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Lehman Brothers' Repo 105

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How the bank duped the Fed, the SEC, and Main Street.

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Editor's Note: This article was written by Lawrence G. McDonald, managing director at Pangea Capital Management LP. McDonald is co-author of the bestselling book "A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers" and is currently on a global lecture tour.


Repo 105 is a phrase you'll hear 1,000 times over during the next several months.

In a simple, easy-to-read way, Patrick Robinson and I describe the concept on page 161 of our book, A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers. We wrote the book to bring people on Main Street inside Wall Street, not to confuse the living daylights out of people.

So what's new? In writing our book, I spoke with close to 200 people up and down Lehman Brothers. Through the process, one thing became more and more clear to me: Richard Fuld, our CEO, was either deprived of crucial information on Lehman's deadly use of leverage or guilty of gross, potentially criminal negligence. If you believe Fuld, the 2,200 page, $40 million examiner's report released late Thursday supports the former. If you believe Lehman President Bart McDade, the latter makes more sense.

At the top of the market, Lehman was levered 44-1. In simple terms, this is like you and I walking into a Las Vegas casino with $100 in our pocket and playing on the table with $4,400.

How was Lehman able to do this? Why didn't then-New York Fed Chief Tim Geithner, our current secretary of the Treasury, do something? Why didn't the SEC and Christopher Cox do something?

The answer? They were fooled by a deceptive and deadly accounting gimmick named Repo 105.

At the end of the quarter in late 2007 and early 2008, while Lehman was raising billion of dollars by selling stock to duped investors, its accounting team would sell some assets (US Treasuries, mortgage-backed securities, and derivatives) to a trust in the Cayman Islands and take in cash.

Lehman would play this Three Card Monte shell game with investors at the end of the quarter, the time when SEC filings are being put on paper and public conference calls with investors are being conducted.

Think of it as a temporary liposuction procedure Lehman would execute on itself at quarter-end in late 2007 and early 2008. The day you take the photo in your bathing suit you are 30 pounds lighter, a few days later, when the cameras are gone, it's back to Mr. Blimpie.

Quarterly reports like 10-Qs would be shared with investors and regulators showing Lehman's leverage at lower-than-real levels. A few days later it's back to the casino.



Lehman executives would book these Repo 105 transitions as a "sale" on the balance sheet and take in cash. The problem is that these transactions were actually "loans" and that's where the fraud comes in.
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