The "Repo 105" Scam: How Lehman Fooled Everyone (Including Allegedly Dick Fuld) And How Other Banks Are Likely Doing This Right Now

Tyler Durden's picture

Presenting a detailed look at "Repo 105" - the next soundbite sure to fill the airwaves over the next weeks and months, as more and more banks are uncovered to be using this borderline criminal accounting gimmick to make their leverage ratios look better. This is the first time we have heard this loophole abuse by a bank, be it defunct (Lehman) or existing (everyone else). There should be an immediate investigation into how many other banks are currently taking advantage of this artificial scheme to manipulate and misrepresent their cap ratio, and just why the New York Fed can claim it had no idea of this very critical component of the Shadow Economy.

From the report:

Lehman employed off-balance sheet devices, known within Lehman as “Repo 105” and “Repo 108” transactions, to temporarily remove securities inventory from its balance sheet, usually for a period of seven to ten days, and to create a materially misleading picture of the firm’s financial condition in late 2007 and 2008. Repo 105 transactions were nearly identical to standard repurchase and resale (“repo”) transactions that Lehman (and other investment banks) used to secure short-term financing, with a critical difference: Lehman accounted for Repo 105 transactions as “sales” as opposed to financing transactions based upon the overcollateralization or higher than normal haircut in a Repo 105 transaction. By recharacterizing the Repo 105 transaction as a “sale,” Lehman removed the inventory from its balance sheet.

Lehman regularly increased its use of Repo 105 transactions in the days prior to reporting periods to reduce its publicly reported net leverage and balance sheet. Lehman’s periodic reports did not disclose the cash borrowing from the Repo 105 transaction – i.e., although Lehman had in effect borrowed tens of billions of dollars in these transactions, Lehman did not disclose the known obligation to repay the debt. Lehman used the cash from the Repo 105 transaction to pay down other liabilities, thereby reducing both the total liabilities and the total assets reported on its balance sheet and lowering its leverage ratios. Thus, Lehman’s Repo 105 practice consisted of a two-step process: (1) undertaking Repo 105 transactions followed by (2) the use of Repo 105 cash borrowings to pay down liabilities, thereby reducing leverage. A few days after the new quarter began, Lehman would borrow the necessary funds to repay the cash borrowing plus interest, repurchase the securities, and restore the assets to its balance sheet.

Lehman never publicly disclosed its use of Repo 105 transactions, its accounting treatment for these transactions, the considerable escalation of its total Repo 105 usage in late 2007 and into 2008, or the material impact these  transactions had on the firm’s publicly reported net leverage ratio. According to former Global Financial Controller Martin Kelly, a careful review of Lehman’s Forms 10?K and 10?Q would not reveal Lehman’s use of Repo 105 transactions. Lehman failed to disclose its Repo 105 practice even though Kelly believed “that the only purpose or motive for the transactions was reduction in balance sheet;” felt that “there was no substance to the transactions;” and expressed concerns with Lehman’s Repo 105 program to two consecutive Lehman Chief Financial Officers – Erin Callan and Ian Lowitt – advising them that the lack of economic substance to Repo 105 transactions meant “reputational riskto Lehman if the firm’s use of the transactions became known to the public. In addition to its material omissions, Lehman affirmatively misrepresented in its financial statements that the firm treated all repo transactions as financing transactions – i.e., not sales – for financial reporting purposes.

And here is the Fed punchline, as it once again implicates Tim Geithner:

From 2003 to 2009, Treasury Secretary Timothy Geithner served as President of the Federal Reserve Bank of New York (“FRBNY”). The Examiner described to Secretary Geithner how Lehman used Repo 105 transactions to remove  approximately $50 billion of liquid assets from the balance sheet at quarter-end in 2008 and explained that this practice reduced Lehman’s net leverage. Secretary Geithner “did not recall being aware of” Lehman’s Repo 105 program, but stated: “If this had been a bank we were supervising, that [i.e., Lehman’s Repo 105 program] would have been a huge issue for the New York Fed.”

And even though the Fed should have been fully aware of any shadow transaction be they "matched book" repos or the "105 variety, nobody had any clue. Just who the hell was regulating banks???

Jan Voigts, who was an Examining Officer in FRBNY’s Bank Supervision Department, had no knowledge of Lehman removing assets from its balance sheet at or near quarter-end via a repo trade treated as a true sale under a United Kingdom opinion letter.

