I'm totally loving these videos! They're explained in such an interesting and creative way, thanks Paddy!

The repo/loan for Lehman is debt. Using repo 105, Lehman essentially hid their debt. So others had no idea that Lehman had already borrowed too much.

Thank you so much, I'm studying this for my MBA Accounting and Financial Management subject at University of Adelaide. I love your explanations, good work and once again, thank you.

Still confused how eliminating assets improves lehmans leverage profile. Maybe if the securities are labeled as liabilities and receives cash.

Its also called: accounting fraud. Same as Enron.

I enjoyed this video. Before, I didn't fully understand why Repo 105 could be booked a sale, instead of as a loan.

Is it better to have worthless assets or no assets at all? Paddy, if you're not teaching at a university, you should consider doing so because your explanation style is superb. If universities don't pay well, start an investment banking training classes!

Thanks for the easy-to-understand explanation, sir.

Remember, these transactions were designed to provide a "snapshot" for financial statement purposes. There is no long term benefit to the transaction. You do the deal on December 29 and undo it at January 3.

for those about to balance your double-entry bookkeeping system, we salute you

Beautifully explained. Thank you so much sir!

thanks! I guess the point is not 105 or 107 or anything then, it's about logging a loan as a sale so that the balance sheet looks cleaner.

The 98-102 cents on the dollar requirement seems incredibly arbitrary. Anyone know what the rationale was for this? What was FASB trying to accomplish?

thanks great one!

Thanks heaps- great explanation the best I have seen so far.

Perfect explanation!!!! First time I understand it for good 😀

Thank you for your visual and simple explanation...I'm just an average Jane and I get it!

thank you for these explanations !!

If i understand it right they hid their debts, but in the video he says they hid their assets

Taking assets off the book/balance sheet of LB doesn't make it look any better from observer point of view as long as such assets are of good quality. The intention of LB for treating the transaction as sales is to hide it's liabilities on one hand and to minimize its tax liability on the other, and not to make asset disappear from its book as wrongly prescribed in this presentation. If the transactions were to be accounted for as borrowing, the financial statement of LB would show it's liability to the lender from whom it borrowed. LB don't want the public and analyst to see such liability because the lower the liabilities, the stronger the wealth of shareholders would appear . Hiding the liability made LB performance appears impressive. Hence LB accounted for the transaction as sales since no liability would be seen in it's books. From taxation point of view, treating the transaction as sales of 105 worth of security for 100 proceed would show that LB is making a loss of 5. By implication such losses would minimize its income in the financial statement and therefore reduces its chargeable income tax. This tax aversion which is not illegal. What they did was to exploit the loopholes in accounting standard to provide the public with a misleading and unrealistic position. This is also not a crime, the accounting standard was to blame. LB was exploiting a means to maximizing it's wealth, unfortunately it went under

I think Joe would still only lend 100 --- Joe is just extra happy to lend the 100 (in theory) because it got 105 in collateral. What i don't get is ... if LB lent 105 in repos, then what happened when it went bankrupt? Did the counterparties keep the collateral and end up profiting $5 from the $105?

@ Raffi, Yes that is true.. but value is also in perception. If people see something as having no value you cant sell it.

You made it very easy to understand..thank you so much for this video

Still $100 I think. As Paddy said, that's one of the reason LB did it, so that the counterparty would be in a good position and continue to do deals with LB.

I'm glad Tim was able to get his AC/DC records back from Sam to use for his next loan lol Thanks for these videos, they're very informative and interesting ;-)

Liked and subscribed! Love the teaching style, sir!

Thanks Paddy!!!

Excellent explanation! Thank you!

Curious, who was valuing the collateral at 105% of the repo? Were they subject to the mark to market rules? Just wondering if there was fraud in that step too [overstating the value of the collateral].

You saved my life lol I was trying to read the textbook and it seemed so confusing. Now I understand =D

Solid explanation.

GREAT video

Superb video

So a repo is like a pawn shop for investment banker

Good job sir

Complicated terms explained in simple terms to a financial layman !

this does not make sense though, if the collateral is 105, how much Joe is lending to LB?

Another great video!

Gud one !!! ian\m sure there must be other invest banks doing the same

Jajajajaja,,, you are good my friend... lovely explanation....

carrier do it right now to make its quater result look good, and it is very wide practice, for different reason.

Thank you for the video. The video seems to suggest that you can make a bank look better by having assets removed from the balance sheet, but fails to explain why that is. It also fails to explain that if repos are accounted for as sales it is the ‘liability to repurchase (repay) the loan’ that is effectively removed from the balance sheet. Other than that a very informative video. Thank you.

So basically it's the pawn shop for billion dollar corporations?

Why is Dick Fuld (the Gorilla) from Lehman brother not in prison for the Repo 105 transactions during his tenure. If a regular person goes to Kmart and steals a sneaker bar, that person goes to jail.

what does the 105 stand for ??

Please speak slowly. I enjoyed the video though. Thanks

I NOW KNOW WHAT TO INVEST IN AND HOW TO DO IT THANKS A MILLION BECAUSE I GET 52 DOLLARS A MONTH SO THIS WILL REALLY HELP ME AND MY GIRL.

Preparing for a Job interview at EY