Repos & securities lending: the accounting arbitrage and their role in the global financial crisis

• Published in: Capital markets law journal Vol. 6; no. 1; pp. 92 - 103
• Main Authors: Ong, K. T. W., Yeung, E. Y. C.
• Format: Journal Article
• Language: English
• Published: Oxford Oxford Publishing Limited (England) 01.01.2011
• Subjects: Accounting; Agreements; Arbitrage; Attorneys; Balance sheets; Banking industry; Capital markets; Collateral; Economic crisis; Insolvency; International finance; Purchasing; Regulation of financial institutions; Repurchase agreements; Securities industry; Securities lending; Securities markets; Transfer of title; United States > US
• DOI: 10.1093/cmlj/kmq030
• ISSN: 1750-7219

Repos and securities lending have grown to become an essential part of the global financial system by providing, among other things, a vital means of liquidity and short-term financing. The recent Lehman Examiners report published on 11 March 2010 highlighted the use of repos to take advantage of accounting arbitrage and manipulate balance sheet results. Among other things, concerns have also been raised about the role of lawyers in this exercise. This article examines the legal and accounting treatments of repo and securities lending transactions, and how Lehman used repos to manipulate its balance sheet results. This article concludes by considering the role of lawyers in the scheme, and discusses whether additional responsibility should be imposed on lawyers in the quest to prevent a repeat of similar balance sheet manipulation. Give Wall Street a rule and it will find a loophole.