All the Devils Are Here [235]
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Lehman Brothers also used a quirk in the accounting rules to book repo transactions at the end of the quarter as real sales of assets, instead of as temporary financing. This strategy, called Repo 105—because the accounting rules required that the firm deliver assets worth $105 in order to get $100 of cash—enabled Lehman to reduce the leverage it reported. Then, once the new quarter started, Lehman would repurchase the assets. As the crisis deepened, Lehman upped its use of Repo 105, from $38.6 billion at the end of the fourth quarter of 2007 to $50.4 billion by the end of the second quarter of 2008. “Another drug we r on,” as McDade later called it in an e-mail.
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The argument that Goldman was hedged on its exposure to AIG was technically true. By the time AIG was rescued, Goldman had already collected more than $10 billion in cash from its collateral calls—along with cash collateral it had received from the counterparties that had sold it credit default swaps on AIG itself. That amount essentially covered the decline in the value of the securities Goldman had hedged with AIG to date. But if AIG had gone bankrupt and the value of those securities had declined further, Goldman would no longer have had its hedge, and it’s debatable whether its counterparties on the AIG credit default swaps could have paid.