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LEHMQ News -- =DJ UPDATE: Report IDs 7 Counterparties In Lehman Repo 105 Deals.

Friday, March 12, 2010 5:26 PM

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News for 'LEHMQ' - (=DJ UPDATE: Report IDs 7 Counterparties In Lehman Repo 105 Deals)

(Updates in fifth paragraph with UBS and Barclays declining to comment.)

By Michael Rapoport and Joe Bel Bruno

Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--A bankruptcy-court examiner's scathing report on the collapse of Lehman Brothers Holdings Inc. (LEHMQ) names seven banks that participated in transactions Lehman used to conceal its balance-sheet weakness.

The report by examiner Anton Valukas also suggests that some or all of the banks, all based outside the U.S., may have known at the time that Lehman was executing what are known as "Repo 105" repurchase transactions in order to keep assets off its balance sheet, and as a result might "try to squeeze Lehman." The report doesn't allege that any of the banks engaged in any wrongdoing.

Most of the banks are identified in the report only with shorthand versions of their names. The report says Lehman's Repo 105 counterparties in 2007 and 2008 were primarily "Mizuho, Barclays, UBS, Mitsubishi, and KBC"--meaning units of Mizuho Financial Group Inc. (MFG, 8411.TO), Barclays PLC (BCS, BARC.LN), UBS AG (UBS, UBSN.VX), Mitsubishi UFJ Financial Group Inc. (MTU, 8306.TO) and KBC Group NV (KBC.BT). Also identified, more completely, are Deutsche Bank AG (DB, DBK.XE) and ABN Amro Holding NV (ABN.YY).

A KBC spokeswoman said the company "never has an insight in how counterparties book repos in their accounting." She said such transactions are common, with terms varying based on the counterparties or the quality of the collateral that is posted.

UBS and Barclays declined to comment; the other banks couldn't immediately be reached. Valukas declined to comment on the matter beyond the disclosures in the report.

The banks were on the other end of deals in which Lehman sold and then quickly bought back securities. Major banks do such repo transactions regularly but, according to the report, Lehman orchestrated the Repo 105 transactions' terms in a way that enabled the firm to account for them as outright sales. This treatment allowed Lehman to take the assets off its balance sheet, so that it would appear less leveraged than it really was. That effect created a "materially misleading" picture of the firm's financial condition before its September 2008 collapse, Valukas alleged.

The report alleges that senior Lehman executives, including Chief Executive Richard Fuld, were aware of the maneuver, which the report indicated could make them vulnerable to legal action. On Thursday, an attorney for Fuld said Fuld "did not know what those transactions were" and wasn't aware of their accounting treatment.

The report's identification of the banks was earlier reported by the Zero Hedge blog.

The report cites internal Lehman email messages that indicated Barclays participated in up to $15 billion of Repo 105 transactions with Lehman. Other amounts listed were up to $10 billion for UBS, up to $2 billion for KBC, up to $5 billion for Mizuho and up to $1 billion for Mitsubishi. Some banks, such as Mitsubishi and KBC, apparently stopped participating in the deals with Lehman in 2008, to be replaced by others such as ABN Amro, according to the report.

Valukas also noted that the transactions should have been less expensive to Lehman than ordinary repos, because Lehman was providing collateral of at least 105% of the securities' value--hence the "Repo 105" name--but they were actually more expensive. He suggests that higher prices may have been charged because the counterparties were "aware of Lehman's desperation" to get assets off its balance sheet.

Valukas cites an email from Michael McGarvey, then the controller for Lehman's fixed-income division, saying, "(e)veryone knows 105 is an off balance sheet mechanism so counterparties are looking for ridiculous levels to take them." In a later interview that Valukas cites, McGarvey said the counterparties might "try to squeeze Lehman" as a result.

All the banks involved in the Repo 105 transactions are based outside the U.S. Lehman typically executed the transactions through a European subsidiary. In its policy on the transactions, included in an appendix to Valukas's report, Lehman acknowledged that it had to resort to obtaining legal opinions under English law that such transactions were "true sales"--something it was unable to do under U.S. law.

The disclosures in Valukas's report also raise the question of whether any other large banks executed similar transactions. According to the report, by late 2007 it was "widely believed" that Lehman was the only firm using this type of transaction, but language in some emails cited in the report suggests it's possible other firms did so previously.

Goldman Sachs Group Inc. (GS), for one, said Friday that it never used such transactions.

-By Michael Rapoport, Dow Jones Newswires; 212-416-2176; [e-mail]

-By Joe Bel Bruno, Dow Jones Newswires; 212-416-2469; [e-mail]

(Jessica Papini contributed to this article.)

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(END) Dow Jones Newswires

March 12, 2010 17:24 ET (22:24 GMT)

Copyright (c) 2010 Dow Jones & Company, Inc.- - 05 24 PM EST 03-12-10

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