The Lehman Brothers Bankruptcy C: Managing the Balance Sheet Through the Use of Repo 105

Abstract

Anton R. Valukas, the Lehman Brothers court-appointed bankruptcy examiner, produced a 2,200-page report detailing possible claims that the estate might pursue, and he identified several, from company officers to its independent auditors. The most startling revelation of the report, however, was that, during its last year, Lehman had relied heavily on an unusual financing transaction — Repo 105. The examiner concluded that Lehman’s aggressive use of Repo 105 transactions enabled it to remove up to $50 billion of assets from its balance sheet at quarter-end and to manipulate its leverage ratio so that it could report more favorable numbers. This case considers in-depth Lehman’s questionable use of Repo 105 transactions and its impact.

Keywords: Systemic Risk, Financial Crises, Financial Regulation

JEL Classification: G01, G28