Repo 105 is an accounting gimmick used by investment bank Lehman Brothers to reduce its net leverage ratio. For these transactions, the bank would temporarily mortgage assets to secure short term financing to pay off its debts. However, such transactions were categorized as “repurchase” instead of “sales”. By doing so, the firm temporarily removed some lower-rated assets from its balance sheets and obtain funds to pay off some debts. This was done near the quarter-end of a financial year to temporarily boost its financial reports, creating a misleading portrayal of the bank’s financial health. When exposed, this incident sparked turmoil in the American banking system.
Watch the video below to better understand Repo 105!
How could such transactions go unnoticed for years? And why were the top executives not held responsible? These transactions were clearly done to deceive investors, who suffered from the swift collapse of the bank. And unlike most of the bank’s employees, whose livelihoods were threatened due to the it’s collapse, the top executives were receiving huge paychecks that guaranteed their financial stability. This incident highlights the need for diligence in corporate governance, and the importance of financial transparency to enforce a company’s integrity and market stability.
