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March 29, 2010 Monday 3:50 PM EST
SECTION: PERSONAL FINANCE; Banking
LENGTH: 389 words
HEADLINE: SEC quizzes financial institutions on ‘repo’ deals
BYLINE: Alistair Barr, MarketWatch mailto:ABarr@marketwatch.com.
Alistair Barr is a reporter for MarketWatch in San Francisco.
SAN FRANCISCO (MarketWatch) — The Securities and Exchange Commission said Monday that it’s quizzing big financial institutions about their use of repurchase agreements.
The SEC said its division of corporation finance is sending letters to the chief financial officers of close to two dozen large financial institutions and insurance companies asking for “very specific” information about the companies’ use of repurchase agreements and their accounting and disclosure of these transactions. The regulator didn’t identify which institutions are getting the letter.
The move comes after a report into the Lehman Brothers (LEHMQ) bankruptcy claimed the firm used a type of repo transaction to make itself look less leveraged than it really was.
The SEC was the main regulator of Lehman and other large brokerage firms in the years leading up to the 2008 financial crisis.
Repurchase agreements, or repos, are a common way for investment banks to finance themselves, though the strategy came under intense pressure during the 2008 financial crisis. An ordinary repo involves the transfer of assets to another party in exchange for cash, alongside an agreement to repay the money and take back the assets at a later date.
A court-appointed examiner investigating Lehman’s demise said Repo 105 transactions used a clause in accounting rules to classify repos as sales, even though the investment bank was still obliged to repurchase the assets at a later date. That meant the assets disappeared from the balance sheet, and it could use the cash it received to temporarily pay down other liabilities.
Goldman Sachs (GS) “has never used this transaction,” a spokesman for the investment bank wrote in an email to MarketWatch on March 12, after the Lehman revelations emerged. J.P. Morgan Chase (JPM) and Morgan Stanley (MS) also said they don’t use such transactions.
However, a J.P. Morgan spokeswoman said it’s unclear whether Bear Stearns used transactions like this before it was acquired by J.P. Morgan in early 2008.
A spokesman at Bank of America (BAC) , which bought brokerage giant Merrill Lynch in 2008, didn’t respond to requests seeking comment, also on March 12. A Citigroup spokeswoman declined to comment.
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