Scribd Logo
Upload

Welcome to Scribd!

  • 44 views

    Bol

    Uploaded by

    Anindya Basu
    Lehman Brothers filed for bankruptcy in 2008, which sent the global financial system into crisis. An accounting loophole called Repo 105 allowed Lehman Brothers to misrepresent its sales and financial health by removing $50 billion in assets from its balance sheet. This manipulation displayed healthy financial statements and risk ratios, enabling Lehman Brothers to obtain more loans and disguise its toxic assets until it collapsed. The accounting loophole and lack of proper regulation contributed to the financial crisis.

    Copyright:

    © All Rights Reserved
    Download as TXT, PDF, TXT or read online from Scribd

    Bol

    Uploaded by

    Anindya Basu
    44 views1 page
    Lehman Brothers filed for bankruptcy in 2008, which sent the global financial system into crisis. An accounting loophole called Repo 105 allowed Lehman Brothers to misrepresent its sales and financial health by removing $50 billion in assets from its balance sheet. This manipulation displayed healthy financial statements and risk ratios, enabling Lehman Brothers to obtain more loans and disguise its toxic assets until it collapsed. The accounting loophole and lack of proper regulation contributed to the financial crisis.

    Original Title

    bol

    Copyright

    © © All Rights Reserved

    Available Formats

    TXT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Lehman Brothers filed for bankruptcy in 2008, which sent the global financial system into crisis. An accounting loophole called Repo 105 allowed Lehman Brothers to misrepresent its sales and financial health by removing $50 billion in assets from its balance sheet. This manipulation displayed healthy financial statements and risk ratios, enabling Lehman Brothers to obtain more loans and disguise its toxic assets until it collapsed. The accounting loophole and lack of proper regulation contributed to the financial crisis.

    Copyright:

    © All Rights Reserved
    Download as TXT, PDF, TXT or read online from Scribd
    Download as txt, pdf, or txt
    44 views1 page

    Bol

    Uploaded by

    Anindya Basu
    Lehman Brothers filed for bankruptcy in 2008, which sent the global financial system into crisis. An accounting loophole called Repo 105 allowed Lehman Brothers to misrepresent its sales and financial health by removing $50 billion in assets from its balance sheet. This manipulation displayed healthy financial statements and risk ratios, enabling Lehman Brothers to obtain more loans and disguise its toxic assets until it collapsed. The accounting loophole and lack of proper regulation contributed to the financial crisis.

    Copyright:

    © All Rights Reserved
    Download as TXT, PDF, TXT or read online from Scribd
    Download as txt, pdf, or txt
    You are on page 1of 1

    There are lies, damned lies and investment bank balance sheets.

    This year marks 12 years since financial services firm Lehman Brothers filed for
    bankruptcy in the US on Monday morning 15 September 2008.

    It's always been a puzzle how Lehman Brothers was able to spout reassuring figures
    on declining indebtedness and healthy underlying trends until the day it collapsed,
    sending the global financial system into a near-apocalyptic meltdown.

    While corporate greed and de-regulated financial markets played a big role in what
    led to the crash, an accounting loophole called Repo 105 played a major role in
    enabling Lehman Brothers to misrepresent its sales and the financial fitness of the
    company.

    Back in 2001 a new US accounting standard SFAS 140 first enabled Lehman Brothers to
    use Repo 105, which allowed Lehman�s to book repurchase agreements as sales rather
    than temporary transactions. While the practice was being used from 2001, it was
    only in 2007 that Lehman�s executives started to use the practice more regularly
    removing over $50bn of assets from the balance sheet.

    Step 1: Purchasing government bond from other bank using SFU in United States.
    Step 2: Prior to the closing of the quarter, the US nit would transfer the bond to
    a London affiliate, known as Lehman Brothers International (Europe) with the legal
    consultation of London based law firm, Linklaters.
    Step 3: The London affiliate gave assets to its counterparty and received cash and
    agreed to buy back the assets at the beginning of the next quarter at a higher
    price. Essentially, the assets given were at least 105 percent of the cash
    received.
    Step 4: Amount obtained was balanced out as pay offs towards LB�s worrisome
    liabilities.
    Step 5: This manipulation displayed a rosy picture on their balance sheets,
    financial statements and the corresponding leverage and other risk ratios. These
    healthy financial statements were issued to investors and healthy ratios were
    displayed to regulators and general public.
    Step 6: Armed with such a healthy and strong financial statements, LB could manage
    to get more loans from other banks and lending institutions
    Step 7: To close the trick, LB would repurchase the securities from their London
    Affiliate at 105 percent of the values of the assets.

    Our findings have also raised the question of the appropriateness of accounting
    principles. This
    also led to FASBs revision of the accounting requirements for factoring of
    receivables as sales or
    loans. What needs to be determined is how widespread similar conventions were in
    effect for
    hiding toxic assets and liabilities by other investment firms.

    This study has also raised the question of the role of auditors to find and
    disclose material
    transactions that may lead to misstatements and their responsibility to protect the
    public.
    Lack of appropriate regulation and oversight may have contributed to the ensuing
    dilemma of the
    sub-prime meltdown, resulting in the bankruptcy of Lehman, the financial collapse
    and loss of
    jobs and income for many Americans.

    You might also like