Wednesday, March 17, 2010

Repo 105 part deux

Looks like I'm not on the only one struck by how the Lehman Examiner's report elides how the bank was insolvent. And I'm not talking about coming in under regulated capital ratios, I'm talking about a (massively) negative equity number.
Two unanswered questions stand out. The first is that even with the extensive Jenner & Block report, we still do not have even a rough sense of how big the shortfall in Lehman’s equity was at the time of its collapse. We know it was hiding $50 billion of liabilities at the end of its fiscal second quarter through its Repo 105 program, but that only tells us the size of one of the cover-up mechanisms. The Lehman report indicates that William Dudley at the New York Fed thought Lehman might require a $60 billion bailout entity, with Lehman providing $5 billion of equity, which says the authorities pegged the unreported shortfall at $55 billion.

The focus of the report was on how Lehman was shut out of the overnight interbank lending market, and did not go to the discount window. It never explicitly states that the reason it was shut out of the repo market was because it had negative equity, and there was real counter party risk to extending what (by design) should be a riskless loan.

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