At Lehman, Watchdogs Saw It All
Here’s how Repo 105 worked in simple terms: At the end of each quarter, to reduce its all-important leverage levels, Lehman would “sell” assets (typically highly liquid government securities) to another firm in exchange for cash, which it would use to pay down its debt. The assets were typically worth 105 percent of the cash Lehman received. Several days later, after reporting its earnings, it would buy the assets back. Normally, this would be considered a loan, or repurchase agreement, but instead it was booked as a sale.
Lehman’s shell game didn’t come to light until June 2008, when a lower-level executive named Matthew Lee sent a letter to management raising a host of questions about the firm’s practices. (By the way, the S.E.C. and Fed were still working inside the building at this point.)