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Essay / Research Paper Abstract
This 3-page paper defines Repo 105 and discusses the justifications for it. Bibliography lists 3 sources.
Page Count:
3 pages (~225 words per page)
File: AS43_MTrepolehm.doc
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Unformatted sample text from the term paper:
was release. In the pages of that report was a gimmick the company used, that had been accepted by U.S. generally accepted accounting principles (US GAAP) up until late 2008.
This gimmick is known as "Repo 105." Repo 105 ("repo" is short for "repurchase") is a fairly common tool used by investment banks;
it allows these banks to borrow funds on a vary short-term basis from companies that have extra cash (Goldstein 2010). Through this tool, the bank sells the company an asset
(such as a bond), meaning if the bank ends up in trouble before it can repay the loan, the company can sell the bond to get its money back (Goldstein
2010). As part of this deal, the bank agrees to buy the bond back at the end of the loan, plus a small amount the company keeps as interest (Goldstein
2010). Because the loans are very short-term (some last as little as days), and because the bank is borrowing money, assets a bank
uses in repo deals remain on the banks balance sheet (Goldstein 2010). Repo 105s have been used to raise funds in the short term, and this has been fairly successful
for a number of years. What went wrong with Lehman Brothers? Because of how Lehman Brothers accountants recorded the Repo 105 transactions -
rather than keeping the assets it had "loaned" out on its balance sheet, Lehman Brothers actually treated the cash raised from Repo 105 transactions as true sales (Goldstein 2010). Lehman
was then taking that money to pay off its debts; then following its quarterly reports (which were inflated due to all of that false liquidity), the company would borrow more
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