Arthur Angulo, who was a Senior Vice President in FRBNY’s Bank Supervision department, likewise was unaware that Lehman engaged in repo transactions at quarter-end, under a United Kingdom true sale opinion letter, where the assets would be returned to Lehman’s balance sheet following the end of the reporting period. Angulo said that the described repo transactions appeared to go “beyond other types of [permissible] balance sheet management." Angulo also said that he would have wanted to know about off-market transactions where Lehman accepted a higher haircutthan a repo seller normally would accept for a certain type of collateral.

Thomas Baxter, FRBNY General Counsel, had no knowledge of Repo 105 transactions, either by name or design. Baxter was generally aware of firms using quarter-end and month-end “balance sheet window-dressing,” but did not recall this being an issue linked to Lehman specifically.

Stunningly, nobody at the SEC was aware of Lehman's Repo 105 program. And guess what: NEITHER DID DICK FULD. This is unbelievable - the criminality reaches to the very top, yet the very top denies all knowledge.

Richard Fuld, Lehman’s former Chief Executive Officer denied any recollection of Lehman’s use of Repo 105 transactions. Fuld said he had no knowledge that Lehman treated any kind of repo transaction as a true sale or that Lehman ever removed from its balance sheet assets transferred in a repo transaction. In addition, Fuld did not recall having seen any reports referencing the amount of the firm’s Repo 105 activity. Fuld further stated that he did not know that Lehman removed approximately $49 and $50 billion in inventory off its balance sheet at quarter-end
through the use of Repo 105 transactions in first quarter 2008 and second quarter 2008, respectively. Fuld said, however, that if he had learned that Lehman was temporarily cleansing its balance sheet of assets at quarter-end through Repo 105 transactions, it would have concerned him.

Evidence, however, suggests that Fuld is blatantly lying:

Fuld’s denial of recollection must be weighed by a trier of fact against other evidence. Fuld recalled having many conversations with his executives about reducing net leverage and emphasized to the Examiner how important it was for Lehman to reduce its net leverage. The night before the March 28, 2008 Executive Committee meeting, Fuld received materials for the meeting, including an agenda of topics including “Repo 105/108” and “Delever v Derisk” and a presentation that referenced Lehman’s quarter-end Repo 105 usage for first quarter 2008 – $49.1 billion.  The materials also were forwarded by Fuld’s assistant to other Lehman executives. It appears that Fuld did not attend the March 28 meeting, but Bart McDade recalled having specific discussions with Fuld about Lehman’s Repo 105 usage in June 2008. Sometime that month, McDade spoke to Fuld about reducing Lehman’s use of Repo 105 transactions. McDade walked Fuld through the Balance Sheet and Key Disclosures document (reproduced in part below) and discussed with Fuld Lehman’s quarter-end Repo 105 usage – $38.6 billion at year-end 2007; $49.1 billion at first quarter 2008; and $50.3 billion at second quarter 2008.

Based upon their conversation, McDade understood that “Fuld knew, at a basic level, that Repo 105 was used in the firm’s bond business” and that Fuld “was familiar with the term Repo 105.”3524 McDade recalled that when he advised Fuld in June 2008 that Lehman should reduce its Repo 105 usage to $25 billion, “Fuld understood that this would put pressure on traders.”3525 McDade also recalled that “Fuld knew about the accounting of Repo 105."

Combing through the Appendix on what collateral was actually "sold" (only to be promptly bought back) in Repo 105s:

Most securities Lehman used in Repo 105 transactions were “governmental” in nature, implying a certain level of liquidity. While representing a relatively small percentage of Lehman’s total Repo 105 assets/securities, at times the nominal amount of non-”governmental” securities Lehman used in Repo 105 transactions was quite large. For example, as of February 29, 2008 (the end of Lehman’s first quarter 2008), Lehman utilized over $1 billion of highly structured securities, i.e., CLOs and CDOs, private RMBS, CMBS and asset-backed securities, in Repo 105 transactions. In the market environment that existed for Lehman in early 2008, these structured securities were likely relatively illiquid as indicated by declines in origination volumes, wider bid-offer spreads, and higher margin requirements.

In August 2008, just before it was over, the firm allowed $55 million, or seven securities, rated CCC to be included in a Repo 105 transaction.

The next chart makes it evident it that 105s were used simply to game the firm's assets into quarter end (yellow highlights), by reducing overall asset for leverage ratio calculations.

That this scam was going unsupervised (just who the hell were the counterparties?) for many years, and that many banks are likely using it right now to fool investors, regulators, rating agencies, and the idiots at the FRBNY (who certainly also know about this), is beyond criminal. Yet that nobody will go to jail for this is as certain as the market going up another 10% tomorrow. A full investigation has to be conducted immediately into whether existing Wall Street firms, and in particular those who use Ernst & Young as auditors, are currently abusing public confidence via such transactions.

