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SEC to Banks: Who Else Used Repo 105?

The SEC has asked about 20 financial firms whether they used the Repo 105, the off-the-balance-sheet accounting method that Lehman Brothers used. And if they did, the SEC wants to know the business justification for using them.

 The Securities and Exchange Commission must've read the bankruptcy examiner's report (PDF) on Lehman Brothers, because now the regulatory agency wants to know if other banks pulled similar off-balance sheet accounting tricks. That's something we -- and others--have been asking as well.

On Tuesday the SEC sent a letter to more than 20 financial firms asking them for details about their repurchase agreements. Repurchase agreements -- or "repos" -- are a form of short-term borrowing, whereby a financial firm exchanges collateral for cash and agrees to later "repurchase" the assets it just traded. With Repo 105, however, the exchange was structured so that the trade was accounted for as a sale, thus moving those assets off the firm's balance sheet.

The SEC's letter (PDF) to the banks, which NPR has posted, asks whether they -- in the style of Repo 105 -- also booked repurchase agreements as sales. It also asks for the firms that did so to "describe the business reasons for structuring the purchase agreements as sales transactions."

That last bit is important. Repos are legal and common. There was nothing wrong with Lehman or others booking them as sales as long as there was a legitimate business interest in doing so. The problem arises when the goal is to misrepresent the size or quality of your balance sheet. That appears to be what the SEC is now trying to establish.

While financial blogger Yves Smith has weighed in with skepticism about the effectiveness of the regulator's latest effort, what's interesting is whether, in sending out the letter, the agency is tacitly acknowledging that the financial information currently gathered from these companies is insufficient for proper regulation. SEC Chairman Mary Schapiro has previously stated that her agency’s oversight of Lehman Brothers was “terribly flawed in design and execution." 

If the SEC gets answers on this, we'd be interested in hearing them. In our experience, when queried about Repo 105, banks aren't exactly forthcoming.


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