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FASB 105Lehman's creative use of repurchase agreements, also known as repos (which should have been dislosed under FASB 105 rules), may have allowed them to misrepresent their true liability on their balance sheet.(Note from Jeffrey : FASB 105 refers to the disclosures that a company needs to make in their financials. It does not require that a company put the liability on the balance sheet. I guarantee you that this concept will be examined and re-examined to death just as the public did on mark-to-market, impairment, derivatives and off-balance sheet reporting of non-consolidated entities used by the banking industry and by Enron.) Repos are agreements between financial firms that essentially act as loans for cash -- one firm pledges collateral to another in exchange for cash with a promise that they'll buy back that collateral. Although Repo 105 transactions may not have been inherently improper, the examiner claimed that their sole function as employed by Lehman was balance sheet manipulation in order to lower their reported leverage. In 2007/2008, 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. Against this backdrop, Lehman turned to Repo 105 (FASB 105) transactions to temporarily remove $50 billion of assets from its balance sheet at first and second quarter ends in 2008 so that it could report significantly lower net leverage numbers than reality. FASB 105 establishes requirements for all entities to disclose information principally about financial instruments with off-balance-sheet risk of accounting loss. Companies are required to disclose information on financial instruments, including the extent, nature, and terms of financial instruments with off-balance-sheet credit or market risk and about concentrations of credit risk for all financial instruments. FASB 105 extends present disclosure practices of some entities for some financial instruments by requiring all entities to disclose the following information about financial instruments with off-balance-sheet risk of accounting loss: |
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