I recently read an article about the exchange of emails between executives at Lehman Brothers regarding the Repo 105 practice the company was engaged in. Below are some of the comments of the executives-
Martin Kelly, Lehman’s global financial controller, stated that the transactions had “no substance”—their “only purpose or motive . . . was reduction in the balance sheet.”
Other Lehman executives described Repo 105 transactions as an “accounting gimmick” and a “lazy way of managing the balance sheet as opposed to legitimately meeting balance sheet targets at quarter-end.” Bart McDade, Lehman’s president and chief operating officer in 2008 (the year the company filed for bankruptcy), in an email called Repo 105 transactions “another drug we are on.”
This drug definitely was fatal for the organization which filed for bankruptcy in 2008!
The recent financial meltdown driven primarily by the financial institutions has made the finance community and the standard setting authorities jittery. Lots of small banks and financial institutions were wiped out, but the one that raised a lot of eyebrows was the demise of the Lehman Brothers. The financial institution used the “Repo 105” accounting trick to dress up their balance sheet and show a better leverage ratio. The company survived till the market crashed and then all these tricks slowly starting coming to light leading to eventually the organization closing its doors for ever.
On October 7, the International Accounting Standards Board (whose rules are used in 100 countries) said that there will be much more stringent disclosure requirements for banks that transfer financial assets. These disclosures will be helpful for investors to better understand off-balance sheet risks and will alert them of any window dressing transactions at the end of the reporting period. The change will be effective from July 1, 2011 but companies can apply them earlier.
Does this mean that there will be no more cases like the death of Lehman Brothers in the future, well that in opinion wont happen, but definitely we are moving in the right direction.I