Quarter End Federal Reserve Provided Window Dressing for the Too Big to Fails


"Regarding the operation to be conducted on Tuesday, September 30, 2014, the Desk will conduct the operation several hours earlier than usual, from 8:00 to 8:30 a.m. (Eastern Time).  All other terms of the exercise will remain the same.

This change only applies to the operation conducted on September 30, 2014. The operations conducted from Monday, September 22, to Monday, September 29, and those conducted on and after Wednesday, October 1, will be conducted at the previous time of 12:45 to 1:15 p.m.  Any future changes to these operations will be announced with at least one business day’s prior notice on the New York Fed’s website.

As an operational readiness exercise, this work is a matter of prudent advance planning by the Federal Reserve. These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future."



"Repo 105 is a repurchase agreement which results in an accounting maneuver
where a short-term loan is classified as a sale.

The cash obtained through this "sale" is then used to pay down debt,
allowing the company to appear to reduce its leverage
by temporarily paying down liabilities
—just long enough to reflect on the company's published balance sheet.

After the company's financial reports are published,
the company borrows cash and repurchases its original assets.

Repo 105 was used by investment bank Lehman Brothers three times...

...Lehman's auditors, Ernst & Young, were aware of this questionable classification.

...the auditors said that the transactions were accounted for in line
with Generally Accepted Accounting Principles.

However, New York attorney general Andrew Cuomo
filed charges against Ernst & Young in December 2010,
alleging that the firm "substantially assisted... a massive accounting fraud"
by approving the accounting treatment.

The Wall Street Journal drew attention to the increasing levels of fees
that Ernst & Young had been paid by Lehmans from 2001 to 2008.

...the Securities and Exchange Commission (SEC) sent letters to chief financial officers
of nearly two dozen large financial and insurance companies
asking about their firms' use of repurchase agreements,
including the number and amount of such agreements that qualify for sales accounting,
and detailed analysis of why such transactions can be treated as sales."


"S.E.C. examiners, working during the watch of Christopher Cox as S.E.C. commissioner,
apparently saw nothing wrong with Repo 105.

...it now appears that the federal government itself
either didn’t appreciate the significance of what it saw...

Or perhaps they did appreciate the significance
and blessed the now-suspect accounting anyway.

...the S.E.C. and other government regulators
were fully aware of the Repo 105 shenanigans for nearly six months
prior to Lehman’s collapse."

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