transactions or “Repo 105” deals. These deals provide repo counterparties with collateral approximated 105 or more percent of the borrowed capital.
The investment bank decided upon the 105 percent figure in interpretation of a guideline suggesting events when a transfer of financial assets can be handled as a sale. If they could act as though the deals behaved as asset sales, Lehman would appear to be using less borrowed capital. Lehman was able to recognize this as illegal and sought legal opinions overseas.
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