Lehman Brothers' 'Repo 105' Accounting Scandal

Nearly 18 months after the collapse of Lehman Brothers, it looks like we might finally get some answers.

The long-awaited bankruptcy examiner's report came out Friday — and it's a whopper — clocking in at 2200 pages. The examiner looked at 10 million e-mails and 20 million documents in the case.

The financial world is still digesting the report, but the first scandal is already emerging. The biggest revelation so far is that Lehman was cooking their books since at least 2007. In the final quarter before filing bankruptcy, accounting tricks boosted their balance sheet by $50 billion.


Let's Get Some Lipstick on This Pig

Insiders called the scheme a "Repo 105." And let me tell ya, Lehman took a page straight out of Enron's playbook with this one.

Here's how it worked: Lehman entered into repurchase agreements with banks in the Cayman Islands. Under the deal, Lehman would "sell" toxic assets to the other bank — with the understanding that they would buy them back in a short time.

The trick made Lehman Brothers look much healthier — on paper, at least. These guys were desperate to fool investors and credit rating agencies. They had screwed up on a truly collosal scale, and lined their pockets all the while.

If (or when) the truth got out, executives knew their careers and reputations would be at stake. But by engaging in this kind of book-cooking to cover it up, they could end up behind bars.

Banks use similar repo agreements all the time. But they mark them on the books as loans, because that's what they are. Lehman marked them as sales. That might not sound like a huge deal, but the effect was that Lehman had $50b more in cash on its books, and $50b less in toxic mortgage assets.

This is complicated stuff, and that's not a mistake. Scams like this are complex by design. The goal is to confuse the mark. In this case, we were all the mark.