Repo agreements are common on Wall Street. But the issues surrounding Repo 105s, which Lehman (Lehman Brothers news) used to lower its debt levels for earnings purposes have been a bit cloudy.

TheDeal.com does everyone a favor by providing some context: Repos are normally accounted for as liabilities of the borrower, but Lehman used Repo 105 to characterize its borrowing as a sale. This is legal, thanks to a loophole in the Financial Accounting Standards Board's (FASB news) Statement 140, passed in September 2000. In some cases, when the collateral assets are worth at least 105 percent of the cash received, the deal can be considered a sale "because FASB feels that, past a certain level, the borrower will not have enough money to repurchase 'substantially all' of the collateral."

It offers an interesting analogy: "It's similar to a cash-strapped person leaving his camera with a pawnbroker, receiving a pittance in return and trying to buy the camera back at full value." According to FASB, repo collateralization between 98 percent and 102 percent of the borrowed amount allows the borrower a chance to buy back the collateral, so Lehman's decision to count 105 percent as a sale seems reasonable. A better approach would be to somehow determine if such deals are designed simply to make the balance sheet look better. 

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