Written Assignment: Repo Transactions and Repo 105 of Lehman Brothers

ACCT800 (25 point)

In March 2010, several Wall Street Journal articles revealed that the Lehman Brothers Holding Inc. employed a short-term borrowing transaction called Repo 105 to obtain liquidity and hide billions of liabilities from investors. The following questions were written to help you understand the issues related to Repo 105. To get credit for this assignment, answer the following questions:

1. What is a repo transaction? How does a repo transaction differ from a secured loan? What are the common underlying assets in a repo transaction? Your references for this question may include: “Repurchase Agreement” of Wikipedia; “When Are Repo Transactions Fraud?” by Annie Lowrey, Washington Independent, 4/12/2010.

2. What is the accounting treatment for a repo transaction before Accounting Standards Update No. 2011-03? Specify the conditions needed to account a repo transaction as a sale versus as a borrowing. Use ASC 860-10-40-4, 860-10-40-5, 860-10-40-24 and 860- 10-55-37 (or FAS 140, par. 9, 47, 49 and 218) as your references.

3. What is Repo 105 of Lehman Brothers? What are the financial impacts of Repo 105 for Lehman Brothers? Use Lehman Brothers related articles on 3/12/2010, 3/13/2010 and 3/15/2010 of the WSJ as your references.

4. Is there any mismatch of financing activities with investment activities in the general repo transactions used by the banking industry? Use “When Are Repo Transactions Frauds?” by Annie Lowrey, Washington Independent, 4/12/2010 as your reference.

5. What is the reason cited by Lehman Brothers as the basis to account a Repo 105 transaction as a sale? Based on your understanding of the proper accounting treatments for repo transactions, state your opinions on the Repo 105 accounting treatments of Lehman Brothers.

6. Describe the use of repo transactions of U.S. banks in window dressing their leverage on their quarterly reports. You need to do a keyword search on Factiva to obtain related articles from the Wall Street Journal to answer this question.

7. Discuss the current accounting treatment for a Repo transaction under Accounting Standards Update No. 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements.