How did Lehman brothers react to the problem of high leverage?
One simple way to de-leverage was to sell off assets. But Lehman had Real Estate properties on its books and selling them was not an option when property prices were falling. Selling during that time would have meant losses and bankruptcy. So one brilliant way was to park these assets in another banks books and raise cash and buy them back later. That's where Lehman used the the repo transactions.
The above picture demonstrates the case clearly. If you observe closely, the assets would decrease and increase periodically. During the reporting season, Lehman would sell the assets to another bank under the repo agreement, drive off the assets from the balance sheet and buy them back later at a small premium. Since these transactions were not allowed in USA, it tied up with a bank in Europe and transferred up to $50 Billion worth of assets using the repo 105K transactions and cooked up its books. Once the value of the assets plummeted, it had neither assets to pledge nor the money to service debt. This is a classic case of window dressing. Unfortunately, one morning they found themselves to the wall and filed for bankruptcy.
One simple way to de-leverage was to sell off assets. But Lehman had Real Estate properties on its books and selling them was not an option when property prices were falling. Selling during that time would have meant losses and bankruptcy. So one brilliant way was to park these assets in another banks books and raise cash and buy them back later. That's where Lehman used the the repo transactions.
The above picture demonstrates the case clearly. If you observe closely, the assets would decrease and increase periodically. During the reporting season, Lehman would sell the assets to another bank under the repo agreement, drive off the assets from the balance sheet and buy them back later at a small premium. Since these transactions were not allowed in USA, it tied up with a bank in Europe and transferred up to $50 Billion worth of assets using the repo 105K transactions and cooked up its books. Once the value of the assets plummeted, it had neither assets to pledge nor the money to service debt. This is a classic case of window dressing. Unfortunately, one morning they found themselves to the wall and filed for bankruptcy.
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