Can someone explain this to me please:
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2010/03/lehman_how_it_disguised_its_fr.html
There is something simple I’m just not getting here. What were the ‘assets’ Lehmans that was exchanging for capital? Bad loans?
IANAA - but I believe what theya re saying is that instead of reporting, say “I have bond assets of $100M and a loan of $100M cash against it” they could say “I have cash of $100M and $105M less of bonds”. Their capital cash went up, their bond holdings went down - so it seemed.
If those were those wonderful US mortgage-backed securities, then unloading them at 96% of face value even on paper probably made them look less risky.
Accountants…
For those playing at home, the “repo” market is the “repurchase/resale” market, where a financial house can borrow money for a few days by selling its assets outright at a loss, the buying them back at face value. When you do this, it doesn’t show up as a debt on the books – it’s a sale.
The assets in question are commercial paper – yes, probably bonds. The thing is, that bonds just aren’t money in the bank; there’s a risk that you won’t get the investment back. Regardless of how good the borrower is, a healthy company won’t have too much paper on its books compared to its cash holdings.
What’s fraudulent about what Lehman did is that they sold ever-increasing amounts of paper right before the end of the reporting period, when they put together the balance sheets. The statements would show ample cash reserves, sensibly low bond assets, and no debt – despite the fact that Lehman had every intention of buying back the paper as soon as the audit was done. And the auditors knew it, had to know it, but basically said “yup, yup, a repo’s a sale, not a loan, nothin’ to see here, move along…”
Lehman allowed their cash assets to drop, of course, because their leverage strategies and exotic investments were bringing insane returns, and they just couldn’t stand to have all that money lying around gathering dust. So they manipulated their holdings to look healthier for a few days – what’s the harm? It’s not like there’s any real risk ! The market’s not gonna crash next week, after all!
Whoops.