"A Repo Man Spends his life Getting Into Tense Situations"

Repos and off-balance sheet financing: you don't want to know the details but I spent a good part of my academic life trying to understant this sort of thing. And here they are, the showcase item in the Examiner's Report re Lehman brothers.

So far I've read only blog and fragmentary news accounts (the best account I've seen is here)--and no, I don't intend to read all nine volumes of the report: hey, what is retirement for, anyway? But so far as I can tell, we are looking at the crudest kind of accounting fiddle--far simpler to understand or explain than the Byzantine machinations of Enron. That is, I bet when the dust settles it will look like this:

Lehman transfers securities to theta, a third party. Theta pays cash. In a standard repo, Lehman has the obligation to buy back (repo) the security at a defined price. The repo price will amount to the original price plus interest.

Why do the deal? Say it slow and say it loud: this is nothing but a secured loan. The transferor borrower gets some cash and posts some collateral. Later, he repays the money and gets the collateral back. If the collateral isn't worth as much as the repayment, he eats it.

Bank and finance types, who of all deals ought to recognize this deal for what it is, will go through all kinds of caterwauling to try to persuade you this is something other than it is. Maybe they thing they need to so as to gin up the fees. Or maybe just because obscurantism is their stock in trade.

So far so good. So what was the Lehman deal? So far as I can tell, Lehman tried to pretend it was really selling the stuff. Once they could take them off the books. But Lehman retained the risk of decline in value. The person with who bears the risk of decline in value--that person is the owner. It's not an "incident" of ownership, it is the very definition of ownership. If Lehman had admitted that it was a loan, it would have had to keep the assets on its balance sheet and book a liability. Treat it as a sale and both asset and liability disappear.

Children, this isn't rocket science. It isn't even popsicle science. Like I say, it is not nearly as febrile or convoluted as Enron. It's a lot more like WorldComm, where what took your breath away was the sheer crudity and simplicity of it all.

Oh, and did I mention: the word is that everybody's doinng it. Lehman got caught only because there was an examiner's report.

Afterthought: Yes, it's recourse again.

Bibliography: I suppose am the ten millionth guy to use that quotation in the title. For the full-dress original with Harry Dean Stanton, go here (at 1:49/1:54).