Big banks asked if they use Lehman accounting 'trick'

Mary Schapiro, SEC

The US financial watchdog has asked 19 banks if they are using the same accounting treatment - the so called Repo 105 deals - employed by Lehman, the collapsed investment bank.

A bankruptcy examiner in the US concluded the Repo 105 accounting was used to conceal billions of dollars worth of risky assets.

Yesterday, during Congressional hearings, Mary Schaprio, the head of the Securities and Exchange Commission (SEC), revealed the regulator has written to 19 banks asking about their accounting.

Associated Press reports that the SEC is looking closely at the accounting used at Lehman.

Repo 105 exploits rules in in US GAAP which determines what can and can't be removed from a balance sheet.

The name in fact refers to so-called repurchase deals commonly used by banks to raise short term funding.

In such a deal assets are sold with an understanding that they will be bought back. Usually, because of the intention to reacquire the assets they remain, on the balance sheet.

In Lehman's case the bankrupctcy examiner said Lehman gave away assets worth 105% of the cash consideration received in return. Because this cash was less than was needed to repurchase the assets on the open market, the bank could be technically deemed to have lost control of the assets. The bank could then remove them from its balance sheet even though there was every intention to buy them back.

The bankruptcy examiner's report heavily criticised the accounting used and auditors Ernst & Young for its role at the bank.

Read more:

Lehman special report