JPMORGAN CHASE recorded some repurchase trades as sales, the same accounting gimmick that spawned Lehman Brothers’s now-infamous “Repo 105s”, suggesting that the failed bank was not alone in its interpretation of a new accounting rule.
Unlike Lehmans, which did not disclose the effects of its repo deals on the firm’s balance sheet, JPMorgan detailed the year-end values of its repo sales and purchases in annual reports beginning in 2001, after a new accounting rule was introduced.
The practice ended in 2005 when the company merged with Bank One. “The transactions were done in very small amounts and were fully disclosed,” a spokesman said.
Lehmans’s use of repo sales as a means to shrink its balance sheet was revealed last week by Anton Valukas, who was appointed in January 2009 by a US court to determine the causes of the largest bankruptcy filing in US history.
Mr Valukas reported that Lehmans’s Repo 105 volumes spiked sharply at the end of a quarter as executives tried to shrink the balance sheet to make the bank appear stronger.
Repo trades have long been a vital source of funding for investment banks, and typically remain on the firms’ books. But under certain circumstances banks can account for the trades as a sale and thereby remove them from their books.
JPMorgan’s accounts list sales – the sort of deals Lehmans undertook – and purchases, which imply that it acted as a counterparty for others doing the same trades.
Its counterparty is not thought to have been Lehmans, and JPMorgan was not named in Mr Valukas’s report.
In 2004 – the last year the trades were done – JPMorgan reported $20 billion (€14.7 billion) in sales and $15 billion in purchases. At the time, its balance sheet had swollen to more than $1.2 trillion. – (Copyright The Financial Times Limited 2010)
