Lehman Brothers Repo 105 Accounting Fraud

The slicker the language you listen to, the quicker you'll land on your ass. And so it is with the Lehman 105 Repo fraud. Let's take a quick look the slick language before avoiding slipping on the bullshit.

In the Business Insider, Tom Kirkendall (who has earned praise at Crime & Federalism many times but who is very confused about Lehman Brothers) writes:

As I understand those transactions, they improved Lehman’s balance sheet by increasing its liquidity position at the end of several quarters through converting non-liquid assets to cash. When Lehman repurchased the assets after the date of the financial statement, the balance sheet didn’t change much except for showing less liquidity because the repurchased asset – which went back on the balance sheet after the repurchase ...

If your eyes are glazing over, there's a good reason: Honest people simply cannot comprehend such bullshit. Here is a non-bullshit explanation of the Lehman Brothers did through its Repo 105 transactions:

1.I ask you to invest $100,000 in my new business You ask me how much money I have in my business account.
2. I only have $0, but do not tell you this.
3. I can sell everything the business owns (including all of our inventory) to a pawn shop for $100,000.
4.The pawn shop will sell me everything back for $105,000 if I come up with the money within 48 hours. They won't even take possession of the property if I pay them within 48 hours.
5.I make the "sale" to the pawn shop.
6.I show you a copy of my bank statement. You can see that I now have $100,000 cash in my bank account. I'm, in other words, liquid 100 grand.
7.You loan me $100,000.
8.I buy my stuff back for $105,000.
9.I now have, thanks to you and some quick accounting fraud, $95,000.

Would you feel misled? Why? All I did was improve balance sheet by increasing my liquidity position through converting non-liquid assets to cash. Right? Anyone? Bueller?

Would anyone care to explain how the above transaction was not designed to trick you into investing money in my business? In SEC speak, we'd say that I materially misrepresented my true financial condition to the investing public. In real life, we'd say that I cooked my books to trick you into loaning me money.

Lehman Brothers committed fraud on the investing people. No amount of bullshit can change that. Heads need to roll. Will they?