What is a 'Repo 105'

A Repo 105 is an accounting trick in which a company classifies a short-term loan as a sale and subsequently uses the cash proceeds from said sale to reduce its liabilities. In the repo market, companies are able to gain access to the excess funds of other firms for short periods in exchange for collateral (usually a bond). The company that borrows the funds will promise to pay back the short-term loan with a small amount of interest and the collateral typically never changes hands. This is what allows firms to record the incoming cash as a sale; the collateral is assumed to have been "sold off" and bought back later.

BREAKING DOWN 'Repo 105'

Repo 105 made headlines following the collapse of Lehman Brothers. It was reported that Lehman accountants used the accounting maneuver to pay down $50 billion in liabilities to reduce leverage on their balance sheet before earnings were announced. This made it look like Lehman was much less reliant on debt than it actually was.

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RELATED FAQS
  1. What is the difference between a repurchase agreement and reverse repurchase agreement?

    Learn how a repurchase agreement is a form of collateralized lending and a reverse repurchase agreement is a form of collateralized ... Read Answer >>
  2. What is the difference between a term and open repurchase agreement?

    Learn about the main difference between a term and open repurchase agreement, including when each is used and how the interest ... Read Answer >>
  3. What's the difference between the prime rate and the repo rate?

    Learn about repo rates and prime rates and their differences. Explore the uses of these rates in consumer lending and managing ... Read Answer >>
  4. In a repurchase agreement (repo) why is a longer tenor more risky?

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  5. What risks does the dealer (lender) in a reverse repurchase agreement take on?

    Read about the lender risks of participating in reverse repurchase agreements or for dealers who use the Fed's overnight ... Read Answer >>
  6. What is each party's role in a reverse repurchase agreement?

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