Felix Salmon

The Repo 105 list

By Felix Salmon
April 5, 2010

As the SEC investigates the question of just how many banks were abusing Repo 105, Vipal Monga today points out that abusing Repo 105 is exactly the same thing as using Repo 105: there’s no conceivable innocent use of this particular part of the accounting-standards rulebook.

The rule in question is SFAS 140, and as Vipal says, the only reason for the rule to exist is so that it can be abused, Lehman-style:

The simple fact that FASB set a bright line acted as an invitation to exploit it. Put another way, FAS 140 seems to officially sanction such treatment. “The only reason to have the rule is to give sale treatment to a borrowing,” Willens says. He adds that Ernst & Young LLP, the auditor that signed off on Lehman’s accounting, was acting “well within the accounting guidelines,” which says something about the rule itself.

It’s pretty much inconceivable that SFAS 140 would have been implemented without a lot of support from people intending to use it. What’s more, we know that the people who used it didn’t disclose that fact — no disclosures surrounding Repo 105 have been made in any financial institution’s filings.

So if and when the list of Repo 105 abusers is finally revealed, expect it to be a long one. And expect to see the ABA’s Ed Yingling out there earning his $2.29 million salary trying to justify the unjustifiable.

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