When Window Dressing Becomes Fraud: Repo 105 Was Much More Than Window Dressing 101


The explosive revelations about Lehman's use of so-called "Repo 105" (and "Repo 108") repurchase arrangements improperly accounted for as sales transactions, coupled with the (not necessarily improper) use of the proceeds to "window dress" the quarter-end balance sheets by paying down other debts, is receiving wide notice.

Taken as a whole, the two-step process engaged in by Lehman would seemingly be a deliberate attempt to conceal, inter alia, its holdings of risky, perhaps value-impaired inventory, its large debt obligations for repurchasing that inventory, and its high debt/equity leverage ratio. The fact that the nominal 5% or 8% spreads were shown as forward purchase derivative assets should have been a clear indicator that secured borrowings, not sales, had occurred, and the strange fact that British-law legal opinions were obtained to support U.S. GAAP financial reporting, were but two of the red flags that should not have escaped scrutiny.

Given the efforts to identify the Lehman bankruptcy as having been a key cause of the recent financial crisis that affected not merely the United States, but much of the developed world, "Repo 105" is likely to serve as yet another costly lesson for the auditing profession.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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