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Wednesday, April 21, 2010

Witch-hunt on Sale and Repurchase Agreement (Repo) started: Securitiy Exchange Commission SEC hunting down balancesheet gimmiks of 20 domestic and for

Author Thomas Ramseyer

Within only 10 days the addressed Enterprises shall disclose the purpose, the counterparties and the volume of their repo-transactions over the past 3 years. The Sale and Repurchase Agreement (Repo) is at stake: it's about to become demonized
According to the press SEC is aiming at the socalled repo-105 transactions where liquid assets are used in exchange of cash for a short term. Repo-105 has massively been misused by Lehman Brothers before their going bankrupt in 2008 just to fix their balance sheet. The repo transactions were booked as sales of assets instead of collaterized credit taken. This is considered a trivial offence thus legal but infavourable for the investors according to the press. 

REPO - Sale and Repurchase Agreement - Reverse REPO Purchase and Resale Agreement
In fact a repo simply is a by high grade liquidity paper collateralized credit. As a matter of fact government paper is used for the purpose. In case of the debtors no-show the creditor may monetize the collateral.
Lehman Brothers' practice legal or illegal ??
The answer is clear-cut: the Lehman's accounting practice is ILLEGAL . . . . what else ?? 

Facts1) Legal activity is never "discovered", they simply exist and are not to be mentioned.
2) 20 domestic and foreign banks and insurance companies are to be bound to disclosure.
3) The delay of 10 days only indicates the urgence of the matter. 

HypothesisAnother paper tiger; Security Exchange Commission (SEC) may no be disavowed. (Lehman's practice has been discovered only on the occasion of an investigation initiated by the unbiased bankruptcy judge)

For some miraculous reason - 60 BioMadoff not forget to mention - SEC usually does not discover the large-scale crookeries, even when sticking up their nose.

The way of the interrogation is aiming at not to discover further dishonest making up the balance. 

The Companies mentioned must only disclose their exposures. There will be no external inspectors thus no revision will take place. The result of the inquiry is at the disposal of the potential misconductors.

The steadily growing staff fluctuation of all levels actually grants that no further fishy business cases are to be discovered.

Assuming possible application of criminal energy, transparency of the camouflaged positions is not easily to be detected because of their complexity as well as the missing links. 

Suggestions1) External audition teams (finance police) - meaning interdisciplinarily cognitive power persons - investigate in the first flight.

2) The Catalogue of the business cases to be inspectet is of a wide range. It will never be sufficient to identify wrongly booked transactions. To enable a future more efficient supervisory system all potentially manipulative transactions have to be disclosed. I.e. shortening of balance sheet, risk camouflaging.

3) All business relationships are shown as a network. All business cases broken down to the third level - daughter companies but also external companies - must be considered. (organisational chart, cells, conspirative constructs) Related software available on the market.

2.1) Catalogue Business CasesRepo-transactions mistakenly booked as sales. (suggesting dilettantism, possibly meant for camouflageing the worse)
Sales of actives combined with [long call short put same strike]positions. (altering liquidity, risks appear as active and passive replacement values; the splitting of the position has the risk evaluation make impossible)
Sales of [low exercise price]call options combined with the sale of at the market put options. (risk remains on the balance sheet, liquidity betters)
Creation of special purpose vehicles SPV for the goal of ridding risk paper, i.e. junk-backed obligation, by instantaneous refinancing (riskpaper is exchanged for short term debitors and participation, ratio 95 to 5, risks seemingly off balance)
Liquidity neutral transactions, i.e. sale and subsequent purchase of investments bearing the same risk and liquidity class. (may be used to manipulate balance as well as profit and loss statement) 

ConclusionThe stated suggestions not applied the outcome of the report will only be waste paper.

copyright Thomas Ramseyer