An analysis of Lehman Brothers bankruptcy and Repo 105 transactions

Abstract

Purpose

The purpose of this paper is to investigate the bankruptcy of Lehman Brothers, with particular focus on its use of Repo 105 transactions.

Design/methodology/approach

The use of the Lehman's bankruptcy report produced in part by Anton R. Valukas was used as a basis to explain how Lehman maintained acceptable leverage ratios through the use of Repo 105 transactions to paint a better picture of its financial position than actually existed.

Findings

The study concludes that Lehman's accounting method choice disguised its real problems, perhaps long enough for bankruptcy to become the only option.

Practical implications

Lehman's bankruptcy becomes part of a growing history of business failures where accounting principles have become the focus. The failure of Lehman reminds us that financial reporting must remain transparent, allowing users to make informed decisions with confidence.

Originality/value

This bankruptcy provides a painful reminder that financial reporting must allow users to differentiate among investment alternatives, based on the relative, factual financial position of the investment. The credibility of our reporting model is at stake.

Citation

Hines, C., Kreuze, J. and Langsam, S. (2011), "An analysis of Lehman Brothers bankruptcy and Repo 105 transactions", American Journal of Business, Vol. 26 No. 1, pp. 40-49. https://doi.org/10.1108/19355181111124098