Repo 105

Banks regularly use repurchase agreements referred to as repo 105 agreements. Say a bank has a short term need for cash, say a week. They transfer some asset, say bonds, to the Fed and Fed transfers cash to the bank. There is an agreement stating the times and amounts and this agreement is called a repurchase agreement. Private companies also use repo's. This led Lehman Brothers into bankruptcy and precipitated the mortgage crisis of 2008. Lehman like many big banks borrowed money to buy mortgages which they then used as assets to trade for cash using repo's. Leverage is a term used to show the ratio between assets and debt. Lehman had so many mortgages on their books and so little cash that the leverage was 40 to 1. They only had one dollar to pay off $40 of debt. This was not allowed so when it came time to issue its quarterly report something had to be done to lower the leverage. The normal thing would be to sell assets to show more cash on hand. Instead Lehman used repo's instead of sales. Just before the report was issued they would transfer assets out and cash in with the plan to reverse the process after the quarterly was published. The public would see a report with acceptable leverage and think everything was in order. The CEO of Lehman, Dick Fuld, said he did not know this was going on so he was not charged with any crime. E-mails sent to Fuld warning him of the danger of using repo's this way were ignored. Fuld testified that he never read emails because he didn't know how to find them on his computer. This confirms what lawyers say when you testify that you say you either didn't know or you can't recall.