Full report

Repo 105

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Strom's picture

The full report available here:

Karston1234's picture

Information is truly extraordinary, I am very interested to read this post
online degree
online undergraduate certificate
college degree
fast degree

mediahuset's picture

Hey i think of your blog is pretty - i found it pleasant in google and I put on my list of favorites would like to see more posts from u soon.

sito agenzia immobiliare

mediahuset's picture

This is a great inspiring article.I am pretty much pleased with your good work.You put really very helpful information. Keep it up. Keep blogging. Looking to reading your next post. buy celebrex

i.knoknot's picture

so... on these fridays, when the FDIC 'receives' a bank and states:

  assets     = $100M

  liabilities = $100M

  cost to FDIC to cover = $50M ...

Is this where that $50M has been hiding?, or is it still in the FASB mark-to-myth, or both or ?

jessiejune's picture

these Friday is really an wonderfull time and we should have many fun here and there just like Maize Mill.

John Self's picture

Note to all:  More Lehman fun coming by Monday, when they will need to file a plan of reorganization, or else cede control to any Tom, Dick or disgruntled shareholder out there.  Look for them to file a pro forma version for now and do their best to maintain control for the next few months until a more credible version can be hammered out.  But in any case, we might just see who's in the estate's crosshairs and whether there's any real hope of reorganization for any of the units (you'd think not, but there have been some statements to the contrary).

i.knoknot's picture

is that why this news is suddenly available now?

are we just being 'worked' here?

"there are no accidents"

    - ally - st elmos fire - a long time ago...

niccy4513's picture

Pass it on. This is a feckless piece of legislation and how can you tell bc Dodd and White House support it. Bernie, what was your price, a new log cabin museum in Stratton Mountain. We had the momentum and the people were behind you and you SOLD OUT. Adidas Adizero Adios

mediahuset's picture

carlei murciali

Really like your blog content the way you put up the things…I’ve read the topic with great interest and definitely will stick your blog routinely for other great posts.

mediahuset's picture

Whoa ! That may be one Amazing Page I Appreciate it So Much, When i just Saved like a favorite your site, Hope that you construct extra material like that.

tienda erotica

Ned Zeppelin's picture

Hilarious hijinx.  Repo 105. Like hearing about credit default swaps for the very first time.

Fuld = liar.  Geithner = liar. 

Puh-leze, guys, you insult us with your denials.

Careless Whisper's picture

Ken Fuld has a bad memory plus Ernst & Andersen said the 10-K's were AAA-okay.

Howard_Beale's picture

Ken Fuld- I hardly knew you.

--Dick Lewis

bugs_'s picture

+1 Ernst & ANDERSON!!!!! LOL

hedgeless_horseman's picture

Please do not use the term "auditors" to describe Ernst & Young.  There must be a better word.  How about co-conspirators?  I don't know, call Rupert Murdoch. He is brilliant at this sort of thing.

Anonymous's picture

co-conspirators works as does boiler room

Cognitive Dissonance's picture

You make an important point. Why would anyone believe any party to the Ponzi is honest or truthful? Because they're supposed to be? Then explain to me the FDIC, FINRA, SEC, the FED and so on. If the Ponzi requires all parts to function as expected in order for the Ponzi to succeed and the Ponzi is clearly succeeding (at least for now) then all parties of the Ponzi are dishonest.

Auditors are no different from anyone else. They have the need to find and retain clients, be profitable and not make too many waves if they wish to stay in business. They know which side of their bread is buttered. Since no one has gone to jail or even suffered much beyond public disclosure and a little humiliation, what makes anyone think the auditors are not corrupt when the auditors were signing off on this shit years before the roof collapsed?

trav7777's picture

FRNbugs may not want to hear it, but it's as I've said:  we are facing an existential crisis in paper where there's a discontinuity moment coming in which confidence undergoes a phase change.

People are waking up to realize that it's all bullshit...all of it. 

Cognitive Dissonance's picture

"People are waking up to realize that it's all bullshit...all of it." 

Agreed. And this is precisely why nearly everyone is frozen in place. Sort of like that half dream, half reality moment when you're beginning to awaken from a long and deep sleep. You're not sure what is real and what is dream. Consciousness (more accurately the ego) is beginning to take over but the dream world is very seductive and alluring.

In the dream world, the nation can endlessly spend and still lower taxes, where house prices always go up and credit card limits increase, where you can replace you car every 2-3 years and it would be nice to have that fourth flat screen TV. The rabbit hole is endlessly deep but only if the public chooses to ignore reality.

cougar_w's picture

Reality is what you make of it.

We started down this rabbit hole in 1913. Manufacturing reality is old hat these days.

