SEC investigates Repo transactions

by Mario Christodoulou

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30 Mar 2010

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Almost two dozen US financial institutions have ten days to reveal their accounting treatment for controversial repo-transactions, as the US securities regulator explores whether dubious practices by the collapsed bank Lehman Brothers were widespread.

The US Securities and Exchanges Commission (SEC) has written to chief financial officers at major insurance companies and banks asking how they classify their repurchase or repo-transactions.

The letter comes two weeks after Anton Valukas, appointed by the New York bankruptcy court, released his lengthy report into the Lehman Brothers collapse, highlighting the bank’s accounting treatment of repo-transactions. The bank was accused of keeping $120bn (£79.6bn) in bad assets off its balance sheet by classifying repo-transactions as sales.

Repo-transactions are short-term finance arrangements which involve the transfer of assets in exchange for cash. Lehman Brothers transferred assets for about ten days during sensitive reporting periods as a means to improve it’s balance-sheet position, according to Valukas. It would then repurchase the assets after the reporting period had ended.

Valukas report may form the basis of a class action against directors of Lehman Brothers and possibly their auditor Ernst & Young.

The SEC now wants to know how many banks use similar set-ups along and has asked for a detailed justification of their use.

It comes about a week after the UK reporting watchdog, the Financial Reporting Council, investigates whether there was a role played by accounting firm Ernst & Young’s UK arm in signing-off on the arrangements. Ernst & Young said it would co-operatre fully with any probe.

Read the full SEC release: LEHMANS SPECIAL REPORT

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