Lehman, the failed investment bank whose 2008 collapse shook the world financial system, is in the spotlight again over the allegedly improper use of repos to understate leverage. The allegations were brought to light in the firm's bankruptcy examiner's report.
Lehman is accused of misusing a common financial instrument for the purpose of altering its balance sheet.
Firms commonly rely on repurchase agreements, or repos, to borrow money. These are typically short-term transactions in which the borrower delivers a security to the lender and receives a certain amount of cash, with the agreement to later repurchase the security for the original cash amount plus interest.
Normally, the security is counted as collateral and thus remains on the firm's balance sheet.
At the end of a quarter, however, Lehman would use legal maneuverings to count repos as sales. Thus, the company was able to state cash on its balance sheet instead of the securities, even though they planned to repurchase the securities in the near future.
Lehman did this in order to understate its leverage.
In a Bloomberg interview, Brad Hintz, a former CEO of Lehman who left years before the transactions took place, called the practice shenanigans.
It was clearly an accounting technical approach in order to bring a balance sheet down, said Hintz,
It wasn't done at the other firms, he added.
The examiner's report called the transactions balance sheet manipulation and stated that Dick Fuld, the former CEO of Lehman, was at least grossly negligent.