Anonymous's picture

and it needs to stop now! So are those of us still in the hole with our 401K's going to be made whole or is misleading
investors OKy Doky these days?

Anonymous's picture

and it needs to stop now! So are those of us still in the hole with our 401K's going to be made whole or is misleading
investors OKy Doky these days?

niccy4513's picture

it is wonderful to see you posting in these spaces. As the unofficial resident autodidact I thank you for providing this excellent vehicle to assist with my explorations. peace neat receipts

jEnron's picture

Geithner stepping down at Treasury.  Obama nominating Captain Renault to replace him.

Better yet, make Andy Fastow this generation's Joe Kennedy.


Anonymous's picture

and Martin Armstrong for vice chair of the Fed.

AnonymousMonetarist's picture

How the hell is this not fraudulent conveyance?

Anonymous's picture

This looks shady under rules governing misleading financials, prospectuses, etc.

However, a fraudulent conveyance requires that Lehman was disposing of assets at below fair market value to harm creditors. If anything, Lehman was "selling" trash assets at inflated prices.

If Lehman was in bankruptcy, the use of the "repo" proceeds to pay particular creditors could be challenged as a preferential payment. I think you are confusing the preferential payment rules with the fraudulent conveyance rules.

AnonymousMonetarist's picture

'a fraudulent conveyance requires that Lehman was disposing of assets at below fair market value to harm creditors'

Ah no...that's like saying an insolvent company can take the money to Vegas and their guilt is a function of whether they
take a haircut or not...

If the bank was not solvent, for example, creditors can examine two years worth of bonus pay in determining whether executives will have to return the payouts to the bankrupt company's trustee.

Preference-payment rules allow creditors to look back one year if the executive or officer receiving the bonus is considered an "insider" under bankruptcy rules. Otherwise, preference claims extend back only about three months.

Preference claims are meant to prevent an insolvent company from favoring one creditor at the expense of another.

The repo transactions as well as the other nuggets unveiled by ZH lay out that Lehman was double secret insolvent..

The catch is that creditors in the Lehman case will need to prove that, considering the bonus payouts for example, the bonuses were not paid out in the ordinary course of business. Creditors will have to prove that paying out bonuses to managers who ran the company into bankruptcy was considered business as usual.

That of course is challenging since fraudulent conveyance has been institutionalized by GAAP, the SEC, the rating agencies and their Nancy Capitalist enablers.

Rick64's picture

 All this time and this is the excuse. Come on you guys are market wizards and geniuses you can do better than this.

Crummy's picture

As long as no one at the SEC fears sitting on their nuts while taking a shit, then no one in on this scam has anything to fear either.

They need to start putting a bounty on uncovering fraud, then we can start a sort of privateer force of regulators.

Our motto: Never send a lawyer to do a pirate's job.

Jesse's picture




Anonymous's picture

yeah fucking awesome idea - too simple.

cougar_w's picture

You just summed up ZH

Miles Kendig's picture

'cept many of us are, in fact, Raiders...

AnonymousMonetarist's picture

In the United States, fraudulent conveyances or transfers are governed by two sets of laws that are generally consistent. The first is the Uniform Fraudulent Transfer Act ("UFTA") that has been adopted by all but a handful of the states.] The second is found in the federal Bankruptcy Code.

There are two kinds of fraudulent transfer. The archetypal example is the intentional fraudulent transfer. This is a transfer of property made by a debtor with intent to defraud, hinder, or delay his or her creditors.

Anonymous's picture

Ho hum. Banks cheat, CEOs and regulators collude and lie. How many times can you be suddenly shocked to learn the same thing over and over again?

Either get off your ass, stop contributing your own funds to the rapist financial markets, and start marching in the streets demanding to go Swedish on the banks, or lose your own credibility along with them.

i.knoknot's picture

don't be so quick to discount the effectiveness of the small laps of a rising tide.

one item is a conspiracy, two is ..., three is ...

i believe most folks are 'on the ready' to act appropriately when the time comes.

this entire process is a comfortable removal of doubt.

Anonymous's picture

the fix is in and we are up against connected parasites, but i agree, every ray of sunshine is welcome, sure it may not make a difference immediately and we have been depleted by these blood sucker for a long time, but you never know when it will do good, its all we can do, keep exposing things, maybe one day we will flush the parasites...

Pat Shuff's picture

Acting appropriately/careful what is wished for dept.



"How a revolution erupts from a commonplace event--tidal wave from a ripple--is cause for endless astonishment...

