“Repo 105″ – like Four Loko, but more dangerous to the health of your company.
Ever wonder how enormous old financial firms suddenly bite the dust? Well, the answer (according to the man suing Ernst & Young for civil fraud) is that they do stupid things with the help of accountants.
According to New York Attorney General Andrew Cuomo, giant accounting firm Ernst & Young helped their client Lehman Brothers hide billions of dollars in debt so that it would look like a healthier company than it really was. For seven years. Until (surprise!) Lehman went bankrupt in 2008.
Lehman owed a lot of people a lot of money (like, billions of dollars). But they didn’t want to go around telling people about it.
credit: kf6gpe
So (according to the lawsuit) Ernst & Young helped them hide their little debt problem with a ninja accounting tactic called “Repo 105.” Basically, Lehman would sell off a bunch of their assets and use the money to pay off some debt. That day was a good day, because when they had to show their financial reports to the world, it looked like they didn’t owe billions of dollars.
But – here’s the genius part – the next day, they would buy back the assets they sold at an even higher price, taking on more debt than they had before.
In exchange for its creative accounting services, Ernst & Young received $150 million in fees from Lehman between 2001 and 2008. Ernst says it was just using “generally accepted accounting principles,” which makes you wonder what other firms have been drinking. Cuomo says it will be paying those fees back to the State of New York by the time he’s done with them.
