Lehman used Linklaters opinion for controversial accounting practices
A report into the Lehman collapse alleges that after US advisors refused to give legal clearance for the practices, Lehman looked to top UK law firm Linklaters…
It is understood that a legal opinion was required for the bank’s use of Repo 105 transactions. There is no suggestion that Linklaters was in any way wrong in its advice, as the rules relating to these transactions are different under English law. Bankruptcy court examiner Anton Valukas claims that Lehman looked to Linklaters to get sign off on the Repo 105 transactions originating from its EU entity Lehman Brothers International Europe (LBIE).
Valukas alleges that Lehman used the “accounting gimmick” to make it appear as if it had off-loaded risky assets and reduced its balance sheet. The practice was deemed controversial in this case for a number of reasons. Here’s a more detailed explanation of what supposedly went on.
TBI: In an ordinary repo transaction, Lehman would raise cash by selling assets with a promise to buy them back later. It’s a common form of short-term financing. And because it was really a financing rather than a sale, the assets remained on Lehman’s balance sheet.
But in a Repo 105, Lehman would treat the transaction as a genuine sale and take the risky assets off its books. Apparently, accounting rules permitted this because the assets valued at 105% or more of the cash recieved. Lehman never disclosed it was doing these transactions.
This was no small thing. In the first and second quarters of 2008, Lehman Brothers used the Repo 105 deals to reduce its balance sheet by $50 billion. That had a large and material effect on its leverage ratio, bringing it down from 13.9 to 12.1.
Which led to this rather damning conclusion in the Valukas report via WSJ:
“Lehman’s own accounting personnel described Repo 105 transactions as an “accounting gimmick” and a “lazy way of managing the balance sheet as opposed to legitimately meeting balance sheet targets at quarter end.” Lehman used Repo 105 “to reduce balance sheet at the quarter end.” In 2008, Lehman knew that net leverage numbers were critical to the rating agencies and to counterparty confidence. Its ability to deleverage by selling assets was severely limited by the illiquidity and depressed prices of the assets it had accumulated.”
