Lehman

During the 2007-08 subprime mortgage crisis, Lehman Brothers used window dressing to hide risk in bid to stay alive that ultimately jeopardized the confidence in the financial system. On September 10th (2008), the rating agency Moody's Investor Services. Inc. threatened to downgrade Lehman Brothers' credit rating after several potential buyers walked away from a deal with Lehman. Lehman had announced a projected $3.9 billion loss for the quarter. Lehman's stock price collapsed by 42% and unable to find lenders willing to roll over its $150 billion of overnight tri-party repo financing. On September 15th (2008), Lehman filed for bankruptcy, with $639 billion in assets making it the largest bankruptcy in history. In a subsequent bankruptcy report, CEO revealed that rating agencies were particularly focused on net leverage and Lehman knew it had to report favorable net leverage numbers to maintain its ratings and confidence.

Lehman resorted to "Repo 105" and here Lehman would accept a 5% haircut on fixed income assets it pledged as collateral in a repo agreement that extended across the end of a quarter, and then buy back those same assets once the new quarter began. Because of the high and expensive haircut, Lehman was able to account for the transaction as a "true sale" instead of financing. This reduced Lehman's reported balance sheet as much as $50 billion-reducing reported net leverage from 13.9 to 12.1 for the second quarter of 2008.

Lehman had not disclosed its use of Repo 105 to regulators, rating agencies, investors or even its own board of directors. SEC conducted an inquiry of 24 US public financial institutions and concluded that Lehman's window dressing was an isolated case. However, data on US tri-party repo agreements (since July 1 2008) show that a very similar form of window dressing continues to occur every quarter among non US banks. To give some perspective, that is over half the value of primary dealers' net positions, and over three times the window dressing done by Lehman.