First a piece of news about something said or done travels quickly, more so than usual, because it is uniquely apt; it fits a half-conscious mood or caps a situation... The fact and the challenger's name generate rumor, exaggeration, misunderstanding, falsehood. People ask each other what is true and what it means. The atmosphere becomes electric, the sense of time changes, grows rapid, a vague future seems nearer...

As further news spreads, various types of people become aroused for or against the thing now upsetting everybody's daily life. But what is that thing? Concretely: ardent youths full of hope as they catch the drift of the idea, rowdies looking for fun, and characters with a grudge. Cranks and tolerated lunatics come out of houses, criminals out of hideouts, and all assert themselves...

Such is, roughly, how revolutions "feel." The gains and the deeds of blood vary in detail from one time to the next, but the motives are the usual mix: hope, ambition, greed, fear, lust, envy, hatred of order and of art, fanatic fervor, heroic devotion, and love of destruction."

--Jacques Barzun, From Dawn to Decadence: 500 Years of Western Cultural Life 1500 to the Present

YourAverageDebtSlave's picture

The powers that be let this information come out knowing full well that it would not be received well.  It reminds me of last week’s Nightline’s piece on 9/11 being a conspiracy that possibly is more than meets the eye.  It reminds me of PBS airing freedom to fascism.  Since when the hell did mainstream media start becoming so anti-government?


These pieces of news are nothing new, but the fact that the powers that be are now responding to these claims via mainstream media makes me suspicious.  Why release the information now?  They know that the general feel from “Joe Sixpack” is that the government is corrupt and something radical needs to be done.  Reports like this from mainstream media are just gasoline on the fire, almost as if they want there to be backlash.  It’s as if they are thumbing their nose at taxpayers saying look how corrupt we are, we know it angers you, now do something about it.  I see evidence of this when I read an online Wall Street journal article and in the comment section, 90% of the comments are saying something about how messed up our government is.


So then the question becomes why would the want aggravate us?  Back in 2008 for the first time (that I know of) the nation enacted an army brigade to be on alert here in the states (   Dennis Blair a few weeks ago stated that the intelligence community will if needed assassinate Americans they believe to be a threat to other Americans (my read is that this means the government as I’m sure the CIA will not be taking out the Bloods and Crips in South Central) (  I could go on with what’s out there that makes me think this is a controlled demolition of America as we knew it.


My guess is that whoever’s in power is waiting for STHF so that they can make a tremendous power grab in the name of democracy.  They will wait for anarchy to break loose, watch a couple of angry entitled generations of Americans riot, loot, and terrorize their next store neighbors and wait for the people to come crying to the government to restore order.  Once that happens, the government will come in with its cape and “save the people” by implementing a more tyrannical style of government than we currently have in place via the military.


What was once fringe thinking and conspiracy is starting to be mainstream, and I believe it is all a ruse to get the public fired up and ready to explode.  Once that happens the government will have a legitimate excuse for coming in and exerting control over the masses.  With our current debt levels, trade cap, shitty currency, we will all be happy to take jobs working in factories for enough wages to get our slice of bread for the day while we pay back the Chinese, Japanese, and the rest of the world while the same big wigs who orchestrated Lehman’s collapse travel to the Caribbean.  Aside from writing snarky comments on Zero Hedge and other forum boards, I’ll just wait back with gun in hand and wait for the fireworks to begin.


cougar_w's picture

Why now: By the time anyone starts digging into this stuff the EuroZone will be imploding, bansk will be folding, and bigger shyte will have hit a bigger fan.

You throw your worst garbage on a bigger fire and run away.

Cursive's picture

These people should be fed to the harden criminals in a state prison.  We'll look the other way.  The inmates are free to do as they wish.  I really hope this is what happens.

Waterfallsparkles's picture

I think the Banks are doing this right now.  Going to the Discount Window and pledging Securities for a Loan right before Earnings.  That way they do not have to show them on their Balance Sheets.  After Earnings they pay back the Fed Loan and get their Securities back.

RockyRacoon's picture

Which transactions, of course, we can never know about.  It might stigmatize the banks, you know.  What a crock.  Audit the fed!

Anonymous's picture

If Lehman had only been doing this a quarter - maybe a "clever" dressing of the balance sheet. But for years? There is no way other financial institutions haven't been doing plenty of this too. Doesn't absolve Lehman or the regulators from their despicable conduct, (perhaps it explains the 2 year lag in disclosure cuz it's gonna get even more ugly as we look under the kimonos of the other institutions) but one more time with feeling - the financial system is still in horrid shape. The real causes and problems all still lurk. Nothing has changed except power and risk is even more consolidated. Fasten your seat belts and keep some cash and gold at home.

Anonymous's picture

Meanwhile, the market finished higher based on volume 3.