Sigh. Again we see the power of the wall street cartel as the criminals involved in one of the biggest heists in history are about to walk away scott free. Per the SEC, it appears that the use of "Repo 105" by Lehman Brothers was not necessarily illegal.
Per the WSJ: In the transactions, Lehman swapped fixed-income assets for cash shortly before the securities firm reported quarterly results, promising to buy back the securities later. The cash was used to pay down the company's debts. Emails sent by executives at the company referred to Repo 105 as a "drug" and "basically window dressing."
So basically, lets assume that you have an investment bank. Your assets are listed at 1 billion. Of those assets you have the "credit card loan portfolio" or CCLP which amounts to 100 million of the bank assets. Now lets assume that the vast majority of the credit card loans in the portfolio are nonperforming. Obviously the value of the credit card portfolio has fallen as many loans are in default. But here is what you do: you sell this portfolio of CCLP to another bank for face value, recieving cash for the CCLP but promising to buy back the CCLP. When its financial reporting time you list the 100 million as CASH as on the balance sheet as opposed to CCLP which is rotting and probably only worth .40 on the dollar. Once the quarterly reporting time is finished you then repurchase the junk from the bank. Hence the term, Repo 105.
This is an extremely fraudulent activity as it presents a false appearance of health for a financial institution. In this way, the banks were able to "paper" over their incredible losses. However, the problem arises because investors relied on these representations of financial health and invested based on the information provided in the quarterly report. Lehman used repo 105 to hide its bleeding losses, but eventually nothing could save this bank and investors lost billions.
Quoting Dick Fuld on the use of repo 105;
Last year, Mr. Fuld told lawmakers he had "absolutely no recollection whatsoever of hearing anything" about Repo 105 at the time of the transactions. Lehman's demise was caused by "uncontrollable market forces" and the U.S. government's unwillingness to rescue the firm, he said.
Make no mistake as the use of repo 105 was widespread across many of the major wall street investment houses. There is evidence to the effect that Bank of America and Citigroup also played these fun games with their balance sheets. But unfortunately the current rule is described as such: if one goes down they all go down, however, if one doesn't go down none of them will go down.
ABSOLUTELY NO RECOLLECTION WHATSOEVER OF HEARING ANYTHING!!!! Now THAT is a defense! Good job Cravath boys as you bill in the hundreds of millions of dollars to defend the scum of the earth who, in large part, played a big role in sending our economy down the shitter. But it is ok I guess, because retribution is finally beginning to take occuron those evil Wisconsin public workers. Or how about those pesky law grads that fail to pass the bar exam right away and go into default on their loans. Its a good thing that these ABA judges are rigfhtfully punishing these people by suspending their licenses as they clearly do not have the moral fiber to practice law.
To conclude from the WSJ:
But after zeroing in last summer on the battered real-estate portfolio and an accounting move known as Repo 105, SEC officials have grown more worried they could lose a court battle if they bring civil charges that allege Lehman investors were duped by company executives. The key stumbling block: The accounting move, while controversial, isn't necessarily illegal.
In a possible sign that the probe has slowed, the SEC hasn't issued a Wells notice to Lehman's longtime auditor, Ernst & Young, according to people familiar with the situation. The firm had concluded that the accounting in the Repo 105 transactions was acceptable. Wells notices are a formal signal that the SEC's enforcement staff has decided it might file civil charges against the recipient.
The snags are the latest sign of trouble for the SEC and other U.S. regulators trying to punish companies and executives at the center of the financial crisis. So far, no high-profile executives have been successfully prosecuted. Last month, a federal criminal investigation of former Countrywide Financial Corp. Chief Executive Angelo Mozilo was closed without charges.
Dick Fuld is on the second row, far right. Angelo Mozilo, last row, far right.