Lehman Brothers' Startling Emails: Repo 105 "Accounting Gimmick" Are "Another Drug We're On"

Photo: Bloomberg

You might think that people at Lehman Brothers had a legitimate reason for using so many Repo 105 transactions, which are often criticised as being barely legal accounting fraud.And you’d be right, if you consider the following reasons they gave to each other in internal emails “legitimate”:

  • To reduce the balance sheet.
  • To use the lazy way of managing the balance sheet as opposed to legitimately meeting balance sheet targets at quarter-end.

Bizarrely, Lehman execs also wrote emails to each other that candidly admitted that Repo 105s were an “accounting gimmick” and “another drug we’re on.”

From the FCIC’s report (click here to download the report):

According to the bankruptcy examiner, Lehman understated its leverage through “Repo 105” transactions—an accounting manoeuvre to temporarily remove assets from the balance sheet before each reporting period. Martin Kelly, Lehman’s global financial controller, stated that the transactions had “no substance”—their “only purpose or motive . . . was reduction in the balance sheet.”

Other Lehman executives described Repo 105 transactions as an “accounting gimmick” and a “lazy way of managing the balance sheet as opposed to legitimately meeting balance sheet targets at quarter-end.” Bart McDade, who became Lehman’s president and chief operating officer in June 2008, in an email called Repo 105 transactions “another drug we R on.”

Related: In 2005, a Bear Stearns analyst was so excited during a meeting about housing that AIG employees thought he was on drugs.

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