The Fed didn’t know about ‘repo 105′ and if it had, it wouldn’t have cared.
That pretty much sums up Ben Bernanke’s planned testimony to the house financial services committee tomorrow.
Knowledge of Lehman’s accounting for these transactions would not have materially altered the Federal Reserve’s view of the condition of the firm; the information we obtained suggested that the capital and liquidity of the firm were seriously deficient, a view that we conveyed to the company and that I believe was shared by the SEC and the Treasury Department.
Mr Bernanke also, of course, says that the Fed was not Lehman’s regulator, and that it only began monitoring the financial condition of Lehman as the financial stress built in March 2008.
As it turns out, former Lehman chief executive Dick Fuld also doesn’t remember the now infamous “Repo 105″ – a technique used by Lehman which critics say allowed it to make its balance sheet look healthier.
Let me start by saying that I have absolutely no recollection whatsoever of hearing anything about Repo 105 transactions while I was CEO of Lehman. Nor do I have any recollection of seeing documents that related to Repo 105 transactions. The first time I recall ever hearing the term “Repo 105” was a year after the bankruptcy filing, in connection with questions raised by the Examiner.
Mr Fuld also contends in written testimony, the company used the accounting technique properly.
I have recently learned that, in 2000, the Financial Accounting Standards Board published detailed accounting rules for transactions of this very type, described them and dictated how they should be accounted for. In 2001, Lehman adopted a written accounting policy for Repo 105 transactions that incorporated those accounting rules. E&Y, the firm’s independent outside auditor, reviewed that policy and supported the firm’s approach and application of the relevant rule, FAS 140.
As I now understand it, because Lehman’s Repo 105 transactions met the FAS 140 requirements, that accounting rule mandated that those transactions be accounted for as a sale. That was exactly what I believe Lehman did. Lehman should not be criticized for complying with the applicable accounting standards.
