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I know there has to be some great accountants, CFO's, finance people, etc on HN that can offer more detail about a Repo 105 and what the benefit is for an organ

I know there has to be some great accountants, CFO's, finance people, etc on HN that can offer more detail about a Repo 105 and what the benefit is for an organization (maybe an individual?) to do this, not just in Lehman's case. WSJ explanation is straight forward, but I would like to hear a little more about this practice--hopefully I'm not the only one. From the article: "We have now learned of the creative way Lehman Brothers hid its leverage (how much money it was borrowing) by the use of a Repo 105. The Repo 105 meant Lehman temporarily swapped assets (such as bonds) for cash. A Repo, or repurchasing agreement, is a way to borrow money. But an accounting rule allowed Lehman to book the transaction as a sale and reduce its reported borrowings, according to a report by the court-appointed Lehman bankruptcy examiner, a former federal prosecutor, last month."

chasingsparks 17y ago
Repo's are essential to banking. At the end of the day, a bank must be in a certain financial state. Fluctuations in withdrawls and deposits can lead to a need or surplus of cash. Financial institutions balance their books daily with repos. (The market is HUGE.) IB's have a need for repo's also, but they often push the limits of sanity. LTCM used repos for large leverage also. (When Genius Failed is an interesting book to read; essentially the crisis of 2007 was LTCM on a larger scale.) The financial crisis of 2007 was actually a run on banks through the repo market. IB's used repos on a rolling basis with very little margin for error. Suddenly, the haircuts got large and blew them up. For an excelent paper on the crisis and the repo markets huge (dominant) roll in the crisis, see Gary Gorton's paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882
- mbateman 17y ago
  Though this is tangential to the story, I would like to second the recommendation of this paper. On the way to arguing for his thesis, the author explains the function of the modern banking system and the "shadow" banking system in clear and cogent terms. He relates contemporary banking practices to older ones and explains shows how they are similar in the event of a banking panic. Very good (but long) article.

chasingsparks 17y ago

Repo's are essential to banking. At the end of the day, a bank must be in a certain financial state. Fluctuations in withdrawls and deposits can lead to a need or surplus of cash. Financial institutions balance their books daily with repos. (The market is HUGE.) IB's have a need for repo's also, but they often push the limits of sanity. LTCM used repos for large leverage also. (When Genius Failed is an interesting book to read; essentially the crisis of 2007 was LTCM on a larger scale.) The financial crisis of 2007 was actually a run on banks through the repo market. IB's used repos on a rolling basis with very little margin for error. Suddenly, the haircuts got large and blew them up. For an excelent paper on the crisis and the repo markets huge (dominant) roll in the crisis, see Gary Gorton's paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882

mbateman 17y ago
Though this is tangential to the story, I would like to second the recommendation of this paper. On the way to arguing for his thesis, the author explains the function of the modern banking system and the "shadow" banking system in clear and cogent terms. He relates contemporary banking practices to older ones and explains shows how they are similar in the event of a banking panic. Very good (but long) article.