Yesterday we asked just who the counterparties on Lehman's Repo 105 transactions were. Today we get our answer: the parties that Lehman used exclusively to mask its true leverage ratio were Barclays, Mizuho, UBS, Mitsubishi, Deutsche Bank, KBC and ABN Amro. This is accompanied by disclosure from the Examiner that these Repos, which should logically have been cheaper to Lehman due to the overcollateralization compared to regular matched repo (remember: 105 instead of 100 plus a minor haircut), in fact were pricier, prompting Lehman staffers such as Mike McGarvey to speculate that counterparties may "try to squeeze Lehman." This is quite a critical development ahead of the lawsuit between the Lehman estate and Barclays (a Repo 105 counterparty), which not only refused to bail out Lehman in the 11th hour, but to subsequently go ahead and in the definition of a fire sale acquire Lehman Brothers' North American brokerage operations for pennies on the dollar, coupled with some serious additional trickery on the side. Another oddity: none of the counterparties were US-based. Did US banks know too well about the imminent collapse of Lehman and thus refuse to participate in the Repo 105 window dressing game? Or, much more relevantly, was Lehman terrified by retaliation of its US-based peers, (be it CDS or stock-based) and as a result refused to open up its deplorable balance sheet to them?
We read from the report:
In the 2007 to 2008 period, Lehman’s Repo 105 counterparties were primarily restricted to Mizuho, Barclays, UBS, Mitsubishi, and KBC, though some of these also tapered off their Repo 105 trading in 2008. E-mail from Chaz Gothard, Lehman, to Mark Gavin, Lehman, et al. (Sept. 4, 2007) [LBEX-DOCID 4553246] (“KBC are no longer able to finance our 105 agency trades. . . . This effectively means we only have 3 counterparts with which to transact this business – Mizuho, Barclays & UBS. Whilst they have taken all the paper we’ve thrown at them to date this situation should not be relied upon.”); e-mail from John Feraca, Lehman, to Ian T. Lowitt, Lehman, et al. (Feb. 28, 2008) [LBEX-DOCID 3207903] (reporting Repo 105 trades with “Barclays – $ 3 billion, UBS – $ 6 billion, Mizuho – $ 2 billion”); e-mail from Mark Gavin, Lehman, to Daniel Malone, Lehman, et al. (May 20, 2008) [LBEX-DOCID 736184] (noting in e-mail with subject line “RE: Repo 105 CPS” that “Mizuho - $5bln,” “[n]o longer at the table: Barclays up to $15 bln,” “UBS up to $10 bln,” “Mitsubishi up to $1 bln,” and “KBC up to $2 bln”);
And some other counterparties attempted:
In February 2008, Lehman found a new Repo 105 counterparty in ABN Amro Bank NV (London Branch). See e-mail from Nirav Patel, Lehman, to Kandy Hosea, Lehman, et al. (Feb. 29, 2008) [LBEX-DOCID 3383394]. Deutsche Bank was also a Repo 105 counterparty to Lehman in 2008. When a Repo 105 transaction with Deutsche Bank failed, Tonucci assigned Carlo Pellerani (International Treasurer) to ensure the problem was resolved. See e-mail from Paolo R. Tonucci, Lehman, to John Coghlan, Lehman (Mar. 25, 2008) [LBEX-DOCID 117336].
So now that we know who the counterparties were, here is how we know that they knew all too well that Lehman was in trouble and could be bled dry, as this was the last recourse the firm had:
Given that in a Repo 105 transaction, Lehman provided its counterparty with more collateral for the same amount of cash as in an ordinary repo, one might expect the interest rate to be lower, as the terms were better for the lender, i.e., had greater protection in the form of more collateral in the case Lehman did not repay its borrowing. The Examiner’s analysis shows that, on the contrary, the interest rate in a Repo 105 transaction was higher than in an ordinary week-long repo despite the overcollateralization. Based on witness statements that Lehman was in a “price taking situation,” and documents such as the e-mail in which Lehman staffers begged to increase the Repo 105 credit line with Mizuho to improve the balance sheet profile at quarter end, the higher interest rate in a Repo 105 transaction was likely a consequence of Repo 105 counterparties being aware of Lehman’s desperation.
Mike McGarvey, who is currently part of the Lehman Derivatives unwind team, said is noted as saying the following:
McGarvey, the author of the e-mail, stated that counterparties such as Mizuho knew that Repo 105 transactions received off-balance sheet treatment and as a result might “try to squeeze Lehman.”
And in the vacuum of responsibility, here are some names which the Attorney General may want to invite for a conversation:
When asked directly, Joseph Gentile, a former FID Finance executive who reported to Gerard Reilly, did not believe that Lehman’s motive for undertaking Repo 105 transactions was financing. Gentile stated unequivocally that no business purpose for Lehman’s Repo 105 transactions existed other than obtaining balance sheet reliefGentile said that he received his “Repo 105 education” sometime near the end of Lehman’s 2006 fiscal year from Ed Grieb, Lehman’s Global Financial Controller who reported directly to then-CFO Chris O’Meara. According to Gentile, Grieb explained that Repo 105 transactions were a balance sheet management mechanism: “a tool that could be use d to reduce Lehman’s net balance sheet.” Gentile recalled that “Repo 105 was a vehicle that Grieb owned and he was using it to take my balance sheet away." When the Examiner asked for further explanation of that statement, Gentile said that if FID had “excessions” in its balance sheet, Grieb would authorize additional Repo 105 capacity to alleviate potential breaches of the balance sheet limit. Gentile explained that two ways existed for FID to make its balance sheet targets where excessions existed: by selling assets or by engaging in Repo 105 transactions. Similarly, Matthew Lee said there was no legitimate business purpose for Repo 105 transactions. In his view, Lehman’s Repo 105 practice was for “window-dressing the balance sheet to make the credit rating higher.”
First, it is beyond a reasonable doubt that 105s were merely used for window-dressing as the following chart from the Examiner demonstrates.
Second, we urge regulators to promptly sequester Mr. Grieb and ask him pointed questions about not only Chris O'Meara's knowledge of Repo 105s, but what CFOs were subsequently requesting that Lehman use the same off-balance sheet book cooking vehicle.
Third, as getting information out of US banks has proven next to impossible, it is time to bring in the counterparties: Mizuho, Barclays, DB, UBS and Mitsubishi, and demand that they disclose if any other banks use or have used comparable off-balance sheet gimmicks.
Lastly, it is time for Bob Diamond to take the witness stand, and disclose just how much of a factor any potential activity on his behalf to raise Repo 105 rates into Lehman's collapse may have had. Here is the proper analogy: just as Goldman benefited the most by cranking up its AIG collateral demands on it CDO exposure, so Barclays could have easily done the same. Net result: the purchase of Lehman NA for sub-blue light special price. As the lawsuit against Barclays is set to commence imminently, we will be very curious as to what disclosure Mr. Diamond reveals under oath.